With QE Infinity potentially ending in mid-2014 and American Capital Agency (AGNC) slashing its quarterly dividend today (now $1.05 per share, was $1.25), mortgage REITs are still hurting. Consistent with our thesis on the group, dividend payments at a variety of industry constituents are not sustainable. American Capital Mortgage (MTGE) also cut its dividend today, while Two Harbors (TWO) lowered its quarterly payout a couple weeks after our industry thesis hit the wires. Annaly (NLY), American Capital Agency, Armour Residential (ARR) and Western Asset Management (WMC) were all down more than 2% today.
With Fed Chairmen Ben Bernanke announcing potential tapering in 2013 and a potential end to mortgage-backed security purchases in mid-2014, the 10-year Treasury yield has moved nearly 15 basis points higher today. Though this may not seem like a big deal, it is a rather large move for the bond market. The 30-year Treasury yield has moved, but not as sharply. If the yield curve continues to flatten, mREITs will continue to see spread income challenged. Our thesis remains unchanged, and we continue to be very bearish on the industry. There is further pain to the downside, in our view.