Weekly Newsletter   Challenge account   Weekly Newsletter   

Impact Of QE3 On Agency Mortgage REITs?

In this article, I look into how QE3, more particularly the Fed’s MBS purchase program, affects agency mortgage REITs. I discussed my approach for agency mortgage REIT analysis in this prior article.

A few days ago, the Fed laid out its plan to buy about $40bb of agency MBS per month over the next several months. The price of mortgage-backed securities has since gone up, and their yields have come down significantly. As a consequence, many fear that REITs investing in these bonds would see their income drop, which would imply lower dividends in the future.

However, I think that in fact QE3 will not have a negative effect for two main reasons:

  • The spread between primary and secondary mortgage rates will widen as the Fed pushes MBS yields tighter.
  • The increase in book value of REIT MBS positions will largely compensate for the loss in interest.

I illustrate my logic with Armour Residential (ARR). I like it as an example because I own it.

Continue reading…

Leave a Reply

Your email address will not be published. Required fields are marked *