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Retired Atlanta dentist with a specific interest in agency mortgage REITs and leveraged Munis.
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  • Predicting The Fed Is A Sure Way To Hear God Laugh.

    I try not to make too much of a spectacle of myself on the comment boards. I suppose I'm taken in as a somewhat blowhard Cassandra with a malicious agenda, I dunno. . .

    But I do note that no one actually has taken issue with my points raised below. One author seemed to take it as a given that as short rates go up long rates will go up further but he never cared to explain why he thought that.

    While the rest of them make the fatal error of trying to forecast the Fed, whereas I prefer to actually listen to what the Fed is saying. The Fed has stated that employment is trending strong enough for them to increase rates, they're deeply hesitant about expanding their balance sheet further, and while they admit they may roil the bond market they're going to raise rates in 2015.

    The yield spread has been trending lower for a year and no one wants to take that fact in either because mREITs have managed to engineer their net interest margins from contracting. Yet there's only so much they can do before the reality that the new bond's they're buying are yielding less and the repo they're financing them with are more expensive than they used to be. Then there are those mREITs who are buying commercial MBS to diversify, but how well they're vetting those loans and how they're going to hold up during our next recession is an open question.

    @jaymorris "The bigger questions are: when will short term and/or long term interest rates rise and, when they do, what effect will they have on mREITS and the indices that the ETNs like MORL are tied to?"

    Glad to see I'm not the only one wondering about this. Of course no one knows, but here are the bullet points that led me to get out of the mREIT sector months ago.

    • The yield spread has been contracting for over 4 quarters.

    • In 2015 the Fed will start to increase the Fed Funds rate.

    • The perception of the Fed Funds increase will be worse than the reality of it's affect on mREITs and will manifest itself in another "Taper tantrum" debacle. (Even Yellen says to expect volatility in the bond market.)

    • The yield spread has been contracting for over 4 quarters. (I know, I typed that twice. . .)

    So looking out over the next 3 quarters, one of which may be the quarter the Fed finally acts, ask yourself if it's better to collect 12% in dividends from mREIT shares and risk losing 12% or more in principle or should you wait and buy after mREIT shares collapse?

    I guess holders of mREITs just don't wanna see the train about to run them over.

    Tags: mREIT
    Nov 20 1:36 PM | Link | 2 Comments
  • Mortgage REIT Chart Of The Quarter - 2-10's Spread

    (click to enlarge)fm The Economist

    The 2 - 10 spread has been contracting all year. So while the 30 day has followed the Fed Funds rate nowhere, the two year rate has nearly doubled in anticipation of the eventual Fed rate hike.

    Current lower MBS coupons and a narrowing spread will make it more difficult for mREITs to generate income without increasing leverage. With short rates going up mREITS will be paying higher rates to lock in longer term repo thus squeezing their net interest spread.

    Next Fed meeting is Sept 16th & 17th and if the Fed is perceived as dovish that may be a good time to exit mREITs, if Fed hints toward hiking rates sooner than anticipated it might get ugly. Consider taking your gains then and wait out the eventual carnage during next years Tantrum Two.

    Added updated Doug Short chart for treasury yields. Another way of looking at the shrinking of yield spreads across various terms. 2s-10s have lost 50bp since January, that's about a 16% drop.

    Sep 02 5:22 PM | Link | Comment!
  • "I'm Out!"

    The pic is from Seinfeld's "The Contest" where Kramer slams down the money he lost from his bet and declares "I'm out."

    Me too, Kosmo.

    Naturally this will be a contrary indicator for everything I got out of. And it's very likely that I've gotten out too soon. Not the first time, won't be the last. The market just doesn't make sense to me. My munis had peaked and were dribbling lower on a daily basis. My STPP position was simply one where I stayed too long on the wrong thesis of a widening 2-10 spread that I finally realized was simply not going to happen again during this business cycle.

    Thanks to Califia Beach for the chart which shows that should the day come when long rates finally go up, the short rates are projected by Fed members to go up as well leaving a narrower spread than we have now. This portends a lot of bad news for the mREIT sector since their need a wide spread to generate dividends. Shrinking the spread will cause them to increase leverage and churn their holdings for trading profits to keep their dividends level with prior quarters.

    I made some interesting bets on several leveraged ETNs that I was able to take profits on, but where I'm getting queasy is the idea of having any positions that contain any leverage at all. The 2X ETNs certainly did as well as the levered munis. My positions in the mREIT sector had a nice run, but the Fed imminent short rate increase and the game of chicken that the bond market is playing with long rates is giving me more agita than I wanna deal with.

    I suppose the wounds are still fresh from Bernanke's Taper hints of last spring. It's hard not to assume that the market will react with similar turmoil when it finally dawns on the bond market that short rates are going up.

    The day will come and when it does I'll be glad that "I'm out!"

    Jul 17 5:46 PM | Link | Comment!
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