Calculating the Spread and the Fed

The agency mREIT sector's malaise has hit shares of said "Portfolio Guru, LLC shareholding Armour Residential REIT (ARR), whose shares have fallen 7.0% in 2013 vs. the S&P 500's 16.9% gain.

Agency mREITs borrow money to buy mortgage-backed securities guaranteed by FNMA, GNMA, or FHLMC. The difference between their borrowing cost (in the repo market) and the interest rate earned on MBS holdings is their "spread." That spread multiplied by the leverage ratio is their profit margin. mREITs are leveraged bond funds dressed up as common stocks, and have to pay out 90% of what they earn to maintain REIT status (and pay no corporate taxes.)...527 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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