Bad Advice

In addition to the bond haters, I have been amazed to see the hate campaign against the mREITs that is being conducted on the various consumer advice sites – Minyanville, Motley Fool, Seeking Alpha and so forth. Not that I normally read any of these sites, but when I get a quote I see their pieces reported as headlines. Regardless of what thinks is going to happem, their reasoning is entirely specious.

The general theme of these campaigns seem to be that a rise in interest rates will cause the value of their portfolios to decline. So what? You buy mREITs for the dividend income, not for capital gains. And anyway, the mREIT that I own (NLY) has a sophisticated hedging strategy – which it publicly discloses. Also, they observe, dividends have been declining so think how horrible it would be to watch your dividend decline further. True – they’ve been declining because Ben has been running the pump to lower mortgage rates and folks have been refinancing to lower rates.  So you should sit out earning 0% because if you invest at 15%  it might become 12%? Ridiculous. Anyway Ben is now threatening “taper” so I suspect dividends will start going up again.

There’s only one thing that can bring this mREIT game to an end and that is a flat or inverted yield curve. Then the mREITs can no longer earn a spread by borrowing short and lending long. But that’s not happening, in fact the curve is steepening, not flattening. That means the mREITs will do better because the spread will widen on new mortgages and mortgagors will not refinance the old ones. But the time will come when short rates start to creep up. Then and only then will it be time to bail.

Here is a neat chart to monitor the yield curve and look back in history. Now it is Treasuries and mortgage bonds yield slightly more, but it is close enough.

Edit: Ok, this is hilarious. The quarterly round of dividend announcements has begun with dividends either holding steady or increasing (as expected, see above), resulting in an accusation from Motley Fool that the mREITs are “bribing investors to stay.”  You really can’t make this stuff up where financial journalism is concerned. In case you didn’t know, REITs are required to pay out at least 90% of their income in dividends, so have very little discretion in terms of payout.

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