Nly

[newwurldmn]

Quote from ralph00:

Uh, no. The best thing in the world at the moment for the mREITs would be TLT going down (i.e., long rates moving higher).

mREITs are getting hammered because rates are too low, not because they're moving up.

1. These guys basically borrow short, lend long. Low long rates cut their net interest margin. Absent an increase in leverage, they earn less.

2. Low rates (particularly as they lower MBS yields) combined with banks' growing willingness to lend could lead to a refi boom - meaning mortgages on mREIT balance sheets priced at 105 will get called away at 100 - devastating to book values.

Other than that, there's a lot of value in what you said. Carry on.

+1

mReits are short calls on their bonds. The higher rates go the more out of the money they get... those calls are what everyone focuses on in mortgages.

 

[Bob111]

Quote from ralph00:

Uh, no. The best thing in the world at the moment for the mREITs would be TLT going down (i.e., long rates moving higher).

mREITs are getting hammered because rates are too low, not because they're moving up.

1. These guys basically borrow short, lend long. Low long rates cut their net interest margin. Absent an increase in leverage, they earn less.

2. Low rates (particularly as they lower MBS yields) combined with banks' growing willingness to lend could lead to a refi boom - meaning mortgages on mREIT balance sheets priced at 105 will get called away at 100 - devastating to book values.

Other than that, there's a lot of value in what you said. Carry on.

judging by volume on pic-looks the refi boom is happening now. and that might explain last sell off in the group.those mortgages at 5% or whatever rate will be called and replaced with cheaper ones and this would reduce their earnings ?

 

[Whistlingleaf]

Quote from Whistlingleaf:

In theory mReits will go down at an accelerated rate compared to TLT since they're basically just TLT on leverage. (I wouldn't touch any of them mREITS cause I think long term rates are going up.)

I forget which is which, but NLY/AGNC are 5&10 times leveraged.

Of course it might take awhile to happen ...

Even high dividend plays are at risk moving forward if Treasuries start to rise.... the Fed's interference really has things out of whack, and eventually things will return to a more normalized state (no QE/Twist) and it won't be pretty.

So anyone wish to disagree with me on what I said about TLT and mREITS ?

Look at the TLT chart and the chart of AGNC.

For the record I was bearish then and I'm bullish now on mREITS - I don't think the Fed will allow rates to rise up too high, and I think foreign buyers will have to step in especially Japan.

I don't know why anyone would hold Japan Bonds at ~1% over our Treasuries at ~3% - Japan is going to be a mess over the next few decades. Negative population growth and all the people they have are getting older.

Japan will go busto long before the US - their currency is the ultimate in monopoly money. Hey you can buy worthless real estate with their worthless currency ! Think about it - less people and same amount of houses. How do you get inflation with that scenario ?

Back to mREITS - not sure when TLT will stop going down but when it does mREITs should stabilize and they're throwing off huge dividends to cushion the blow.

I'm looking at the list of mREITS that went down 6-10% today... looks like someone BIG playing the spread got liquidated.

 

[newwurldmn]

I've been doing some work on NLy today.

They hedge a lot of the rate risk. So the decline should beige extreme than tlt but not 5x

I am getting bullish as well but have to think more about it.

 

[JesseJamesFinn]

They keep on getting hammered, Short Interest keeps on pilling up with Western Asset Management, IVR, JMI, and AGNC, NLY. Where do we discover the right price to what the Book Value will be worth next year and how do we determine the rate of it's erosion?

 

[JesseJamesFinn]

NewWurld, your busy trading right now, I was curious if you were able to come to some idea how much NLY's book-value has deteriorated from this first half.


I was reading a article about the destruction of these mREITs and Agency Securities describing how the fear of what Bernanke hinted at actually caused us to move up in i-Rates faster than the Great Crash of Bonds in 1994. That Crash was driven by a 100 Basis Point move and Wall Street has priced in 117 Basis points already.

 

[newwurldmn]

I don't know about that stuff.

I think they are dangerous. It's unclear how effective their hedges are and I think there's a lot of duration in those portfolios. So there is a lot of risk to a large increase in rates. I think the market might have gotten ahead of itself yesterday but I don't think I will be buying here.

 

[pikachu9]

Quote from newwurldmn:

I don't know about that stuff.
I think they are dangerous. It's unclear how effective their hedges are and I think there's a lot of duration in those portfolios. So there is a lot of risk to a large increase in rates. I think the market might have gotten ahead of itself yesterday but I don't think I will be buying here.

AGNC has tried to swap their 30 yr for 15 yrs. Helps a little. I'd expect less decline in book value on further LT rate rises. I'm still bullish on rates and bearish on mREITS. Seems to me a likely Summers nomination would drive rates even higher due to market perception on him being taper friendly.