One of the last things that informed investors would expect from mortgage REITs is the possibility that they would destabilize the mortgage market. But that's precisely what may be happening.
According to Matthew Graham of MBSLive, a real-time source for mortgage-backed securities price quotes, there's talk in the MBS market today about heavy selling from mREITs. If true, the selling pressure has the potential to exacerbate the already precipitous fall in MBS prices and the concomitant rise in interest rates. This reared its head most noticeably on Friday when mortgage rates shot up by the largest single-day margin in history.
"After Friday's blow out, MBS spreads had done an admirable job of tightening on Monday and leveling off yesterday," said Graham. "Hints of volatility in the basis are popping up here and there this morning with pronounced -- but HIGHLY illiquid -- selling just before the Wholesale Inventories data. The alleged culprit is the MBS-based hedging of REIT selling."
Here's a chart from Mortgage News Daily illustrating the extent of the impact in the MBS market over the past few weeks.
An article published today by Bloomberg News cited a source at JPMorgan Chase claiming that mREITs like Annaly Capital Management (NYSE: NLY ) , American Capital Agency (NASDAQ: AGNC ) , and ARMOUR Residential (NYSE: ARR ) may have needed to sell about $30 billion worth of MBSes in "just one week last month to maintain the amount of borrowing relative to their net worth." As the article went on to note, "Those types of sales deepened losses in the mortgage-bond market, which had the worst quarter since 1994, accelerated the exit from fixed-income funds, and fueled a jump in home-loan rates to a two-year high."
For anyone who follows this sector, this news should come as no surprise. Since the beginning of the year, shares of mREITs have fallen by double digits. Annaly is down 17%. American Capital Agency is off by 28%. And ARMOUR Residential by 34%. On top of this, many have been forced to cut their dividends.
This leads me to ask: Where should investors turn for yield?