The Federal Reserve finally moved forward with its long-awaited tapering of quantitative easing last week, reducing its mortgage-backed bond purchases by $5 billion per month as part of a broader reduction in overall bond buying. Yet shares of Annaly Capital (NLY -0.32%) and Two Harbors (TWO -0.72%) were up on the week, and even losses from fellow mortgage REITs American Capital Agency (AGNC -0.11%) and Anworth Mortgage (ANH) were relatively subdued.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at mortgage REITs and the impact that the taper could have on them in the future. Dan notes that even with the $5 billion taper, the Fed continues to buy $35 billion monthly in mortgage-backed securities, continuing to keep rates artificially low. At the same time, the Fed's pronouncement that it intends to keep short-term rates low even longer than previously expected could help high-leverage mortgage REITs make larger profits, with the potential for rising interest spreads that could make more money available for dividends. Dan discusses the mortgage cuts that Anworth and Two Harbors have made recently, in addition to longer-term dividend declines for Annaly, American Capital Agency, and other mortgage REITs. Dan concludes that rising rates could hurt mortgage REITs eventually, but with years to go before financing costs rise, there may be more time for them to produce profits for their investors.
