Take profits on mortgage REITs above book
The tactical case argued is to take profits on mortgage REITs like Annaly Capital Management when they trade well above book value, especially as a flattening yield curve threatens future yields.
The argument
The guest noted that while he holds Annaly for long-term income, investors focused on capital appreciation should take profits when the stock trades above book value, as these firms typically issue shares under those conditions. Additionally, falling interest rates lead to write-downs on negative-duration mortgage servicing rights, and a flattening yield curve will make it harder to sustain high yields.
The thesis, stress-tested
✓ What validates it
- ✓Annaly or peer mortgage REITs announcing secondary share offerings while trading above book value
- ✓Write-downs on mortgage servicing assets reported in upcoming quarterly earnings
▸ Risks discussed
- ▸Finding alternative assets that replicate a 13% to 14% yield is extremely difficult
- ▸A steepening yield curve would counter the thesis and support mortgage REIT profitability
Hear it yourself
"But all mortgage firms, remember, when interest rates fall, they always take write downs on their servicing assets because servicing is a negative duration asset. It's the opposite of a treasury bond. When treasury yields go up, the, yield, if you will, on mortgage servicing goes down."
00:00 / 00:20
AFFILIATE LINK · ZORTIX MAY EARN A COMMISSION · NEVER A RECOMMENDATION TO TRADE