10 year T-note jumped up from 1. While that spike seems minimal, it still is the highest this note has been since May. Could this be a sign that interest rates are rise? If so, how could this investment ideas for rising interest rates affect dividend investors with positions in mortgage-based real estate investment trusts?
The markets have been on the lookout for the potential rise in interest rates for a while now. Analysts are continually trying to predict the moment when these yields and interest rates will bottom out and bounce back to historically average numbers. A good indicator on the outlook of potential increases in interest rates is the yield on 10 Year US Treasury Notes. As noted above, 10 year T-notes have seen quite a spike in yield in the past month alone. While maybe this just a fluctuation of the market, with no real long term implication, it could also be a sign that interest rates are in fact on the way back on up. Goldman Sachs analysts see 10 year T-notes reaching yields of about 2. More specifically, this will result in mortgage rates starting to rise therefore affecting the housing market and mortgage-based real estate investment trusts.
Mortgage-based REITs performed well in the first ten months of 2012, but started to see downward movement from October to the end of the year. Because of the recent hard times, these firms have had to cut dividends paid to investors. Looking forward, there is a possibility that more of the same is in store for these REITs if interest rates see some fluctuation. High mortgage rates can be a positive for mortgage REITs, but they bring a downside as well. If mortgage rates do indeed rise, this could mean investors will start to see large fluctuations in mortgage REIT prices in the short term.
Since these companies are involved in such a volatile market, they tend to not maintain a consistent dividend payment each quarter. This can be problem for dividend investors seeking consistent income from investments. Another problem with a sharp increase in mortgage rates is the overall effect on the housing market and economy as well. If rates do indeed rise, this will put pressure on the housing market as buyers will be hesitant to borrow to buy a home. This lack of housing consumption would put a strain on mortgage REITs in the short term.