Jeffrey Saut: T-Note Yield Gains Spell Trouble for U.S. REITs

Excerpt from Raymond James strategist Jeffrey Saut's latest essay:

While everybody is focusing on the major market indices, there are some other things worth considering. Our first consideration is the following chart of the yield on the 10-year benchmark Treasury Note:

10-Year Yield Index

As can be seen, the yield has broken out to the upside, lifting the yield on the 10-year T-note to its highest level since mid-February. Also of note is that the inversion in the yield curve between the 90-day T-bill and the 10-year T-note has disappeared as the yield curve steepened, implying higher interest rates going forward. And that sense seemed to put a "bid" under the Dollar Index as it lifted from its recent multi-year low of 81.10. Obviously this was not good for our long trading position in Japanese Yen (FXY), and if the Yen breaks decisively below 82.00 we will be stopped-out. Then too there are negative implications for commodities (gold, copper, grains, etc.), as well as P/E multiples, in a higher interest rate environment (read: P/E compression), but that is a discussion for another time.

Plainly, the potential for higher rates has not been lost on the REIT complex, as can be seen in the next chart:

The REIT Index has broken below its rising trendline and accelerated on the downside. We think this has negative implications for investment positions in U.S.-based REITs. While we still embrace international REITs, we are selling many of our domestic REITs.

Editor's note: US REIT ETFs include the iShares Cohen & Steers Realty Majors (ICF), iShares Dow Jones US Real Estate (IYR), the streetTRACKS Wilshire REIT ETF (RWR) and the Vanguard REIT Index VIPERs (VNQ).

Comments

[Danny Lobo:]

If I have to move my funds from Local REITS to Foreign REITS, is there a good fund that you would recommend?

2007 May 23 01:26 PM