As you know, bond prices are inversely related to bond yields. As the yield curve steepens and interest rates rise the price of the mortgage back securities held by the mREITS would go down. The extent to which the change in the bond's yield affects a bond's price is measured by its duration. The Mreits that have a large proportion of their investments in fixed rate long term bonds like AGNC would get hit the most. As interest rates rise the assets decline in value causing the book value to drop. The Mreits that invest in short duration bonds and adjustable rate mortages will be affected the least. We all know that Mreits are priced as a multiple to book (1.2x is fair value).
A steepening yield curve widens the spread between long term rates and the short term repo rates they borrow at which is good news for earnings. If there is no Fed to buy the bonds on a consistent basis volatility will spike in the yields. This makes hedging interest rate exposure a lot more expensive and creates more difficulties in creating effective hedging strategies. This also spikes volatility in book value.
Because of all the above, I bought 1/2 of my position this morning in NYMT. They have their last Q report archived on their website if you are interested in listening. The steeper the curve the better these guys will do.GLTA
I realize now that increasing rates imply a lower book value in the future and decreasing rates a higher book value in the future aside from hedges. Because the existing loans become worth more when interest rates decline and worth less when interest rates increase.
This is the first I heard of the 1.2 times factor. I thought it was 1.0 because that was what the discussions here seemed to imply. I'm not saying you are wrong. I just have not heard of the 1.2 factor. Is there further reading on this?
I'm not sure what you mean by the yield curve steepening. Are you talking about the rate of change in interest rates? If so, can't it steepen in either direction? Wouldn't that change the conclusion one would make then? So I assume you mean steeping upward. Also since you are buying NYMT I assume you mean that they are making variable rate loans and thus less affected by interest rate changes. I bought CYS because they had a large percentage of variable rate loans and lost money on them and they are still headed down. Had I not sold them I would have lost my shirt. This logic makes sense to me but it does not seem to be working in practice. In fact, nothing seems to be working in the mREIT sector right now. And until I see evidence to the contrary I think I will take a cautious stance which is to not own them. That said, I plan to track them closely and make buys if it is wise to do so. Currently I think it is unwise to buy mREITs. Bottom fishing works for someone, obviously, but I think most jump the gun and buy too soon. And those that hold through any turmoil no matter what happens, well, they are just meat for the wolves. They will lose more often than not these days because the market has been flat for the most part for the last 13 years and flat is considered a bear market because fixed investments do better than flat. But we should all be thankful for these investors because they allow the rest of us to make money.
Must be nice to have enough money to make moves like that. If I continually cash in a cash out, with the small amount of shares I'm working with trade fees would kill me. What would you suggest someone who deals in increments of $300-$500 do in this situation. With my dividends included I'm still up on AGNC. I was planning on holding until next ex-divy to evaluate my position.