It was just about one year ago that QE3 made its debut, and mortgage REITs, particularly agency-only players like Annaly Capital (NYSE: NLY ) , Armour Residential (NYSE: ARR ) , and American Capital Agency (NASDAQ: AGNC ) began moaning about the increased competition for mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
As the spread between short-term and long-term interest rates began to contract, strangling profits, competition for MBSes also caused prices to rise. Other agency mREITs were nervous, too. CYS Investments (NYSE: CYS ) noted at the time that QE3 turned the Federal Reserve into the sector's biggest rival for mortgage bonds, and as spreads began to shrink, so did dividends. By December of last year, Annaly, Armour, and Capstead Mortgage (NYSE: CMO ) had all trimmed their payouts.
But, that was months ago, and the market has grown accustomed to quantitative easing -- so much so, that just a whiff of anything remotely resembling a tapering of the monthly MBS and bond purchases sent the mREIT sector reeling. When the Fed announced yesterday that the taper will not occur until economic indicators are more favorable to a slow QE3 exit, mREITs responded with exuberance.
Annaly rose by nearly 5% before the market closed yesterday, and American Capital Agency clocked a 5.3% gain. Poor Armour, which has really been getting clobbered lately, saw its share price gain almost 7%. CYS increased by 5.45%, while Capstead logged a lower, but still respectable, hike of nearly 2%.
So, the worst is over, right?
It's wonderful to see the battered sector finally get some investor love, but there is some definite short-sightedness going on here. The FOMC decision is, at best, a reprieve, since QE3 can't go on forever. The pain will return with the FOMC's October meeting, as analysts and investors await the meeting minutes to arrive in November. Then, just as occurred when the July minutes were released last month, everyone will scour the report for the slightest hint of taper talk.
By the time the December meeting comes around, complete with a summary of the committee's take on the economy and a press conference, markets will be in a lather again. No doubt, mortgage REITs will have jumped back on the roller coaster long before the FOMC's last meeting of the year.
For the long-term mREIT investor, times will be tough, but there is a silver lining, here: Buying on the dip becomes much easier. Savvy investors who monitor taper talk and keep an eye on share prices should be able to pick up some sweet deals the next time the Nervous Nellies spring into action.
The long-term view is still the best
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