Interest rate spreads drive mortgage REIT performance
For mortgage REITs like Annaly and AGNC, the absolute level of interest rates is secondary to the yield spread they can capture.
The argument
The speaker explained that the recent uptick in the 10-year Treasury and the broader rate complex beyond two years is beneficial for these REITs because they can purchase higher-yielding assets. They leverage these government-insured assets through repurchase agreements to generate double-digit dividend yields.
The thesis, stress-tested
✓ What validates it
- ✓Stabilization or widening of the spread between short-term funding costs and longer-term Treasury yields
▸ Risks discussed
- ▸A narrowing of the spread between cost of funds and asset yields
- ▸Disruptions in the repurchase agreement (repo) market used for leverage
Hear it yourself
"In the case of Annaly, the uptick in the ten year treasury and and really the entire rate complex out beyond two years is actually good for them because they are buying today securities with higher yields."
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