While the recent spike in Treasury yields pressured mREITs, Diana only anticipates a 0.25% hike by the end of the year, followed by a “long pause,” which should have little impact on mREIT fundamentals.
“A 25-bp fed funds rate hike could also push 10-year/ mortgage rates higher, with little impact on net interest rate spreads/dividends,” Diana added. “If expectations of further near-term rate hikes are muted, book values could also remain relatively stable. We expect stabilization with a slight downward bias.”
Mortgage REITs have exhibited a negative correlation to interest rates changes, especially if the yield curve flattens. Many agencies use leverage to capitalize on the arbitrage spread between short- and long-term interest rates, so companies can still make money in a rising rate environment, as long as long-term rates rise faster than the short-term rate or if the yield curve steepens.
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.