Agency mortgage REITs have made for great investments in 2012. Is the run over?
David Schawel at Economic Musings sure thinks so:
Leveraging a bond that yields 1.5%-2% (same bonds the Fed is buying via QE) over 8x is not a great business proposition. As the Fed keeps their foot down via QE-infinity, prepayments will continue to accelerate causing margin pressures at the mREITs. At the same time prepayments accelerate, they will be forced to redeploy this cash back into lower yielding bonds. This is a bad formula and dividends will be cut more than investors realize.