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Mortgage REITs eye sliding interest rates

  • The swoosh down in interest rates - the 10-year Treasury yield is now off 8 bps on the session to just 2.44% - isn't really boosting the mREIT sector (REM -0.1%), and one wonders which managements hunkered down for higher rates and now find themselves overhedged. There's also a flattening yield curve and it wasn't too long ago when the bear case on mortgage REITs was slimming net interest margin, not higher rates.
  • Kudos to CYS Investment (CYS +0.5%) management, which - not finding a ton of value in mortgages - loaded up on Treasurys in Q1. The stock is one of the sector's stronger performers YTD, up 24.5%.
  • Others today: Annaly (NLY +0.1%), American Capital (AGNC -0.7%), Armour Residential (ARR +0.7%), Hatteras Financial (HTS -0.3%), Capstead Mortgage (CMO -0.2%), Western Asset Mortgage (WMC -0.6%)
Comments (19)
  • James Bjorkman
    , contributor
    Comments (662) | Send Message
    CYS yay! Interest rates have no bottom yet.
    28 May, 03:41 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (2196) | Send Message
    This is setting up for a double whammy.
    Part one came in Spring/Summer 2013.
    Part two is on it's way
    28 May, 04:01 PM Reply Like
  • rbyrne1946
    , contributor
    Comments (16) | Send Message
    avatar - what's your best guess when Part two will get under way?
    28 May, 04:04 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (2196) | Send Message
    I have no idea rbyrne1946.
    Nobody knows.
    Even the CEO's that run the reits have been caught betting on the wrong direction.
    So they don't know either.


    At some point rates will go back up (presumably).
    If reits aren't prepared for that, it will be another book value hit.
    28 May, 04:49 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (8317) | Send Message
    How can the mREITs lose in this environment?


    Yield is king and that which has yield shall rule in 2014.


    You can thank deflation for this.
    28 May, 04:13 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (2196) | Send Message
    DeepValueLover, how did AGNC's share price go from $35 to $23.65 it's at at the close today.


    It looked like it was partially because rates rose before they expected them to and got caught betting on the wrong direction.


    [edit] now we have rates falling again. Seems like not a good sign.
    28 May, 04:51 PM Reply Like
  • Rob1492
    , contributor
    Comments (225) | Send Message


    mREITs lose in three ways:


    1. They are so heavily hedged for fear of rates going up that it impacts their dividends
    2. The lower rates drop ultimately the more room they have to rise when the fed raises rates... mREITs secondary to their leverage despite their hedging lose more BV with rates going up then they gain when rates go down
    3. The falling rates narrows the interest spread.


    Finally we are losing the nice cushion we had in the fall with the large discount to BV. I don't think it will be as painful as last spring but it will cause pain and it is coming
    28 May, 04:37 PM Reply Like
  • wriskit
    , contributor
    Comments (112) | Send Message
    The "market realist" site which comments on reits and bonds and the factors that affect them says that NLY has mostly deleveraged. Mreit investors should check its weekly reports faithfully.
    28 May, 11:44 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (8317) | Send Message
    NLY is overly hedged?


    Are the double-digit dividend yields in trouble?


    I still like the mREIT yields over T-Bond yields.
    29 May, 09:26 AM Reply Like
  • Rob1492
    , contributor
    Comments (225) | Send Message
    They are all heavily hedged and relatively deleveraged to prevent BV erosion when rates go up. The problem is rates have gone down. Thus there is even more room for rates to rise. Many of the mREITs are still in reasonable position to cover their dividends although NLY is one that might be a bit at risk of not covering.
    29 May, 09:33 AM Reply Like
  • DeepValueLover
    , contributor
    Comments (8317) | Send Message
    Are we sure about NLY?


    Where can I find out for sure that NLY is over hedged for a rise in interest rates?
    29 May, 09:38 AM Reply Like
  • Rob1492
    , contributor
    Comments (225) | Send Message


    Core earnings down to $.23 from $.35 the quarter before. There dividend is $.35 a quarter. They had an only 1.4% rise in BV with the falling rates.
    29 May, 09:46 AM Reply Like
  • DeepValueLover
    , contributor
    Comments (8317) | Send Message
    But where can I find out that NLY has its hedges all wrong?
    29 May, 12:49 PM Reply Like
  • Want2buygold
    , contributor
    Comments (64) | Send Message
    The increase in rentals in a recovering economy will mitigate the effects on an increase in interest rates.
    28 May, 05:08 PM Reply Like
  • MashieNiblick
    , contributor
    Comments (37) | Send Message
    I think I've about had it with the mREITS. We got killed last year because everyone was afraid interest rates would go up with the tapering. Now we're getting hammered because interest rates are going DOWN. Screw this - I'm buying more blue chip dividend payers and sticking my head in the sand.
    28 May, 05:12 PM Reply Like
  • Hank890
    , contributor
    Comments (841) | Send Message
    Even at a lower share price, the yield on these creatures is good,...and the shares are cheaper,... for bolstering the position moving forward. I just reinvest the dividends.


    Eventually, I will consume the periodic yield, a few more years. But the volatile share price itself is not a deal breaker,...imo. CapGain is not my primary concern in the near term.
    28 May, 06:07 PM Reply Like
  • tstreet
    , contributor
    Comments (599) | Send Message
    Time to short treasuries? If not now, when? Or will we have low rates forever? So much for the taper.
    28 May, 06:07 PM Reply Like
  • William Packer
    , contributor
    Comments (299) | Send Message
    Tstreet. Perfect time to short treasuries at 2.42% on 10s.. My thoughts exactly. I am short 4 10 year tsy futures contracts at 125'237 sell average. Also long 30,000 shares WMC.
    29 May, 10:45 AM Reply Like
  • johnlewis319
    , contributor
    Comments (79) | Send Message
    HOusing starts and durable goods orders are Upticking, will result in upward
    pressure on GDP, will result in pushing higher treasury rates, will favorably
    impact the second half of 2014. Republicans will win big in mid-
    term elections which will boost the markets. June should signal an upturn
    as all of these variables beg positive anticipations. The ECB wil continue
    to stimulate, Europe and China economies will improve, and the Outlook
    SEEMS positive....WHICH is my betting Guess. The biggest unknowns -
    the banking industry's resistance on easing credit standards and the
    global positioning of the Dollar as the Fed continues to devalue it. Currently,
    mReit managers, economists, and the Fed all appear to be struggling to
    understand underlying causes and effects of the low rate scenario, however
    as the 10-year touches 2.40%, the Markets continue to seemingly discount
    the deflationary trend with continuing positive equity support (???). One can
    only conclude that unless the Market has blinders on, the confidence levels
    remain positive, hence anticipating a positive 2nd Half result. The Guess is
    always a function of confident anticipation. My Guess is that the mReits will
    remain strong as their net interest margins will be managed Well with acceptable
    results and continuing acceptable payout results.
    29 May, 11:16 AM Reply Like
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