“Eoin's recent postings on Agency Mortgage REITs are intriguing -- reasonably decent charts, moderate volatility and very high pay-outs. They also trade in high volumes, so I wonder, is it too good to be true? It would be instructive to know how they create those high pay-outs, whether return of capital, leverage, etc., and if some or all the pay-outs are tax advantaged dividends to US taxpayers.”

Eoin Treacy's view Thank you for these highly relevant questions. A number of these issues were addressed in the articles kindly submitted by a subscriber and posted in Comment of the Day on May 29th.

In addition to default and prepayment risk, mortgage REITs tend to take on a reasonably high degree of leverage which exposes them to interest rate risk. At present, there is little prospect of higher interest rates in the USA but when that outlook changes this asset class could come under severe pressure. Double digit yields do not come without risk and their high degree of leverage puts them in the speculative category. However, the upside can continue to be given the benefit of the doubt provided their trends remain reasonably consistent.