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Why Did Annaly and Peers Get Crushed in the Fed's Wake?

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When I wrote yesterday about mortgage REITs and the upcoming press conference regarding the Federal Reserve's two-day meeting, the entire financial sector -- including mortgage REITs -- was lit up bright green. I noted that investors seemed to have come to peace with the idea of a tapering of QE3, though I didn't think it likely to begin right away.

A mortgage REIT massacre
Fed Chair Ben Bernanke did, to my surprise, address the issue of tapering off the bond-buying spree known as QE3 in a definitive way, giving a tentative timeline of "later this year" for a reduction of its monthly purchases, as long as the economy cooperates. Bernanke also said that it would want to see the unemployment rate sitting around 7% at the end QE3, which he estimated to be mid-2014, with a commensurate inflation rate of less than 2.5%.

Blood immediately began to flow in the mREIT sector, with Annaly Capital (NYSE: NLY  ) dropping by 2.77%, while fellow agency player Armour Residential (NYSE: ARR  ) fell by 3.30%. Despite staying high on the day it announced a dividend cut, American Capital Agency (NASDAQ: AGNC  ) took a plunge, too, registering a share price loss of 3.55% by the close of trading. Even hybrid Two Harbors (NYSE: TWO  ) suffered a sizable dent in its share price, experiencing a plunge of 3.23%.

What happened? Obviously, the market wasn't really ready to hear about a taper, no matter how calm it appeared on the surface. Granted, the possible slowdown has been identified by Uncle Ben as happening sometime later in the year, but it will happen only if certain criteria are met. Some analysts predicted a tapering in early 2014, so granted, the new reality is that it might happen a few months early. Is that really so awful?

Lots of good news, too
Even as Annaly managed to gain after-hours after announcing a dividend trim, the sector was, nevertheless, fairly buried by twitchy investors. It's worth noting, however, that the entire market was down late in the day: Financials lost more than 1.50% throughout the day, and both the Dow and the S&P 500 ended up with losses greater than 1%.

The possible speed-up of a QE taper was, really, the only bit of bad news -- and that is also something to keep in mind. Not only did the Fed note in a statement that it would, for the time being, continue with its bond and security buying program, but it was clear that the Fed committee is not in favor of raising interest rates until at least 2015.

For mREITs, this means another long span of low borrowing rates. With long-term rates ticking upward, many trusts have seen their spreads widen -- a very good thing, indeed. Another plus is the fact that the committee said the Fed will retain the mortgage-backed securities it has been buying -- which means there won't be a sudden deluge of MBSes being dumped on the market, which would very likely be detrimental to the trusts' book values.

Time to chew, and digest
Investors knew this day would come, and once the shock wears off, things should normalize. It's important to remember that the Fed sees some definite improvement in the economy, which is great news. Really, wasn't that the whole idea behind quantitative easing in the first place?

There's no question Annaly Capital's double-digit dividend is eye-catching -- even with the just-announced cut. But can investors count on that payout sticking around? With the Federal Reserve keeping interest rates at historically low levels, Annaly has had to scramble to defend its bottom line. In The Motley Fool's premium research report on Annaly, senior analysts Ilan Moscovitz and Matt Koppenheffer uncover the key challenges the company faces and divulge three reasons investors may consider buying it. Simply click here now to claim your copy today!

Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 20, 2013, at 3:26 PM, pace2001 wrote:

    Simple reason why MREITS are down. The underlying assets they hold are in freefall. From Quarter End to pre fed the prices of 30 year Agency 3.5% was down 2.5% since Fed announce in 2 days that same security is down another 2%.

    2% doesnt sound like much but when your talking about 8 times lever even with hedges in place. I could assume a 10% drop in book value since Fed announcement.

  • Report this Comment On June 20, 2013, at 9:50 PM, mickeysps wrote:

    Can you do an indepth report on how this is bad news for mREITs? If long term rates are up and short term low how is this bad news.Wish the anal investors would use thier heads and quit jumping ship at any supposed bad news.The Fed has to ease up sooner or later. Grow up people.

  • Report this Comment On June 21, 2013, at 8:55 AM, ilanzm wrote:

    I am not worried about the hysteria of the market, nor do I care about NLY investors jumping off ship. Instead I am buying with as much cash that I left for such occasion.

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