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American Capital Agency Corp. Message Board

  • dr_klumps dr_klumps Sep 1, 2013 4:56 PM Flag

    Staring into the Mortgage REIT Abyss !

    This is an inflection point, 100% sure of this. Benchmark interest rates have climbed since the end of April 2013, with the yield on the 10-Year US Treasury peaking at 2.7 percent in early August and now in early September. This recent uptick in Treasury yields reflects the increasing likelihood that the Federal Reserve will reduce its monthly bond purchases as the central bank gradually tightens its accommodative policies in September.
    The prospect of rising interest rates has prompted investors to rotate out of fixed income, including the mortgage-backed securities held by MREITs. At the same time, the cost of borrowing to leverage portfolio returns has climbed, squeezing many MREITs' margins. The cost of hedging to protect Book Value has soared.
    Although the uptick in mortgage rates has boosted current returns on securities recently purchased by MREITs, these higher yields haven't been sufficient to offset the margin squeeze or the declining value of the legacy mortgage-backed securities in their portfolios. MREITs' preference for longer-term paper in the low-yield environment of the past two years has exacerbated these problems and this may be the poison that ends up killing some..
    The proof is in the dividends: A number of prominent M-REITs have slashed their payouts over the past 12 months, sending share prices spiraling lower. The proof is in the compensation arrangements of the managers, which seems to reward total assets managed alot more than sustaining dividends and net profits.
    I treat stock investments like employees, you have to bring them in on a Friday afternoon and review performance and evaluate corrective action. The past two years, dividends declined in a time of record low yields and now book values drop 30-40% in four months. If I had an employees whose job was to protect my book value and that employee went out and loaded up on 30 year, fixed 3 and 3.5% MBS six months earlier and the tail end of a low interest rate cycle. TERMINATION !

19.78-0.04(-0.20%)3:19 PMEDT