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Annaly Capital Management, Inc. Message Board

  • stanaz1 stanaz1 Sep 19, 2011 1:45 PM Flag

    Fed's Operation Twist

    Looks like the Fed will propose their Operation Twist shortly. Forgive my ignorance on all its ramifications but doesn't it seem like it could have negative effects on all mortgage reits?

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    • The lowering of medium and long term yields should:
      1. Flatten the "yield curve" which in turn will affect, (reduce) the earnings of mREITS and;
      2. Encourage refinancing which will also negatively affect mREITS.
      However, as I see things...
      1) The yield curve has been flattening for a couple of months now and the results have been predictable...reduced earning and reduced dividends. When "Operation Twist" was done in the 60's the result was a 12-20 basis point reduction in longer term rates. Given the extremely low rates currently for mid and long term money, I don't think that the effect will be much greater than what the markets have already experienced; and
      2) Current refinancing programs may be expanded but the problems facing those who's homes are "under water" are still the same and so I really don't see a great wave of refinancing occurring.
      In short, IMHO, neither "Operation Twist" nor expanding current refinancing programs are likely to have an impact much beyond what current conditions are and which I believe have mostly if not fully been priced into current share values and are being reflected in the recently reduced dividends. This in turn, for me, makes current valuations/yield very attractive.

    • A flattening of the yield curve is bad for mREIT's. Not only for mREIT's, but for banks too. This is the most important way that banks make money. A flat or even inverse yield curve is usually a predecessor to recession. Thi is why I seriously doubt the Fed will to this twist. They are not that stupid (I hope). They would be injuring the very firms they are in bed with. Makes no sense.

    • From what I've read and FWIW the Twist if that's their intent will do little to MReits.

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