What happened

In the month of September, shares of the mortgage real estate investment trust (mREIT) AGNC Investment Corp (AGNC 1.81%) fell close to 30%, according to data provided by S&P Global Market Intelligence.

The main culprit for the drop is due to spreads on mortgage-backed securities (MBS) widening.

So what

REITs offer investors an easier way to invest in real estate because investors don't have to buy any actual real estate themselves. They buy shares like any other stock and then the management team does various types of investment strategies. To qualify as a REIT, the company must pay out at least 90% of its taxable income in dividends to shareholders. Mortgage REITs are simply REITs that invest in mortgages and MBS.

Like most of the stock market, mortgage REITs have been suffering as the Federal Reserve has aggressively raised its overnight benchmark lending rate. Mortgage rates have exploded higher and outpaced treasury yields, leading MBS spreads to widen as well.

30 Year Mortgage Rate Chart

30 Year Mortgage Rate data by YCharts

AGNC has about 71% of its investment portfolio invested in agency MBS, meaning these are guaranteed by the government-sponsored entities Fannie Mae and Freddie Mac.

According to AGNC's second-quarter regulatory filing, a 0.50% rise in MBS is projected to erode tangible net book value per common share by 31%. That's because MBS values trade inversely to interest rates so the higher the yield the lower the value of the bond, which will hurt AGNC's book value.

At the end of the second quarter, AGNC's tangible net book value per common share was $11.43, a decline of $1.69 from the end of the first quarter. Considering MBS spreads have continued to widen in Q3, more pain could be coming. MREITs can trade based on a multiple of their book values, which is why the stock price can fall when the book value does.

Now what

With many REITs including AGNC trading below book value, this certainly could be an opportunity to get in at the right time. Additionally, AGNC currently pays out an annual dividend yield of close to 17.5%.

However, it's also possible that MBS spreads continue to widen because the Federal Reserve is currently in the process of quantitative tightening (QT), in which it reduces its balance sheet by letting U.S. Treasury bonds and MBS it has purchased roll-off, or the Fed can make an outright sale.

If more MBS flood the market that leads to more supply and less demand, leading to a decline in MBS values and therefore a rise in MBS yields. The last time the Fed attempted QT, MBS spreads widened.

There are a lot of moving parts right now and a lot of unknowns. For now, I'd still recommend staying on the sidelines right now, unless you feel really confident about the trajectory of the Fed's interest rate hikes and QT. If there is more clarity in the near future, that could make AGNC an attractive opportunity.