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Sunday, June 23, 2013

Volatile period for mREITs

Mortgage backed REITs such as NLY and AGNC are being decimated these days. It is certainly no fun to see them dropping everyday. While I don't think the good time for NLY & AGNC is over, in the short term, they are likely very volatile and maybe continue to decline a bit. The reason is also related to the very fast shooting up of the yields of the long-term Treasury bonds. Actually with the short-term interest is still near zero and the long-term interest is fast increasing, the spread between the two is much wider, which should be very beneficial to mREITs as this is how they earn their money (borrowing with low interest money and lending with higher interest). However, the other side of the coin is that the mortgage bonds held in the mREITs' portfolio is decreasing in value quickly when the value of the long-term bonds are decreasing (value of bonds is just inversely related to their yields). This has brought down the net asset value of mREITs, causing people to dump them.

If you have bought NLY or AGNC, better to keep a stop loss on them as I don't know how low and for how long they may go down before recovering. If you are thinking to buy them, then better to wait to let the dust settle down a bit. Eventually they should come back as long as Benanke keeps the short-term interest low, which won't start to increase till 2015. You just need the gut to go through the volatility during this turmoil time period with bonds.

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