U.S. Treasuries are in a total sell-off…
Yahoo! Finance reports the U.S. 10-year note yielded 1.65% at the start of February. Yields have since shot up to 2.12%, and the T-note sell-off drove a powerful 27% rise in yields in just 30 days (see chart below below).
[Bond prices and yields move in an inverse fashion. So, when bond prices decline, yields rise.]
10-Year Treasuries Have Rocketed 27% Higher in One Month
The article goes on to say the move higher is crushing interest rate-sensitive sectors like real estate investment trusts (REITs) and utilities. Both are now breaking below their 200-day moving averages. That’s a quick, steep move lower for these sectors.
The news won’t surprise Mega Trends Investing (MTI) subscribers. Here’s what Editor Teeka Tiwari wrote about REITs in his special report, How to Survive and Prosper in the Coming Income Crisis:
REITs and mortgage-backed securities rely on cheap interest rates to make money. Here’s how it works for a mortgage REIT…
A REIT will buy packages of higher-yielding residential mortgages. It makes money by collecting the spread between its cheap borrowing rate and the higher return it enjoys (from the packages of mortgages it buys).
It’s a great business when money is cheap. But it’s a horrible business when rates are rising. That’s because the value of the mortgages held by the REIT starts to decline as rates rise.
As a REIT’s portfolio of mortgage-backed securities declines, its financial strength weakens. The costs will rise and its profit margins will fall. This will ultimately lead to it having to cut its dividend.
This happened to two of the most popular mortgage REITs in 2013. Annaly Capital and American Capital both cut their dividends. The companies’ stocks dropped 30% and 36%, respectively, in 2013.
Teeka’s special report includes his “Red Flag List” of 37 REITs that you must avoid at all costs—along with the municipal bonds, junk bonds, utilities, telecoms, and other interest rate-sensitive assets you should exit. As he notes, the combination of higher rates and a declining portfolio value will slam this type of investment. He believes REITs and mortgage-backed securities may fall by another 40% or more.
For more insight on the devastation rising interest rates will wreak on many unsuspecting income investors, read our next item…