Tuesday, November 20, 2012

mREITs still under pressure

Mortgage REITs (mREITs) margins continue to be squeezed from both sides. Agency MBS yields are still near record lows, while cost of funding is elevated. mREITs fund their leverage through term repo, which is near the highs.


Source: JPMorgan

JPMorgan: - REITs have been squeezed by both narrower asset spreads since QE3 as well as by higher funding costs via repo. This has caused their equity to plunge, with NLY and MFA down roughly 12% over the past six weeks. Forward demand from these investors will be weaker since their price/book ratios are largely below par, and there have been some concerns of actual REIT selling of MBS. We believe it’s more an issue of a lack of MBS demand, rather than selling, but it’s been another source of pressure.
Of course back in September after this post on mREITs, we got numerous e-mails arguing that these are still superb investments that provide stable income and one should not be concerned about the leverage. Perhaps, but September was certainly not a great time to get in.


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