Debt Ceiling Debate Creates Opportunity Mortgage REITs, KBW Says

Indie Research

Shares of Annaly Capital Management (NYSE: NLY - News), the largest U.S. mortgage REIT by market value, are down another 4% today as the debate on Capitol Hill to extend the U.S. debt ceiling drags on, approaching the August 2nd deadline. Annaly has seen its shares tumble 8% in the past week as politicians from both sides of the aisle have struggled to reach an agreement that would prevent the U.S. from defaulting on its debt obligations.

The Mortgage Investment Stocks Index is down another 2% today and has slid 4% in the past week, but Keefe, Bruyette & Woods is out with a research note today saying the debt ceiling-induced pullback may provide a buying opportunity in select mortgage REITs.

The research firm thinks a downgrade to U.S. debt would be handled well by the broader market because a ratings change to AA from AAA would not significantly alter spreads.

"GSE MBS (a government-sponsored enterprise mortgage-backed security) is not rated by the rating agencies (their debt is). So there would be no official downgrade of GSE MBS. Given that the MBS is collateralized but government debt isn't, the market wouldn't downgrade MBS similarly because they wouldn't miss any payments, at least for some time," KBW said in its note.

Shares of Hatteras Financial (NYSE: HTS - News) are down 4% while Capstead Mortgage (NYSE: CMO - News) is off 3%. Shares of Invesco Mortgage Capital (NYSE: IVR - News) are down 2% after Jefferies pared its price target on the stock to $23 from $25 citing risks for a downturn in the housing market and interest rate volatility. BRT Realty Trust (NYSE: BRT - News), Cypress Sharpridge Invest (NYSE: CYS - News) and Northstar Realty Finance (NYSE: NRF - News) are all slumping 3% today.

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