When a panel of executives managing agency mortgage real estate investment trusts sat down for a recent FBR Capital conference, the takeaway from their discussion was clear: Much like hybrid mREITs, agency REITs are “stuck between a rock and a hard place” as it becomes unpredictable to pinpoint the direction of mortgage rates.

The panel included Kevin Grant from CYS Investments, Lloyd McAdams from Anworth Mortgage Asset Corp. and Phillip Reinsch from Capstead Mortgage Corp.

“Unless there is a significant shift in the interest rate outlook, our expectation is that the group likely remains trading-oriented with investors playing the stocks relative to daily moves in rates,” FBR Capital wrote in its coverage of the panel.

It seems all REITs are somewhat dependent on the flow of rates, and Ron D’Vari, CEO and co-founder of NewOak Capital, knows just how slippery a slope it can be.

He remembers last summer when Ben Bernanke sent hints of a coming tapering of Fed asset purchases to the market. If the Fed had actually moved in September, it would have meant fewer mortgage-backed securities and Treasury purchases by the Fed each month.

Hearing this at the time, the market saw rates shoot up automatically, putting some strain on REITs.

"When Bernanke spoke you had a jump in mortgage rates, especially the agency mortgage REITs," D'Vari explained. "When rates go up, the securities lose value. Then, you have to sell them to reduce your leverage."

The key question for investors is how quickly will rates rise — and how hedged are the REITs going forward, D’Vari noted.

As far as rates rising, the market knows a Fed taper — especially with Friday’s improving jobs data — could come as early as March. The prospect of rates going up is a major headwind for REITs, but it’s manageable as long as strong communication exists in the market, D’Vari suggests.

To prepare for interest rate spikes, D’Vari says REITs can do two things — reduce leverage and hedge. While there are calls for interest rate spikes by early 2014, he believes REITs still have time to manage some of the risk.

"From a realistic point of view, the Fed cannot afford to see the mortgage rates at 5%," he said. "Therefore, in a way the REITs have a lot of time to adjust and lower their leverage."

Yet, he's insistent that REIT managers should not create a double-whammy scenario in which rates go up at a time when a REIT is still adjusting both its hedge and leverage.