If interest rate spreads are widening then mriets should bold well this quarter.
Recall that these publicly traded trusts buy mortgage bonds with borrowed money, thus, as interest rates rise, it costs more to borrow. If the long-term rates don't keep pace, or exceed the rate of growth in shorter-term yields, we will have a narrowing of the interest rate spread due to a flattening of the yield curve. In fact this yield spread is key to mREIT profits, because these companies borrow capital at very low short-term rates, and then invest in potentially higher yielding real estate mortgage assets. But here is the kicker. The long-term interest rate has expanded faster than the short-term rates. This means that companies like NLY should make more money, not less. While I have warned of a flattening of the yield curve in the past, it seems the curve is actually widening right now.
As of the time of this writing, the current interest rate for a 30-year fixed rate mortgage in the United States is 4.08%, whereas the shorter 15-year fixed rate mortgage is 3.17%. At the start of the quarter, these rates were 3.5% and 2.8%, respectively. Thus, the absolute spread was 3.5%-2.8%=0.7% at the start of the quarter and is now 4.08%-3.17%=0.91%. On a relative scale, the 30 year to 15 year ratio was 3.5%/2.8%=1.25 at the start of the quarter. This ratio measure too has widened, and is now 4.08%/3.17%=1.29. This exercise can be utilized for any short-term and long-term interest rate comparison.
So while folks are panicking over the 30 year rate rising (which in my opinion means people on the fence about home purchases will rush to buy before rates go up further), in reality, it has led to a widening of the interest rate curve, for now.
So with the spreads widening mtge and other mriets should have better than expected earnings.
The entire sector is getting a beat down based on BV concerns right now. A lot of the hedges are based on treasuries, hence not effective (or at least less effective) since treasuries and MBS have begun to diverge. The spread will be up this Q, but it won't be anywhere near enough to cover the losses elsewhere, particularly with MTGE's TBA roll portfolio. The spread won't matter because the focus is on MBS prices. Rightly or wrongly.
We went through a similar scare when the bond buying program was announced, though for reverse reasons (BV up, spread down). So the program was bad news coming and now its bad news going. The first round of fear proved a buying opportunity. I'm certain today's fear will, too, but right now the entire sector is a bunch of falling knives. I am long some positions, but I won't be adding anytime soon.