Are Mortgage REITs Destabilizing Interest Rates?

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.

Source: Mortgage News Daily

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.

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  • Report this Comment On July 10, 2013, at 2:03 PM, ArmChairPundit wrote:

    A better way to control interest rates is to use the cost of living rates. Not the Fed.

  • Report this Comment On July 10, 2013, at 2:22 PM, jonkai3 wrote:


    Destabilizing Interest Rates? --------needed to sell about $30 billion worth of MBSes in "just one week


    what is particularly idiotic about this implied argument is the fact that MReits provide the buying that was the only thing that kept interest rates low before the fed, The only Destabilizing factor of course is the fed.

    and the fact the Fed is Buying about $30 Billion a week in MBS paper, which if these "experts" were even close about the selling, would mean interest rates were back to "NORMAL"... (and these "experts" are rarely even close)....

    in reality the MReits provide the place where MBS is BOUGHT, without them, interest rates would be substantially higher through out the last 15 years at least.

    the ONLY reason for the rising interest rates is because of the fed's statements about not BUYING as much, there by letting interest rates return to more "normal", imagine if there were no MReits... a whole new "Normal" would be on the order of the "Carter" years....

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