Yesterday one of the more hawkish Fed Governors got up and started singing with the rest of the choir.
Why is this good for amREITs?
Because it could enable them to lock in their income spreads for years instead of months.
Not that it’s particularly news, even in the exact phraseology of “low rates for an extended period.” Fed statements have contained that exact language for months.
In what used to be called the Fed Chairman’s Humphrey-Hawkins biennial report to Congress, Bernanke used them just last week.
But Fisher was against putting that language into the Fed statement when it first appeared, and has hinted that he’s not happy with it a few times. To have him now say that he is on board with the idea of keeping rates low for a good long time should let the market relax its concern for higher rates in the late 2010 and early 2011 time frame.
That, in turn, should allow prudent amREIT managers to get longer term repo financing or to buy caps or swaps that lock in short rates well into 2011 or 2012.
As I’ve pointed out before, there are several risks facing any amREIT manager, and they have to pick which risks they will hedge, and how much.
As an income investor, the risk I like to see hedged out is the future cost of financing, since hedging that risk “locks in” spreads, therefor locking in future profits. Since they are REITs, I know they’ll be obligated to pay me at least 90% of those profits.
That still leaves long-term rate risk (which translates into equity book value or NAV risk), prepay risk, “basis” risk (the spread of the MBS vs. benchmarks like LIBOR or Treasuries), and liquidity risk, but among them all, the risk I most like to see mitigated is the one that directly affects the cash they pay me in dividends.
I’m pretty simple that way.