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Money flows into mREITs as averages and yields tumble

  • One sector nearly fully in the green on a big down day for the broad averages is the mortgage REITs (REM +0.6%) as investors - worried about further declines in book value - take comfort from a big 10 basis point dip in the 10-year Treasury yield to 2.76% (off from 3% at the start of the year).
  • Leading are CYS Investments (CYS +3.1%), Annaly (NLY +1.7%), American Capital (AGNC +1.4%), (MTGE +1.5%), Invesco (IVR +1.8%), Anworth (ANH +1.3%), and AG Mortgage Investment (MITT +0.7%). The sector elephants - Annaly and American Capital Agency - are head 6% and 8% YTD, respectively.
  • With the big drop in yields at the long end, how long will it be before investors stop fretting about declines in book value and shift to concern over narrowing spreads!
  • Related ETFs: MORT, MORL
Comments (16)
  • Be Here Now
    , contributor
    Comments (3760) | Send Message
     
    >With the big drop in yields at the long end, how long will it be before investors stop fretting about declines in book value and shift to concern over narrowing spreads!

     

    Mr Market is irrational as usual. The spread is what produces the dividend.
    23 Jan, 02:28 PM Reply Like
  • murray555
    , contributor
    Comments (218) | Send Message
     
    Mr. Market is indeed irrational and we should be glad about it since it gives us opportunities to buy stocks on sale.

     

    Personally I think this is an excellent time to pick up some mreits. Collect the dividends and when things look bad or when the price goes up to your target sell.
    23 Jan, 04:02 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (8137) | Send Message
     
    I kept wondering why mREITs were being sold so intensely in Q4 while they traded for less than tangible book value.

     

    Now that yields are falling again I suspect there will be a lot of short covering over the next few weeks.
    23 Jan, 08:50 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (835) | Send Message
     
    "With the big drop in yields at the long end, how long will it be before investors stop fretting about declines in book value and shift to concern over narrowing spreads!"

     

    Ugh, that was funny, sad and well said all at the same time.
    23 Jan, 02:29 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (438) | Send Message
     
    Dear Darren:

     

    I think the issue is which is the greater effect:

     

    Realized or unrealized Valuation gains due to interest rate declines

     

    Narrowing spreads reducing interest income.

     

    VTFI
    23 Jan, 04:00 PM Reply Like
  • mershaw2001
    , contributor
    Comments (106) | Send Message
     
    Damage to the book value is already done. These companies have hedged up, but it's after the fact and the hedging just hurts them now because it eliminates the gains as these MBS return to lower interest rates
    23 Jan, 02:30 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (438) | Send Message
     
    Dear mershaw:

     

    But according to Scott Kennedy's article, there were $520 M gains due to hedging in Q4, which helped the net income per share.

     

    VTFI
    23 Jan, 04:04 PM Reply Like
  • Scott Kennedy
    , contributor
    Comments (2999) | Send Message
     
    Hi VTFI,

     

    The projected derivative net valuation gain of $520 million is for Q4 2013 where interest rates modestly increased during the latter-half of the quarter.

     

    I believe mershaw2001’s comment is in relation to the recent quick drop in treasury yields / rates in general. As such, Q1 2014 has some derivative valuation losses (offsetting the material MBS gains) so far.

     

    What I feel some people are overlooking is the fact even though U.S. Treasuries have decreased around 25 bps so far in Q1 2014, the mortgage rate decline has only been minor in comparison. Mortgage rates (non-jumbo; conventional) have only decreased around 10 bps so far during Q1 2014. 30-year mortgages are slightly under 4.5% while 15-year mortgages are slightly under 3.5%. These levels are still much higher than what they were only a few quarters ago.

     

    As such, mREITs can still sell-off their lower-coupon MBS while re-rolling into the currently higher coupons. Using this strategy, WAC would still be increasing during Q1 2014 (so far). This has been AGNC’s / MTGE’s strategy recently. The quick dip in U.S. Treasury yields doesn’t really change this strategy. Just my take on the current situation.

     

    Scott
    24 Jan, 05:29 AM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (438) | Send Message
     
    Thanks Scott for this important clarification regarding mortgage rates versus ten year treasury rates, and the bottom line fact that AGNC can still pursue its beneficial strategy of portfolio conversion , which had been selling 30 year MBS and buying higher coupon 15 year MBS.

     

    VTFI
    24 Jan, 05:36 PM Reply Like
  • darloduck
    , contributor
    Comments (5) | Send Message
     
    INCOME MATTERS
    23 Jan, 02:44 PM Reply Like
  • rsunna
    , contributor
    Comments (11) | Send Message
     
    "With the big drop in yields at the long end, how long will it be before investors stop fretting about declines in book value and shift to concern over narrowing spreads!"

     

    Looks like a lose-lose situation here...
    23 Jan, 03:04 PM Reply Like
  • tstreet
    , contributor
    Comments (560) | Send Message
     
    I don't know but it didn't hurt the last time. However, I do wonder if some companies like AGNC have overhedged. But then tomorrow everything could change.
    23 Jan, 05:00 PM Reply Like
  • atobey
    , contributor
    Comments (5) | Send Message
     
    Perhaps another simple positive for NLY: with the market cap now risen back above $10 billion, it will again be eligible for some mutual fund and institutional portfolios whose policies exclude smaller caps.
    23 Jan, 03:18 PM Reply Like
  • Tom_S
    , contributor
    Comments (44) | Send Message
     
    REIT market was irrational on the way down, no reason it shouldn't be irrational on the way up :-)
    23 Jan, 03:48 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (438) | Send Message
     
    Dear Tom_S:

     

    REIT market was irrational on the way down, no reason it shouldn't be RATIONAL on the way up :-)

     

    VTFI
    23 Jan, 03:57 PM Reply Like
  • Someone to listen to.
    , contributor
    Comments (3) | Send Message
     
    Jeffrey Gundlach loves them
    23 Jan, 08:30 PM Reply Like
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