Mortgage REITs resilient despite yield curve inversion
The guest argued that mortgage REITs like Annaly Capital Management are resilient to interest rate fluctuations because they manage spreads and hedge leverage effectively, making price dips buying opportunities.
The argument
The guest explained that mortgage REITs raise capital in equity markets and use short-term repo financing to leverage government-guaranteed mortgage-backed securities. He noted that despite the two-year treasury yielding more than the ten-year treasury for years, these vehicles performed well due to strong management and hedging strategies.
The thesis, stress-tested
✓ What validates it
- ✓Stable or expanding net interest margins in upcoming quarterly reports
- ✓Consistent dividend payouts despite yield curve volatility
▸ Risks discussed
- ▸Inability of management to hedge interest rate risk effectively
- ▸Disruptions in the short-term repo financing markets
Hear it yourself
"REITs like Adelie and AGNC and PennyMac all raise their capital in the equity markets. They invest in government guaranteed mortgage backed securities, and then they add leverage. The leverage that they get, Julia, comes from the short term markets."
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