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Retired Atlanta dentist with a specific interest in agency mortgage REITs and leveraged Munis.
  • Taper Tantrum 0 comments
    Jun 13, 2013 10:08 PM | about stocks: MORT

    "Taper Tantrum" has to be the best description I've heard of the market reaction to the recent Fed Fiasco of last May's meeting. Give a listen to the Bloomberg podcast download here with Pimm Fox and Carol Massar interviewing JamesBianco, president of Bianco Research.

    "What happened in 1994, the Fed raised rates one time, 25 basis points and the markets completely collapsed. . . because the market said that one move was the start of many, many moves so don't wait until they're done, let's just price the whole thing right now and that's why the market's collapsed." Bianco states that explains the market current reactions to the Fed's recent tapering remarks.

    "What he [Bernanke] was afraid of at that point [May 22nd] was the markets were at all time highs, and a lot of people were saying, these markets are being driven unnaturally higher by the talk of liquidity from Central Banks, they're disconnecting from the fundamentals and if you let this go, it's going to get out of hand."

    ". . . they've [equities] been pushed higher on carry trades coming out of Japan, coming out of the United States, people were borrowing cheap money and buying things like emerging market and those markets have been reversing really hard and that trend continues thru today." Bianco looks for the Fed to offer reassurances that they will continue QE thru to 2014.

    I had read about a possible Yen carry trade influence on mREITs in a comment on SA, but Bianco's mention of the carry trade makes me think that one of the reasons mREIT's and other high dividend stocks have plunged so violently is that mREITs have been the long half of carry trades financed by cheap yen. Hedge funds are really fast money who weren't buying mREITs based on fundamentals, but for a hefty dividend. As the yen strengthened, the trade got more expensive so they bailed, leaving the entire mREIT sector trading at large discounts to book value.

    Viewing a chart of a Yen ETF and MORT on the day of the Fed meeting, they show the Yen strengthening, making a yen/mReit carry trade more expensive. That both should reverse quite significantly today tells me there's correlation between the two.

    And here mREIT investors thought they had enough to worry about with how the Fed is actually going to taper. Now we add another boogie man, hedge fund yen carry trades, to the anxiety closet.

    (click to enlarge)

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