But some well-managed mortgage REITs should be able to continue to deliver better relative returns even in the new environment, the analysts emphasized. In particular, they’re favoring American Capital (AGNC) and the hybrid Two Harbors Investment (TWO).
“As is often the case, what is negative for spreads has a positive impact for book values given the sharp tightening of MBS spreads,” CS added.
Mortgage REITs are currently as a group trading at about an 8% discount to estimated third quarter book value, the report noted.
Also, CS predicts that the Fed’s reinvestment in mortgage-backed securities “could lead to further liquidity coming into the repo market” and result in a reversal of the recent widening of MBS repo rates.