In many past postings I have opined on agency reits and noted that I currently own them in the six figure totals so I am not just bloviating about them. Frankly I had avoided them for many years except for occasional periods where I considered the largest of the bunch Annaly Mortgage, NLY, to be seriously undervalued. Today I own two AGNC and HTS, both I consider fairly priced currently and soon likely to be even better values. There are several other agency reits to choose from so up front do not take my ownership as these being the best as I have my purposes so you do your due diligence. However you can hardly go wrong with NLY.
Agency reits make money borrowing money at short term lower rates and then buying Mortgage backed securities (MBS for short) which are paying higher interest rates and making money on the spread. Note these are US government guaranteed mortgages so your money is absolutely safe and your only risk is if the borrowing interest rates go up so as to cost you more to borrow. You also can get hurt if the mortgage interest rates move up and you are holding MBS securities that pay lower making your holdings worth less. Otherwise the dividends are real nice at around 14% to 18%.
The Federal Reserve made clear back in October of this year that interest rates on the lower end would not be rising for at least two years. Since they have significant control of such rates as they lend much of the money to banks for consumer lending you can rest assured that interest rates on the lower end are set for two years. Add in that with the economy going nowhere I would bet that those low rates are here to stay for a while longer too.
This past week bond guru Bill Gross posted his mutual fund holdings and it was what would be called a "all in" and "bet the farm" moment. Bill has bet over $60 billion, yes that is a B that the Federal Reserve is going to do a QE3 early next year and much of that will be buying over $500 billion in MBS securities. Now Bill bet wrong last year and maybe is looking to make some of his lost wager back, but I would not bet against Bill twice and certainly not a levels this high. He rarely make mistakes, and he as yet to made the same one twice.
So if the Fed buys up MBS securities next year the mortgage end of the yield curve is going down and the last few digits of the borrowing end is likely headed lower too. Wonder if you can be forced to pay negative rates? Anyway the current holdings of the agency reits will become more valuable and that should buoy stock prices and maybe move them up some. Either way the spread will be good for future MBS agency purchases and the dividends will continue to be in middle teens double digits.
This will make me buy even more of these babies going forward and I would suggest you consider some of these agency reits as well as part of your portfolio. You can also buy these reits via an ETF, symbol MORT. I would buy the ETF if it offered options, but for my hedge funds purposes can not. How anyone can put all their money in US Treasury bonds at less that 1% when you can get yields like this that are guaranteed by the same government. Even if you lose 25% of your stock value of a 5 year period, which I expect not to happen you still make around 60% net including your dividends. US Treasury 10 Year bonds yield at best 10% return over the same period without considering any captial loss risk from inflation.
One other benefit of a QE3 are lower rates for home buyers. So home buyer hold your fire and maybe make your move early next year.
I am currently long AGNC and HTS. Also own options on both. Will be adding to one or both by the end of December. Yeah, I am putting my money where my mouth is.
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