Wacky stuff

[brewer12345]

As I read it, the market yesterday either completely lost its mind or is forecasting higher long-term rates and a steeper yield curve. How did I arrive at this? I watch several fixed rate preferreds and several mortgage REITs, watching for an opening. The fixed rate preferreds sold off, but the mortgage REITs (NLY, MFA, ANH, etc.) all went up 1 to 4%. So maybe the Fed will be backing off soon and LT rates will spike? Plausible, I suppose, but not how I read things. Anyone else?

 

[greg]

Brewer: Ah, yes. Junk going to he## in a handbasket. I've been watching for a steepening of the yield curve for ages. I don't know if this one is real, but I'm semi-prepared either way :.

--Greg

 

[Nords]

Re: Here it comes...

Over the last two weeks Navy Federal Credit Union has raised their rate for a 30-year 20% LTV fixed-rate mortgage to 6.125. That's three-quarters of a point since August, and they're usually the last & slowest to raise their rates.

 

[brewer12345]

The thing is, everyone seems to think that ST rates will keep going up, and thus far, LT rates have only gone up enough to barely prevent inversion. At some point, the Fed will stop raising rates. My suspicion is that this happens in the first half of next year. When that happens, a lot of pressure will come off the likes of the mortgage REITs, especially if longer rates continue to move up. I want to be in them by the time that happens, but I think its too early.

I can't understand the current market pricing of risk. For example, take CCRT. This is a subprime credit card lender that lends money to the bottom of the economic barrel. They provide next to no information on what goes on in their receivables portfolio. They use the most impenetrable accounting methods (gain on sale). They almost certainly will be taking a severe beating from the spike in bankruptcy filings. Yet they are trading at 3X book and I estimate 14X earnings (generous for a financial). I can't imagine anything good will result, especially as I compare them to somebody like FMT.

 

[thefed]

The thing is, everyone seems to think that ST rates will keep going up, and thus far, LT rates have only gone up enough to barely prevent inversion. At some point, the Fed will stop raising rates. My suspicion is that this happens in the first half of next year. When that happens, a lot of pressure will come off the likes of the mortgage REITs, especially if longer rates continue to move up. I want to be in them by the time that happens, but I think its too early.

Do you care to elaborate on this a little more for a newb? What are mortgage REIT's? I have a REIT in one of my funds, but I was only in it for the RE boom and because it's returned 10% for over 10 yrs.

 

[brewer12345]

Do you care to elaborate on this a little more for a newb? What are mortgage REIT's? I have a REIT in one of my funds, but I was only in it for the RE boom and because it's returned 10% for over 10 yrs. 

A regular REIT invests in actual physical real estate. I suspect that's what you own. Mortgage REITs borrow money and invest in mortgages or mortgage-backed securities. Some invest in commercial mortgages (like SFI), some make subprime mortgage loans and hold them for income (NEW, NFI, etc.), some make mortgage loans to prime customers (TMA), while others invest in mortgage-backed securities. The ones I mentioned invest in MBS. NLY, MFA, ANH and others do this by borrowing short and lending long. They take on a lot of interest rate risk, but typically make lots of money, although they go through some painful downturns. Others, like TMA, try to hedge their interest rate exposure as tightly as possible. This yields somewhat lower returns, but less risk, assuming they don't mess up the hedging.