Two Harbors' Shift Towards Fixed-Rate Agency Securities

| About: Two Harbors (TWO)
This article is now exclusive for PRO subscribers.

Digging through the SEC filings of Two Harbors Investment Corp (NYSE:TWO), I noticed a fairly dramatic shift towards fixed-rate agency bonds in their RMBS portfolio over the past two years.

(Click to enlarge)

And to see the relationship more closely, here's a line chart with the same data:

(Click to enlarge)

You can see in the chart above how the red line (fixed rate agency securities) has gone from a lower-point on the graph (at 23%) and slowly worked its way near the top (78%).

This is one reason I have favored TWO over other mREITs, as I expect the yield curve to flatten further, which should be more beneficial to mREITs holding fixed-rate debt securities. Interestingly enough, this makes TWO look more like Annaly Capital (NYSE:NLY), as far as agency composition goes.

While NLY focuses more exclusively on agency RMBS (compared to TWO, which has about a 17% exposure to non-agency), TWO and NLY do not look dramatically different in terms of agency holdings. 93.4% of TWO's agency holdings are now fixed-rate, while 89.2% of NLY's are fixed-rate.

TWO's dividend yield is currently at 16.5%, while NLY's is at 14.5%. According to Yahoo Finance, TWO currently sells right at book value, while NLY sells at a slight premium with a P/B ratio of 1.08. While I like both NLY and TWO right now, I slightly favor TWO due to what I perceive as a slightly more attractive price, coupled with much higher insider buying. I also like TWO's more flexible strategy. The one downside, in my view, is that NLY has a more established long-term track record, while TWO is still fairly new to the mREIT game. Either way, I favor both TWO and NLY over mREIT holdings with a significant concentration in variable-rate securities.

Disclosure: I am long TWO, NLY.