Heading into 2015, mREIT investors should monitor action in short-term Treasury ETFs, such as the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY) and the Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO), because if the Fed does raise rates, it will likely be short-term rates. Mortgage REITs are particularly sensitive to fluctuations in short-term rates.

“Second, and more significantly, interest rates may rise as soon as 2015. With short-term rates likely rising faster than long-term rates, this could cause mortgage REIT’s net interest margin to compress,” note Calanog and Severino.

Fed Interest Rate Expectations

Chart Courtesy: Market Vectors