In case your memory is blurred by everything that transpired with the CDO’s let me refresh it. The CDO was basically a collection of mortgages that were pooled, rated and then sold to investors. For the most part they were rated “AAA” by all of the rating agencies. The problem started when some of them began to have homeowners that could not meet their obligations.
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.