Knowing that Fed chairman Ben Bernanke will not taper the federal repurchase asset program before the end of the year is keeping
Findings from a
The mortgage REIT market of late has gone through ups and downs “with much of the group lingering near 52-week lows” as their average books of business traded at discounts of about 15%, analysts wrote.
“Interest rate concerns are clearly still at the forefront, as the market wrestles with when Fed tapering may begin, what it might do to rates, and what that might do to REITs.”
What many in the industry appear to forget, analysts argue, is that mREIT portfolios “are better hedged and less exposed to rates now than they were in recent quarters.”
The bigger risk until tapering actually begins, or there is a more detailed baseline plan in place, analysts warn, is disconnecting interest rates from macro fundamentals as the market focuses less on “what are Treasuries worth” and more on “what will the Fed do next.”
“The market has focused so much on the risk of rising rates it has become oblivious to the negative impacts such sharp increases would likely have on economic growth,” or the debt ceiling standoffs and “sharp philosophical divides” about the budget.
The overall economy is likely to disappoint “against even low expectations,” and interest rates may increase further, concludes KBW’s “mREITs and Rate Sensitivity” report.
In summary “the short answer” to what is happening in the mREIT market, analysts note, is that agency REITs most probably will see an interest rate increase of about 166 basis points to an average of about 4.45% on 10-year pricing.
These rate gains “appear already priced” into the agency REIT group assets.
Analysts’ estimates based on the current structure and book value indicate that if rates rise 100 basis points agency mREITs would lose about 10% of book value.
Pricing of hybrid mREITs on the other hand is expected to be “substantially more” tightened.
Rate volatility is expected to continue over the coming months “as the market wrestles with each incremental macro data point and tries to guess what it might mean for tapering.”
Nevertheless, analysts’ “bias is positive” as in the absence of “real near-term catalysts” and presence of low-teens yields “mREIT investors do get paid to wait.”
