As I contemplate what will happen in the near future with mREITs, I am left with a long position, mostly due to the long time frame for investing that I have. The interest rates rising will cause the mREITs to allocate more of their capital to hedges, that will eat into whatever spread increase comes with the higher rates. The falling book values that come with higher rates will be offset more in Q3 than they were in Q2 by the extra hedges that were put into place by most mREITs in Q2. If the rates stabilize, than we can see some positives in Q3 and perhaps a little recovery, but not much. I don't see a recovery in price happening until we have stable or falling rates, or until dividend increases recover some of the low price to book value. On earnings calls we are hearing about the lowering of supply of mortgages coming from higher rates. This could eventually recover price in some of the MBS.
With a lot of the MBS mREITs hold no longer trading at a premium, They are cheaper to buy and also safer from losses from prepays. Holding on to them until maturity can also be a strategy that will preserve value if MBS start trading at a discount.
It could get a little worse from here when the FED taper begins. I don't think its all baked into treasury yields or MBS prices yet. We could see more large red days when Taper is announced to be beginning.
However, the short term rates should stay low until 2015, and that takes out spread worry. How long will it take mREIT prices to stabilize and dividends to start increasing is all up to the management and interest rates. If treasury rates rise faster than mortgage rates, we could see some recovery in BV because the hedges will perform better than the MBS price drop, at least in theory.
I think long term, your dividends will cover price swings and you will make money on mREITs, if the FED can keep rates from rising too fast in an economic recovery.