(wow) Words Of Wonders Level 2719 Answers – Interest rates are not going off the cliff this time. Today, stock prices are falling because interest rates are rising.
Monday was a wild day for the stock market. Sure enough, the S&P ( SPY ) is down about 4%. That sounds great until you consider the decline in the mortgage REIT index:
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You might wonder why two ETFs are similar when their downside is so similar. However, they have quite a lot of overlap. Also, investors are better off with individual mortgage REITs, where they can get better returns by carefully selecting positions rather than buying blindly. Let’s start with the reason for the fall:
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See how the rate went up? The smallest part is the largest part of the whole picture. Prices went up yesterday.
Now we can move on to MBS. We’ll use a 30-year fixed income MBS with a 4.5% coupon:
You may notice that the price has fallen over the past 6 months as higher interest rates have reduced prices. However, in the last two days, it has decreased. It fell from around $100.95 on Thursday to $98.67 yesterday. It’s a big tone.
Note how the 30 year MBS with a coupon of 4.5 went to $1.30 yesterday. That’s $100 at face value. In contrast, 5-year government bonds fell by around 0.97%. Typically, 30-year fixed-income MBS are not expected to decline much more than the roughly $101 5-year Treasury. Mortgage REITs hedge against interest rate fluctuations. Often this hedge is in the form of LIBOR swaps or Treasury futures. However, the effectiveness of these hedges depends on how well each investment performs. On such occasions we sometimes find one side vibrating more than the other. in 2020 the spread between MBS and Treasuries widened early. This means that MBS Treasuries are underperforming. in 2020 at the end and in 2021 MBS eliminated the treasury. We call it toughness.
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On Monday, we saw interest rates rise as spreads widened. This combination lowers the book value of many mortgage REITs. Why drag values? Many mortgage REITs (not all, that’s an oversimplification) lost 1.6% to 0.9% in assets yesterday. Let’s take 1.3% as a simple number. Then they earn a share of their hedge. Let’s say 0.8 percent. Note that these numbers are not for mortgage REITs. This is just an example. If a mortgage REIT were to run 7 turns ($800 invested in a $100 share), they would have lost 10.4% of their equity (before hedging) due to lower asset prices. On the other hand, their hedges would have yielded a 6.4% return on their equity.
Has every mortgage REIT been hit this hard? Does anyone hit that hard? maybe When will we have a better idea? We get updated Scott Kennedy ratings every week. Book value losses since Friday of last week are already factored into our model. Next weekend we will also add this week’s moves.
Are crises terrible? Of course, a little. These are not all major financial crises. You are not even an epidemic. This crisis seems particularly mild. Compared to previous events, this one is as fun as standing in line at the post office. If they made a movie about this debacle, it would look just as similar to the Facebook video of the fourth best small-town elementary school musical.
Yes, we have high inflation. Yes, the Federal Reserve is in a recession. No, the world hasn’t ended. We still have pretty low unemployment, which is good. Even if unemployment rises by 100 basis points, it will not be higher. This is important because it means that goods and services will continue to be produced. The market is happening.
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Compare the GFC with today’s recession. In the GFC there was high unemployment and one in four homes were underwater. Profits were killed because many companies had mortgages that defaulted, necessitating massive insurance. People without jobs and negative equity had no money to spend. This high demand. It was bad.
Compare today’s recession with a pandemic. The shutdown increased unemployment. Either negligence or mismanagement (I don’t claim to know which and I don’t think it can be proven) at some level of government contributed to the liquidity crisis. Evictions were banned to prevent mass displacement. Do you remember this? How many people would say that the flats were completely uninvested? Eviction insurance has become a big concern for housing REITs (as we predicted). The vast majority of residents were still paying their rent as agreed, and the real challenge is falling occupancy and rental rates, although both were due to return in 2021. at the end
But what about April? In April 2022, the interest rate increased even more. Is NRZ dead in 2022? April?
During the quarter, our book value increased to $12.56. Our book is currently priced at about $13.50. We apply interest rate components to protect our long-term assets as well as our MSR portfolio, which should only help increase our book value when the Fed is expected. We increased our cash and liquidity reserves to $1.7 billion. We will be patient in looking for opportunistic investments in the financial services sector. We believe patience is rewarded in these markets, and the first quarter was an excellent example of our diversified business.
New Times, Dec. 1, 2022 By New Times, San Luis Obispo
Are my eyes deceiving me? I think $13.50 is actually a higher number than $12.56! NRZ had a great announcement, followed by even better news on the conference call.
I highlight the NRZ because it gets a new fast rating. The stock took a complete hit on Monday. They decreased to 16.74 percent. They’re down 22.9% from their 52-week high, and most of that fall was yesterday. This record of 52 weeks was set in 2022. on May 4, just one day after the market saw NRZ’s 2022 first quarter results and learned from NRZ about their April earnings.
Before the fall, we had a small position in NRZ. We doubled this position yesterday. I think NRZ will recover. They closed at $9.05 yesterday, which seems too little for a REIT that has purposefully carried excess liquidity and raised interest rates.
High interest rates hurt their startups, but are great for MSRs (Mortgage Servicing Rights). That’s why NRZ has held up so well in recent quarters. in 2022 the first quarter was exceptional in revenue numbers, but NRZ reported that 2021 IV and 2021 book value increased slightly in the third quarter. High interest rates cannot reduce them.
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Is this mortgage REIT trade attractive today? does not have Anyway, those are the ones we added on Monday.
When we trade, we send real-time notifications to REIT Forum members. We are open about our outlook and buying intentions, so our actions rarely surprise members. You can track whether we have added or removed a position from our public article by checking our featured list. However, the disclosure does not indicate the size of the duties. Given the extent of the decline in NRZ and our position covering the stock, I thought it appropriate to inform all our readers that we doubled our position yesterday.
Since the stock fell right at the end of the day (after our purchase), we have a small unrealized loss on the position. It’s beautiful. We bought the stock at $9.40 (rounded up) and I expect to make a decent profit on this option. $9.05 shares are even better.
We also added a few other positions and closed a few more on Monday’s trading alert. In general, we bought more than we sold, and the selling was only to free up capital for purchases. As volatility increases, we want to take significant action to capitalize on changes in risk and reward profiles. Looking at NRZ, we think the market was wrong. You did it wrong before. I still have 737 shares of New Residential in my open position, purchased on 04/06/2020 for only $3.49.
Estes Park News, December 16, 2022 By Estes Park News, Inc
Taking profit, this position is still over 200% after yesterday’s decline. I don’t think we’ll see that kind of weakness again. This crisis is not as terrible as a global financial crisis or a pandemic.
One person confused about the REIT position we more than doubled was NRZ. This is the sign of the new place of residence. Clear enough?
No, they will save us? They aim for inflation to reduce inflation. Can they beat inflation? No, they may have a small effect (causing a recession), but the main drivers are still on the supply side of the equation. They have minimal impact on supply.
If supply improves, inflation should come down significantly. In this case, one would expect the Federal Reserve to recognize the confidence and accuracy of a thinking child
