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An Inverted Yield Curve Means Tough Times Ahead For MREITs

Published Mon, 03 Jun 2019 13:53:32 -0400 on Seeking Alpha

The mortgage REITs are all falling together: Annaly Capital Management (NLY), Two Harbors Investment Corp (TWO), Chimera Investment Corp (CIM), AGNC Investment Corp (AGNC), as well as others. Any mREIT that holds mainly agency MBS is getting punched in the mouth. Even the mREITs that don't hold agency MBS are getting hurt.
Data by YCharts Data by YCharts
Normally I would look to buy in this situation, but I'm still holding because of the yield curve. The yield curve recently inverted which hurts mREITs profitability.

I generated this in excel using data from treasury.gov. As you can see at the end of May 2019 the yield curve inverted. The 1 year, 3 year, and 10 year dipped below the 3 month yield. This trend of inversion is a global one as well.
Source: Matt Phillips and Stephen Grocer of the New York Times
An inverted yield curve has historically indicated that a recession is on the horizon. But whether you agree with that or not, an invested yield curve eliminates the chance of profitable trades for many mREITs.
mREIT Profit = (Yield of MBS - Repo Financing Rate) +/- (Swaps, Caps)
If the yield of MBS is less than the repo financing rate, you can say goodbye to profits regardless of leverage.
Current Rates according to WSJ:
Fannie Mae 30 year yield as of 5/30/2019 are 3.54.
6 month LIBOR, a reasonable indicator for guessing short-term financing rates, is 2.54.
This puts interest margins at approximately 1%. To put this in... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
TWO HARBORS INVESTMENT 12.64   0.0 -1.73 1.88 14.92
ANNALY CAPITAL MANAGEMENT 9.21   0.0 -1.59 1.20 13.16
CHERRY HILL MORTGAGE INVESTMENT 16.58   0.0 -1.25 1.96 11.81
AMERICAN CAPITAL AGENCY 16.92   1.0 0.01 1.92 11.44
CHIMERA INVESTMENT 19.21   15.0 1.28 2.00 10.56
ISHARES FTSE NAREIT MORTG PLUS CAPPED INDEX FUND 41.92   0.0 0.00 0.00 0.00