Mortgage-backed real estate investment trust exchange traded funds continue to weaken on expectations President Obama’s re-election will offer no opposition to the Federal Reserve’s $40 billion mortgage bond purchasing plan, causing spreads and yields to diminish.
REIT earnings and dividends are under pressure as QE3 has caused spreads, bond yields and homeowner borrowing costs to decline, according to Five Star Equities.
Matt Schilling for Seeking Alpha points out that if the Fed continues to buy mortgage-backed securities and act like a pseudo-mortgage REIT, the sector will face lower yields and profitability. Consequently, with no definitive end to the mortgage purchasing plan, investors are already considering other high-yield options.
The Fed will purchase agency mortgage-backed securities. As such, the greater demand will translate to higher prices. However, the increased prices for MBS will diminish yields. While QE3 would help boost book value, mortgage REITs would suffer from lower interest rate spreads, which diminishes interest income.
“Through the use of leverage, these REITs have yields in the midteens,” Morningstar analyst Patricia Oey wrote in a report. “At this time, mortgage REITs are benefiting from historically low short-term rates, but tightening spreads, or a sudden freeze in the credit markets, would have a significant negative impact on these firms.”
Companies that invest exclusively in agency mortgage-backed securities, like Annaly Capital Management (NYSE: NLY) and American Capital Agency (NasdaqGS: ACAS), have taken the brunt of the hit after the Fed’s QE3 announcement. [Options Traders Bet Against REIT ETF]