A good article from MarketWatch:
“Mortgage REITs operate in much the same manner as leveraged bond funds, borrowing at lower short-term rates to invest in higher-yielding, longer-term securities. The product of this arbitrage constitutes most of the total return to investors, especially when the yield curve is steep.”
..which is why we like them so much right now…”Helicopter Ben” is guaranteeing short-term rates stay low through 2014 (i.e. cheap borrowing for mREITs).
“But we’ve seen the yield curve grow flatter over the past year, beginning with the Fed’s Operation Twist initiative, commenced in September 2011.
Thus has the particular art endemic to arbitrage been especially apparent, as some mREIT managements have more deftly navigated the flattening curve than others. And that disparate performance can certainly be seen in the underlying metrics.”
…the author goes on to say that he is long AGNC, CYS and NLY.
We are long AGNC, NLY and TWO.