Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC): Are Mortgage REITs Destabilizing Interest Rates?

Annaly Capital Management, Inc. (NYSE:NLY)One of the last things that informed investors would expect from mortgage REITs is the possibility that they would destabilize the mortgage market. But that’s precisely what may be happening.

According to Matthew Graham of MBSLive, a real-time source for mortgage-backed securities price quotes, there’s talk in the MBS market today about heavy selling from mREITs. If true, the selling pressure has the potential to exacerbate the already precipitous fall in MBS prices and the concomitant rise in interest rates. This reared its head most noticeably on Friday when mortgage rates shot up by the largest single-day margin in history.

“After Friday’s blow out, MBS spreads had done an admirable job of tightening on Monday and leveling off yesterday,” said Graham. “Hints of volatility in the basis are popping up here and there this morning with pronounced — but HIGHLY illiquid — selling just before the Wholesale Inventories data. The alleged culprit is the MBS-based hedging of REIT selling.”

Here’s a chart from Mortgage News Daily illustrating the extent of the impact in the MBS market over the past few weeks.

Source: Mortgage News Daily

An article published today by Bloomberg News cited a source at JPMorgan Chase & Co. (NYSE:JPM) claiming that mREITs like Annaly Capital Management, Inc. (NYSE:NLY), American Capital Agency Corp. (NASDAQ:AGNC), and ARMOUR Residential REIT, Inc. (NYSE:ARR) may have needed to sell about $30 billion worth of MBSes in “just one week last month to maintain the amount of borrowing relative to their net worth.” As the article went on to note, “Those types of sales deepened losses in the mortgage-bond market, which had the worst quarter since 1994, accelerated the exit from fixed-income funds, and fueled a jump in home-loan rates to a two-year high.”

For anyone who follows this sector, this news should come as no surprise. Since the beginning of the year, shares of mREITs have fallen by double digits. Annaly Capital Management, Inc. (NYSE:NLY) is down 17%. American Capital Agency Corp. (NASDAQ:AGNC) is off by 28%. And ARMOUR Residential by 34%. On top of this, many have been forced to cut their dividends.

This leads me to ask: Where should investors turn for yield?

The article Are Mortgage REITs Destabilizing Interest Rates? originally appeared on and is written by John Maxfield.

John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.