REITs Deepening Bond Losses as Leverage Forces Sales – BLoomberg 07-10-13

Salient to Investors:

JPMorgan Chase said REITs may have needed to sell about $30 billion of government-backed mortgage securities in just one week last month to maintain the amount of borrowing relative to their net worth.

Bryan Whalen at TCW said REITs have been one of, if not the biggest contributors to the underperformance and volatility in mortgage bonds.

Ken Hackel at CRT Capital Group said the industry relies on leverage, and REITs’ sales of mortgage bonds to meet margin calls and maintain leverage have absolutely been a factor in the slump in mortgage-bond prices.

Mahesh Swaminathan et al at Credit Suisse said higher interest rates could trigger further REIT sales, creating a key risk to their recommendation that mortgage bonds would outperform.

Scott Minerd at Guggenheim Partners said REITs and other investors that use leverage helped push up bond yields as they sold debt or added bearish bets on Treasuries as hedges, and rising rates will reduce housing affordability, and housing is the primary locomotive of US economic growth.

Steven Delaney at JMP Securities said investors have been overcompensating in selling REIT stocks while preparing for bond prices to fall further, increasing the discounts to book values at which REIT shares trade – on July 5 companies that invest in only government-backed bonds were trading at 88 percent of current book on average.

Daniel Altscher at FBR Capital Markets said mortgage REITs got undeservedly whacked and look attractive as a short-term trade.

Merrill Ross at Wunderlich Securities said she doesn’t see relative value in REIT stocks for the first time in 5 years due to the heightened risk that the only way to raise liquidity might be to disgorge bonds at fire-sale prices.

Read the full article at http://www.bloomberg.com/news/2013-07-10/reits-deepening-bond-losses-as-leverage-forces-sales.html

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