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Abstract

OASES OF INCOME Try as it might, the Fed can't seem to stomp out every last source of interest income in America. Mortgage REITs and business development companies, for instance, still yield enough to sustain the body and spirit of your favorite charity, retiree or lay-about heir. Following is an update on the risks and rewards of yield hunting. Mortgage real estate investment trusts, as every paid-up subscriber knows, are leveraged yield machines. Mortgage-backed securities stock the asset side of their balance sheets. Repurchase agreements are the mainstay item on the liabilities side. As the Yield curve fluctuates, so fluctuates a REIT's income-generation power. The wider the gap between mortgage yields and the cost of financing--i.e., the steeper the curve--the better it is for the stockholders. When, on Sept. 13, the Federal Reserve disclosed plans to buy $40 billion of mortgage-backed securities every month until it sees the whites of the eyes of prosperity, prospects seemed to dim for mortgage REIT investors. Week by week, the Fed would be buying more mortgages than the market originated--surely, the rising prices of residential mortgage-backed securities would squeeze margins and, perhaps, nudge homeowners to trade in their current mortgages for cheaper, lower-coupon models. And so it has come to pass, though Mr. Market, no respecter of authority, had the temerity to front-run the purchases of the Bank of Bernanke. So it is that since the official start of QE3, the prices of some MBS have actually fallen. Altogether, it's been no bed of ...

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