Investments

mREITs feed off possible QE continuation

Government shutdown provides opportunity for more MBS purchases

Mortgage real estate investment trusts rallied on the HW 30 Tuesday, as Congressional attempts to restart the government failed to gain traction, leaving the nation in shutdown mode.

There are various theories as to why the mREIT sector is outperforming others, but one of the more obvious theories ties back to the Federal Reserve's dependence on economic data and certainty. A government shutdown breeds uncertainty, which can lead to the continuation of QE as the Fed tries to stroke both the housing recovery and the economy.

With the government froze, the Fed lacks key data, such as the weekly jobless reports — a significant economic barometer given the fact the continuation of QE is often linked to the unemployment rate.

If the market does not receive new unemployment data, it provides the central bank with a bigger incentive to continue its monthly purchases of mortgage-backed securities, explained FBR Capital Markets analyst Daniel Alstcher.

"If you don’t know where the numbers are coming in at, you can make a good argument that we have to continue tapering, which means we will kick the can down the road for another month or so," he stated.

Furthermore, a government shutdown also means a lot of a housing activity has come to a halt — meaning homeowners attempting to refinance may face difficulty.

While it’s a clog in the pipeline for borrowers, mREITs are taking advantage of the market stop because it means these companies won’t get prepaid on their portfolios, leading to a stronger book of business, Alstcher pointed out.

Regardless of the reason, mREITs outperformed Tuesday, along with the entire HW 30, which was up 0.32% at market close.

mREIT American Capital Agency (AGNC) closed up 0.97% for the day, while Annaly Capital Management (NLY) also rose an impressive 1.12% on Tuesday.

Additionally, private issuer dominator Redwood Trust (RWT) closed out Tuesday up 0.10%, with Two Harbors Investment (TWO) following suit, up 0.67% for the day.

Although Alstcher is not banking on a long-term trend in mREITs, he urges investors to take the sector day-by-day.

"For now, it seems to be working," he stated.

Overall, all indexes closed out on top, with the Dow Jones unchanged, while the Nasdaq and S&P 500 finished up 1.03% and 0.60%, respectively.

The talk on Wall Street was that all of the uproar over the government shutdown could increase the government's chances of resolving the debt ceiling debate.

However, it’s important to note that if a resolution cannot be agreed upon, the market will face another headache on top of the government shutdown, analysts say.

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