Agency REITs benefit from a bear steepener
The guest argued that a bear steepener is beneficial for agency mortgage REITs because they fund short-term and benefit from wider spreads, unlike property REITs.
The argument
The guest explained that agency REITs like Annaly buy mortgage-backed securities and mortgage servicing rights, funding themselves primarily in the short-term repo market. Consequently, a steeper yield curve increases their net interest margin, whereas property REITs are hurt by steepeners because they must issue long-term debt.
The thesis, stress-tested
✓ What validates it
- ✓Widening spread between short-term repo rates and long-term mortgage-backed security yields
- ✓Stable book value performance in quarterly earnings reports
▸ Risks discussed
- ▸Hedging mismatches during rapid yield curve shifts
- ▸Repo market funding illiquidity or spikes in short-term rates
Hear it yourself
"From my understanding, NLY is a highly levered leveraged, sorry, paper company, meaning they borrow short to lend long. What if there is a bear steepener? Can you please ask him to expand on this portion of the thesis?"
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