Seeking Alpha

Mortgage REITs slide as Treasury yields take off

  • A few days ago, the 10-year Treasury yield stood at about 2.50%, but it's been on the rise all week and shot up to near 2.7% this morning following the strong jobs print and drop in unemployment to 6.1%. Checking the short end of the curve, Eurodollar futures are selling off as well, and now have baked in more than one rate hike between now and one year from now, and 75 basis points of hikes by the end of 2015.
  • Previously: Treasury yields jump, gold slumps after strong jobs print
  • Off 1.1% today, Annaly Capital (NLY) is down nearly 5% since this time last week, with a similar move having taken place in American Capital Agency (AGNC -1.2%).
  • Chimera (CIM -1.4%), CYS Investments (CYS -1%), Invesco Mortgage (IVR -1.8%), American Capital Mortgage (MTGE -1.6%), New York Mortgage Trust (NYMT -1.2%), AG Mortgage (MITT -1.8%), Ellington Residential (EARN -0.7%), Dynex (DX -0.8%), MFA Financial (MFA -0.9%).
  • ETFs: REM, MORT, MORL
Comments (45)
  • berloe
    , contributor
    Comments (1711) | Send Message
     
    Looks like after watching for some years I got hungry for yield and jumped in at the wrong time. What to do now?
    3 Jul, 10:05 AM Reply Like
  • w.sak
    , contributor
    Comments (125) | Send Message
     
    This stock is still paying, I got out, not because I didn't like it, but because I did like another & jumped in on it. You will still see dividends & the price will level out. good luck!
    3 Jul, 10:36 AM Reply Like
  • Days of Broken Arrows
    , contributor
    Comments (22) | Send Message
     
    NYMT in the last year has ranged from 5.55 to 8.17. That's not a small divide, but it's not as massive a difference as some stocks.

     

    What I did when this happened to me was stayed the course. I kept collecting dividends for I think three quarters. Then when the stock started to rise because things had changed and an ex-dividend date was approaching, I dumped a bunch more money into it. So I was able to make a small profit on the sale, but since I'd collected big dividends that whole year, I came out in the black.

     

    I've found that when you're in the red with a dividend stock, an upcoming ex-div date will often cause a "rising tide" and by throwing some bucks into the stock as it rises, you can break even or profit.
    3 Jul, 07:57 PM Reply Like
  • Days of Broken Arrows
    , contributor
    Comments (22) | Send Message
     
    Addendum: If any moderator is reading, is there a financial forum where people can ask general questions and get answers from experienced investors like the ones we have here? If not, would SA consider implementing one?

     

    I answered a question above, but my answer could apply generally to any stock and might have made a good post on such a forum, where I'd have space to outline what I did.

     

    But conversely, I sometimes have questions I'd like to ask that don't have to do with a specific stock, but I have no place to ask them.

     

    I wish there was a place for some give-and-take, since Investopedia and the like can only tell you so much.
    3 Jul, 08:29 PM Reply Like
  • stockdunn
    , contributor
    Comments (257) | Send Message
     
    I've been thinking the same thing-then we could get targeted answers to specific questions.
    4 Jul, 03:05 PM Reply Like
  • Urbannek
    , contributor
    Comments (873) | Send Message
     
    I have also been thinking the same thing.
    6 Jul, 05:47 AM Reply Like
  • William Packer
    , contributor
    Comments (392) | Send Message
     
    Treasury yields are still below the end of the first quarter levels. And back then the stock prices on many of these MREITS were higher. Go figure.
    3 Jul, 10:15 AM Reply Like
  • jrs03n
    , contributor
    Comments (68) | Send Message
     
    It's not the absolute yield that affects mREITs, it's the rate at which it changes.
    3 Jul, 10:34 AM Reply Like
  • William Packer
    , contributor
    Comments (392) | Send Message
     
    Jrs03n, the rate at which it changes? Look, the yield on the 10 year is basically flat on the day now. What change is there? Yet MREIT prices are down big. Non-agency is rallying today. (see XDMOX, the nav of DMO). The market is completely disconnected from reality, especially on hybrid MREITs... which are enjoying higher non-agency prices on the back of a stronger economy. Just look at MTGE, 32% of portfolio equity in non-agency. You can see rates are basically unchanged today.. but non-agency up. So thus.. NAV is up probably.. yet the stock is down. lol. There is no logic here.
    3 Jul, 11:54 AM Reply Like
  • Rob1492
    , contributor
    Comments (360) | Send Message
     
    This is what creates buying opportunities... also CHMI is down 2 %.... primarily owns MSRs should benefit from rising rates but gets lumped in with the rest... if MTGE and or CHMI continues to fall will continue to add
    3 Jul, 12:17 PM Reply Like
  • jrs03n
    , contributor
    Comments (68) | Send Message
     
    WIlliam,

     

    The first bullet point:

     

    "A few days ago, the 10-year Treasury yield stood at about 2.50%, but it's been on the rise all week and shot up to near 2.7% this morning"

     

    magnitude of change / period of time = rate of change

     

    Plus, you really have to evaluate each mREIT individually, even if they own the same paper due to all the hedging they may or may not be doing. Regardless, it is how the rates are changing, not necessarily the absolute yield, that is important (and what destroyed the sector last year).
    3 Jul, 06:27 PM Reply Like
  • William Packer
    , contributor
    Comments (392) | Send Message
     
    Jrs03n, except for the fact that resistance in yields at 2.66% on 10s is very obvious. So.. It's not like they are going to keep rising at the same rate.. in fact.. they probably will fall again. I guess we will see how the market reacts to the 10 year stabilizing. WMC has negative duration and thus book goes up when rates go up, yet their stock got poo-poo'd on. Pretty lame. It's just panic selling.
    5 Jul, 12:43 PM Reply Like
  • jrs03n
    , contributor
    Comments (68) | Send Message
     
    I bought more CYS and DX last week, so that tells you my thoughts there. My point is just that your original comparison of treasury yields and stock prices from last year to this year is meaningless. How the rates moved in between then is what impacts mREITs NAV and thus stock price.
    9 Jul, 10:10 AM Reply Like
  • William Packer
    , contributor
    Comments (392) | Send Message
     
    Ok, my comparison was how the stock price (MTGE) was 2 weeks ago and now despite yields going from 2.5% to 2.7% and back to 2.5%... yet the stock is stuck at $19.60 when it was trading $20 a two weeks ago. In fact, agency mbs has been doing really well compared to treasury so... If you look at NAV performance I would imagine you would see a lot of value add over in Q2 (and up to today's date with yields at 2.51%) yet the stock (MTGE) appears stuck in the $19-$20 all the time. The stock is always stuck yet the book is on the up and up. And today... MTGE is down yet treasury yields are lower today... and agency mbs is up.. so NAV should be up - yet the stock is down. lol. There's no logic. See.. this is why I like trading treasury futures better... because at least the bond market makes sense. I can understand what happens there. I make really good money trading 10 year treasuries.. but I can't for the life of me... trade MTGE stock because the stock does not trade correctly. Things that benefit the company(like NAV going up) have no impact on the stock price on a day-to-day basis. But you know.. if you get a really strong jobs report.. it's easy to get short treasuries and get out later that day for a huge profit. And the liquidity is fantastic. It's all so easy to predict and make money.. but I guess what I am saying is MTGE and other MREITS don't make logical sense in terms of stock price performance. They just don't really follow a pattern.. rates don't matter much. Nothing does. They don't even trade on technicals very well. But the bond market trades on technicals very very well.
    11 Jul, 11:51 AM Reply Like
  • DeepValueLover
    , contributor
    Comments (8669) | Send Message
     
    Yields will begin to slide again next week.

     

    2015 will start with the 10 Year ~2.35%.
    3 Jul, 10:17 AM Reply Like
  • smurf
    , contributor
    Comments (4130) | Send Message
     
    Any basis in fact for these projections, or a hunch?
    3 Jul, 02:17 PM Reply Like
  • 67g8i32
    , contributor
    Comments (231) | Send Message
     
    I think that is wishful thinking.
    3 Jul, 07:55 PM Reply Like
  • Rob1492
    , contributor
    Comments (360) | Send Message
     
    Bertie.... Buy more.... Most now are trading at > 10% discount to BV
    3 Jul, 10:18 AM Reply Like
  • rsphillips
    , contributor
    Comments (39) | Send Message
     
    Would sit tight and enjoy the dividends.
    3 Jul, 10:20 AM Reply Like
  • William Packer
    , contributor
    Comments (392) | Send Message
     
    The yields are dropping again.. Look. Buy MTGE right now at $19.50, by days end sell at $19.75.
    3 Jul, 10:23 AM Reply Like
  • William Packer
    , contributor
    Comments (392) | Send Message
     
    yields on the 10 year are only off by 2 basis points lol
    3 Jul, 10:23 AM Reply Like
  • cwbamber
    , contributor
    Comments (23) | Send Message
     
    This article is a bit misleading when talking about the drop in MREIT prices. When the author talks about NLY and AGNC being down nearly 5% since last week, what they fail to mention is that these stocks went ex-div last week, so 2-3% of the drop is directly attributed to the typical sell-off right after ex-div. There is definitely nothing to panic about here.
    3 Jul, 10:55 AM Reply Like
  • SA Editor Stephen Alpher
    , contributor
    Comments (546) | Send Message
     
    The now-4% decline in NLY since last Friday morning has occurred after the payment of the dividend and adjustment in the stock price.
    3 Jul, 11:02 AM Reply Like
  • grantr01
    , contributor
    Comments (11) | Send Message
     
    Berloe, if you need this money in the next few years, sell. You should not have invested in the first place. I bought AGNC and TWO when they tanked some time ago. My investment paid then and now 12 and 10 percent respectively. Since I have no desire to sell my stock, I will continue to reap those dividends until the companies decide to cut them. But even a 50 percent reduction in dividends will leave me in a better situation than most other stocks provide. All of this is part of a very diversified portfolio. I tell you all of this in the hope that it will give you some ideas on how to proceed. You need to read up on Buffet and Graham and then follow their lead.
    3 Jul, 11:26 AM Reply Like
  • lstahler
    , contributor
    Comments (165) | Send Message
     
    Amen. In the long run, a steady hand wins most hands.
    3 Jul, 01:39 PM Reply Like
  • hallereugene@gmail.com
    , contributor
    Comments (267) | Send Message
     
    Wasnt it said that Reits will get killed if interest rates start moving? Since they are so low the only way they can move is up. So if the price (Reit) goes down which Reit will have the least likelihood to cut the dividends?
    3 Jul, 02:09 PM Reply Like
  • Rob1492
    , contributor
    Comments (360) | Send Message
     
    Hi hallereugene!

     

    Scott Kennedy just did an article on this with respect to the AGNC REITs. Most agency REITs have cut their leverage increased hedging and increased the percentage of 15 year mortgages in anticipation of rising rates this has had a negative impact of dividends but the dividends have been adjusted down because of this. The larger impact of the rising rates therefore will be on NAV rather than dividends. Hybrid REITS and total nonagency REITs in general will do better with rising rates
    3 Jul, 04:05 PM Reply Like
  • 67g8i32
    , contributor
    Comments (231) | Send Message
     
    That's why my hybrid OAKS only down 1 penny today. I feel lucky.
    3 Jul, 08:11 PM Reply Like
  • joeytheghost
    , contributor
    Comments (39) | Send Message
     
    I have seen this happen too many times to hit the panic button. I only own 1000 shares of AI since I dumped my NYMT a few months ago (I like NYMT but think it trades at too heavy a premium to BV. With mREITS being sold off I am going to sit back and buy TWO & NYMT when the carnage subsides. Good luck with your investments. I often ask myself; "will mreits be around when rates go up or will they simply become extinct and we all know the answer"... This event with a sell off happens once a year and my advice is to stand pat and pick up some bargains.
    3 Jul, 04:47 PM Reply Like
  • jowalern
    , contributor
    Comments (8) | Send Message
     
    Look at the National Debt. Any increase in interest rates has to be short term, because the Fed cannot allow higher interest rates for an extended period of time. The result would be the bankruptcy of the United States. If my CIM goes belly up the U. S. will also go belly up. Hopefully neither happens.
    3 Jul, 06:03 PM Reply Like
  • c21vintage
    , contributor
    Comments (75) | Send Message
     
    Agree w/above...Going x dividend took .27 off and the rest is a pittance given the yield. Why have only 1 payer? PSEC (a BDC) pays monthly dividend in this range as well and trades right at Net Asset Value.
    3 Jul, 07:14 PM Reply Like
  • cwbamber
    , contributor
    Comments (23) | Send Message
     
    Thanks c21, I also hold ARR and JMI for the monthly dividend payments. I agree that diversification within the mREIT sector is important.
    4 Jul, 02:22 PM Reply Like
  • Roughneck10
    , contributor
    Comments (2) | Send Message
     
    Howdy. Any thoughts or input from anyone. To continue to hold CYS now and into the future - don't see CYS mentioned by anyone here? I am $2 and $4 below my AVG price paid for roughly 500-shares of both CYS and NLY respectively. Obviously, not a large amount of money involved in these. But, hate those Red numbers!! And, yes. I added shares to both just weeks before their price plummeted.
    4 Jul, 08:49 AM Reply Like
  • Rob1492
    , contributor
    Comments (360) | Send Message
     
    CYS is a very well run agency mREIT with an excellent dividend and a greater than 10% discount to NAV have added more on the dip.. I think currently CYS is better run than NLY
    4 Jul, 09:24 AM Reply Like
  • Urbannek
    , contributor
    Comments (873) | Send Message
     
    Agree Cys is better than NLY. Long CYS.
    6 Jul, 05:53 AM Reply Like
  • c21vintage
    , contributor
    Comments (75) | Send Message
     
    Just a question about Mreits in general...if rates rise, that should cut the # of refies and the portfolio of the mortgage reits should stabilize. Falling rates are what trigger the refies and that destabilizes the portfolio, right? Why would Mreits take a hit when rates rise??? This seems backwards to me.
    4 Jul, 10:13 AM Reply Like
  • Rob1492
    , contributor
    Comments (360) | Send Message
     
    Hi C21!

     

    When rates rise the value of the bonds they hold fall. This loss is magnified by their leverage but is discounted to some degree by their hedges. Also the mortgages extend... As rates go up refinancing decreases. a typical 30 year mortgage is not typically held for 30 years...you could imagine a more typical number would be around 15 years. This is do both to refinancing as well as principal prepayments. Sot he extending part is you can imagine with less refinancing the average mortgage might be around for 18 years rather than 15 years. With rising rates the MREIT would want the portfolio to turn over more quickly so they could by new Mortgages with higher yields. With fixed rate Mortgages just the opposite happens.

     

    Falling rates are beneficial to mREITs in that the value of their bonds increase and again this is magnified by leverage. But also prepayments increase which is not good and over time their interest rate spread decrease.
    4 Jul, 11:08 AM Reply Like
  • stockdunn
    , contributor
    Comments (257) | Send Message
     
    I can see where DGI stocks that pay dividends under the treasury rate would sell off if treasuries rise, but with my 8-13% dividends coming in every month, I love it when my REITS, BDCs, and MLPs take a breather, so I can buy more. PSEC, ARCP, and LNCO made me a little nervous lately, but I held on and bought on dips, and they're heading back up, all the while paying out those dividends.

     

    Long CIM, AGNC, EQR, PCL, ARCP, VGSLX, PSEC, LNCO
    4 Jul, 03:19 PM Reply Like
  • c21vintage
    , contributor
    Comments (75) | Send Message
     
    Thanks Rob, I understand the typical mtg actually averages about 8 years but it seemed that the Mreits took huge hits when rates were falling due to all the refies shredding their portfolitos, now that rates are stable/creeping up they get hit again? I would hope this company isn't holding bonds, maybe I need to do more homework. I've been a holder of PSEC for about 4+ years now, it has grown to be my largest holding and have enjoyed the monthly payouts all that time with avg cost about $9.25 less all those dividends so can't complain.
    5 Jul, 08:52 AM Reply Like
  • Rob1492
    , contributor
    Comments (360) | Send Message
     
    Hi C21!

     

    Overall mREITS benefit from rates falling some more than others depending on the structure of their portfolios. While falling rates lead to more refinancing in general which is negative we have seen very little uptick in refinancing since the rates have fallen from their last peak in December. We might need the 10 year T bill to get closer to 2.0 before we get an uptick in refinancing again. Congrats on PSEC. I also own a big chunk but at a higher cost basis.

     

    The best author in this space on mREITs is Scott Kennedy. You might want to read some of his articles
    5 Jul, 10:10 AM Reply Like
  • c21vintage
    , contributor
    Comments (75) | Send Message
     
    Thanks Rob, I will look for his work on this...doubt we will see much lower rates from here but do think it will be fairly stable for at least the next 6 months. The fed won't raise till after the election at the earliest and with the takers having accumulated so much cash at the expense of the former working class they need places to stash it, the only reason I can imagine the prices of bonds, all around the world are so low. Can you believe Spain, with 25% unemployment has bonds trading at nearly the same rates as the US?
    6 Jul, 09:09 AM Reply Like
  • Rob1492
    , contributor
    Comments (360) | Send Message
     
    Yes I agree! In Europe there is a greater fear of deflation than inflation at this point. This will keep their central banks from tightening and when the Fed raises our rates money will move into US treasuries blunting the rise. That being said it looks like the US economy is finally improving and these zero short term rates will not last for ever.
    6 Jul, 09:29 AM Reply Like
  • CornStove
    , contributor
    Comments (109) | Send Message
     
    EX-DIVIDEND DATE is tomorrow July 10, 2014 for a declared dividend of $.9642 which means you have to own the stock before the end of trading session today July 9, 2014 to get the dividend. One day yield is .9642 divided by Yesterday trade of $22.82 equals 4.22% one day return!
    9 Jul, 08:57 AM Reply Like
  • Rob1492
    , contributor
    Comments (360) | Send Message
     
    Hi Cornstove!

     

    I assume you are speaking about MORL... but I don't get your logic.... when MORL goes x-dividend it's stock price will drop by amount of the dividend ... whether it will be up or down for the day from there is anyone's guess but you almost certainly won't be left with a 1 day return of 4.2%
    9 Jul, 09:04 AM Reply Like
  • CornStove
    , contributor
    Comments (109) | Send Message
     
    That's the MORL Ex-Dividend Date I was talking about set July 10, 2014 for $0.9642.
    9 Jul, 09:05 AM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector