Mortgage REITs are a polarizing asset, either loved (for their yield) or despised (for their risk) by investors.Mortgage REITs are financial firms that arbitrage the spread between the short-term interest rate and income from mortgage-backed securities. Mortgage REITs do not have access to deposit funding, so they rely on short-term loans like repurchase agreements.
Q. What’s does negative convexity mean for most US MBS?
A. As rates go up, the bond’s duration lengthens, so it gets less valuable faster than a standard fixed rate bond.
Q. What’s an m-REIT?
A. A leveraged vehicle that invests in US MBS
Q. So an m-REIT is a leveraged negative convexity play?
Q. What could possibly go wrong?
A. Well, m-REITs are down 19% in a couple of months without really big moves for one thing.