Mortgage REITs Crash and Burn, and There's More to Come

Mortgage REITs got clobbered again on Monday, making Friday's drubbing look like a walk in the park. While all players got slapped around to some extent, the agency trusts took it the hardest. Annaly Capital (NYSE: NLY  ) lost more than 5%, American Capital Agency's (NASDAQ: AGNC  ) stock fell over 6%, CYS Investments (NYSE: CYS  ) took a dive of nearly 8%, and long-suffering Armour Residential (NYSE: ARR  ) lost well over 8% by the close of business.

What happened?
A few things came together at once, it seems, causing more deep pain in a sector that has seen more than its fair share lately. Last Friday's somewhat positive jobless claims announcement, which showed a decrease of 15,000 in new unemployment claims from the week prior, set the stage for the return of the taper tremors, and mREITs sank.

Concerns over Larry Summers being the favorite to replace Federal Reserve Chair Ben Bernanke also added to market turmoil, as he is seen as more apt to speed the taper than rival Janet Yellen. 

Monday saw more negative action, as 10-year Treasury yields sat briefly at 2.90%, the highest in two years. Nerves are extra raw as investors await Wednesday's release of the Federal Open Market Committee meeting minutes from July, wherein analysts and investors alike plan to find evidence of a taper timeline. According to analysts surveyed by Bloomberg, 65% expect the Fed to begin slowing its $85 billion monthly asset purchases as early as September.

Expect rough seas for a time
No matter what the market decides is the plan for asset tapering, things aren't going to settle down for a while. Even if things calm a bit after the FOMC minutes are chewed and digested, new jitters will begin well before the government releases the August jobs report on September 6. Then, of course, there is the next Fed meeting, taking place September 17 to 18, with a summary and press conference to follow.

The battering of the agency mREITs is disconcerting, but surely not a sign of mortality. The strong leadership of Annaly and American Capital Agency will see them through, and though CYS had an especially tough second quarter, I'd bet CEO Kevin Grant learned a lesson from the company's disappointing hedging experience.

Dividends will most likely suffer, though, and Armour, with its monthly payout, may be the first to make such a cut. Remember, though, that Annaly's dividend fell to $0.10 back in 2005, and the company survived -- and thrived. True believers may want to look at the current situation not as a setback, but as a buying opportunity.

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  • Report this Comment On August 21, 2013, at 12:27 AM, grahamsway wrote:

    One might want to be very cautious with mReits.

    Not because of market sentiment, or losses in book value or reduced dividends but because of simple finance.

    As interest rates especially in the 5yr to 10yr area move up, the value of the MBS holdings goes down. Unfortunately these are used as collateral for the short term repos funding them.

    If rates continue to rise and once the collateral coverage is sufficiently reduced it will likely put a big hurt on these firms.

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