American Capital Agency Corp. (NASDAQ:AGNC) was not well prepared for a QE tapering. Therefore, it suffered in terms of stock price depreciation in recent times. However, the management has announced that it has rebalanced its investment portfolio to better suit climbing interest rates. It has gotten rid of some of the long-term 30-year fixed residential MBS securities, which are considered highly sensitive to changes in interest rates. Further, it announced active management of its assets and hedges to create attractive investment opportunities. These efforts make the company more suitable for the current environment.
Two Harbors Investment Corp (NYSE:TWO) is another favored mREIT. It’s a hybrid mREIT that invests in both Agency and non-Agency MBS. It’s also among the top picks of Credit Suisse and Barclays. Two Harbors Investment Corp (NYSE:TWO) has significant exposure in the non-Agency space, which will enable to the company to withstand rising interest rates. The company also has a higher allocation to credit sensitive assets, which protects its book value. The company is taking advantage of its hybrid structure to pursue opportunities that differentiate it from its peers. These include its mortgage servicing (MSR) license. MSRs provide the company with an effective hedge and a source of higher income. MSRs increase in value as rates go up.
While the macroeconomic environment may become even more challenging if the Fed decides to exit the Agency MBS market, some mREITs have positioned their portfolios to take advantage of the situation. Annaly Capital Management, Inc. (NYSE:NLY), American Capital Agency Corp. (NASDAQ:AGNC) and Two Harbors are three such mREITs. Therefore, I am bullish on these stocks.
The article Buy These mREITs Amid QE Unwinding originally appeared on Fool.com.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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