The last five years have been a veritable bonanza for mortgage REITs. With historically low short-term interest rates and, until now, less demand for mortgage-backed securities, companies like Annaly Capital Management (NYSE:NLY) and American Capital Agency (NASDAQ:AGNC) have been raking in profits.
Like all good things, however, this too has come to an end. The most widely cited catalyst for the change is the Federal Reserve. In September of this year, the Fed unleashed a third round of quantitative easing, whereby the central bank is expanding its balance sheet by purchasing long-dated securities. Most importantly, the measure is aimed specifically at reducing MBS yields -- the same yields that mortgage REITs rely on to make money.
But while the Fed's impact can't be denied, it's nevertheless only one reason mortgage REITs are bound to suffer going forward. The other reason is that the market itself, irrespective of the Fed's involvement, has simply gotten way too crowded. As you can see below, all but two of the largest mortgage REITs that specialize in agency-backed paper have popped up since the financial crisis began.
The impact of this is simple: Because more money is vying for approximately the same supply of agency-backed MBSes, the prices of the latter will invariably remain elevated and their yields concomitantly depressed. With this in mind, investors in these vehicles should start preparing themselves for a future of less spectacular returns than they've experienced in the past.