{"id":22135,"date":"2011-07-06T10:49:57","date_gmt":"2011-07-06T14:49:57","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=22135"},"modified":"2011-07-06T10:49:57","modified_gmt":"2011-07-06T14:49:57","slug":"why-right-now-might-be-the-perfect-time-for-these-12-yields","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/07\/06\/why-right-now-might-be-the-perfect-time-for-these-12-yields\/","title":{"rendered":"Why Right Now Might Be the Perfect Time for These 12% Yields"},"content":{"rendered":"

<\/strong>By Carla Pasterna, DividendOpportunities.com <\/a><\/strong><\/span><\/p>\n

Yield-starved investors are wondering \t\t\t\t\twhere they \t\t\t\t\tcan capture high yields when a savings account pays 0.5%. A \t\t\t\t\tcertificate of deposit (CD)? A 1-year CD pays 1.2%, \t\t\t\t\taccording to \t\t\t\t\t BankRate.com<\/a>.<\/span><\/span><\/span><\/p>\n

That doesn’t even keep up with inflation.<\/p>\n

Already we’ve seen bond prices surge as income investors \t\t\t\t\tscramble to find anything paying a remotely high yield.<\/p>\n

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And it doesn’t look like things are going to change anytime \t\t\t\t\tsoon…<\/span><\/span><\/p>\n

Recent soft U.S. economic data and what Fed Chair Ben \t\t\t\t\tBernanke calls a “frustratingly slow” economic recovery have \t\t\t\t\tlessened the chances rate hikes.<\/p>\n

The consensus among futures traders is that the Federal \t\t\t\t\tReserve won’t raise rates until mid-2012. Even then, the \t\t\t\t\tJuly 2012 federal-funds futures contract is pricing in just \t\t\t\t\ta 30% chance the Fed will hike the funds rate to a still-low \t\t\t\t\t0.5%.<\/p>\n

Oddly enough, this low-rate environment is great for a group \t\t\t\t\tof securities I’ve been tracking. This asset class routinely \t\t\t\t\tprovides yields of 10%… even 12% or more. And no, I’m not \t\t\t\t\ttalking about distressed securities that give you gargantuan \t\t\t\t\tyields because the share price has plummeted.<\/p>\n

On the contrary, some of these securities enjoy stable \t\t\t\t\tprices and even recent price gains.<\/p>\n

So where can you find them? They’re called mortgage real \t\t\t\t\testate investment trusts<\/em> (M-REITs).<\/p>\n

Unlike their better-known cousins that own real estate \t\t\t\t\tproperties such as shopping centers or medical office \t\t\t\t\tbuildings, mortgage REITs own no physical property. Rather, \t\t\t\t\tthey invest in residential mortgages that have been bundled \t\t\t\t\ttogether into securities called mortgage-backed securities (MBS).<\/p>\n

I think the best investments are those with portfolios \t\t\t\t\tfilled with so-called “agency” loans — securities \t\t\t\t\tguaranteed by Fannie Mae and Freddie Mac — which are in \t\t\t\t\tturn backed by Uncle Sam. That backing lessens your risk.<\/p>\n

How can these companies offer such supersized yields? \t\t\t\t\tMortgage REITs profit from the difference, or spread, \t\t\t\t\tbetween interest rates earned on the mortgage loans in their \t\t\t\t\tportfolio and their short-term borrowing rates.<\/p>\n

One M-REIT I found — Anworth Mortgage (NYSE: ANH<\/a>)<\/strong> — \t\t\t\t\tearned net interest of 3.11% on its mortgage assets during \t\t\t\t\tthe first quarter of this year. But it paid an average 1.39% \t\t\t\t\tto fund these assets. The difference of 1.72% is basically \t\t\t\t\ttheir profit.<\/p>\n

\"\"These \t\t\t\t\t1% to 2% returns don’t sound like much, but looked at in \t\t\t\t\tanother way, Anworth’s $57 million of interest income for \t\t\t\t\tonly $22 million in interest expense leaves a $35 million \t\t\t\t\tgain in just the first three months of this year.<\/p>\n

These returns shrink or expand as mortgage rates or \t\t\t\t\tborrowing costs rise or fall.<\/p>\n

Right now, mortgage rates are near historic lows, but \t\t\t\t\tM-REITs are benefiting from record-low short-term lending \t\t\t\t\trates. They can borrow for next to nothing. That won’t last \t\t\t\t\tforever, but as I mentioned earlier, I think rates will stay \t\t\t\t\tplenty low for some time.<\/p>\n

That means the high yields we’re seeing with this special \t\t\t\t\tbreed of REITs should be secure for some time.<\/p>\n

Certainly, risks are inherent in the M-REIT model, as with \t\t\t\t\tanything yielding double-digits. Some are built-in, such as \t\t\t\t\tfuture interest rate increases or consumer prepayment of \t\t\t\t\tmortgages. Others, such as congressional legislation \t\t\t\t\taffecting Fannie Mae and Freddie Mac, are more situational. \t\t\t\t\tBut for a yield-hungry investor, securities such as these \t\t\t\t\twith a double-digit yield and a business model to sustain \t\t\t\t\tthese yields, may be worth the risk.<\/p>\n

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Good Investing!<\/span><\/p>\n

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\"\"
\nCarla Pasternak’s Dividend Opportunities<\/em><\/span><\/p>\n

<\/span> P.S.<\/strong> — There is plenty more to know \t\t\t\t\tabout M-REITs before you invest. If you’d like to learn \t\t\t\t\tmore, I covered them in depth in my July issue of my High-Yield Investing<\/a><\/em><\/strong><\/span>. To learn more about this \t\t\t\t\tadvisory, which is enjoyed by more than 30,000 subscribers, \t\t\t\t\tI invite you to watch this presentation<\/a><\/strong><\/span>…<\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Yield-starved investors are wondering where they can capture high yields when a savings account pays 0.5%. A certificate of deposit (CD)? A 1-year CD pays 1.2%, according to BankRate.com.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-22135","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/22135","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=22135"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/22135\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=22135"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=22135"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=22135"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}