Moving forward, income investors are concerned about the negative effects of a rising rate environment. However, the Sterne Agee analyst point out that while the Federal Reserve is reducing its total mortgage-backed securities purchases, the supply of MBS has also declined due to slow refinancing activity and fewer home purchases. Consequently, in a low supply environment, coupled with the Fed’s continued policy of reinvesting MBS principal paydowns to offset tapering, the market may be in a better-than-expected position. [Mortgage REIT ETFs Look Attractive in Subdued Rate Environment]
Additionally, the analysts believe Fed chair Janet Yellen is unlikely to hike rates given the stubbornly high rate of unemployment. The U-6 unemployment/underemployment rate is still at 12.1%, the highest level in over 20 years. The U-6 number represents total unemployed, marginally attached workers and part timers, according to the Bureau of Labor Statistics.
iShares Mortgage Real Estate Capped ETF
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Max Chen contributed to this article.