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Financial Winners & Losers

Annaly, AGNC Lead in Session's Financials Trading

Dan Freed

11/27/13 - 02:32 PM EST

NEW YORK (TheStreet) -- Financial stocks were essentially flat mid-Wednesday on light trading ahead of the Thanksgiving holiday.

Financial Select Sector SPDR (XLF), an exchanged-traded fund that tracks financial stocks, was up just 0.12% to $21.52 on light volumes with about two hours left in the trading day.

Two of the more actively traded names in the financial sector were mortgage real estate investment trusts American Capital Agency Corp. (AGNC) and  Annaly Capital Management (NLY).  Both stocks bounced back from significant losses on Tuesday, when they hit the 52-week lows at or near the end of the trading session on very heavy volumes.

AGNC closed Tuesday at $19.92,  down more than 3% on the day, shortly after touching its 52-week low of $19.85. Volumes of 20.8 million were nearly triple their trailing three-month daily average. Annaly saw similar trading activity, falling 3.33% on nearly four times average daily trading volumes. Shares of Annaly closed Tuesday right at their 52-week low of $9.86.

Wednesday action looked to be a response to the severity of Tuesday's selloff. AGNC shares were up 2.10% on volumes that had already equalled the trailing three-month daily average with about two hours left in the trading session. Annaly shares were up 2.74% on similarly strong volumes. 

The selloff of Tuesday got the attention of at least one analyst, Credit Suisse's Douglas Harter, who wrote Wednesday that "following the pullback during earnings, we see the mortgage REIT sector as more attractive from a total return standpoint than we have seen in some time. Not only have valuations become more attractive but the REITs have moved to a more defensive positioning in order to better protect book value."

Arguing against the influence of Harter's note was the fact that his most recommended mortgage REIT, Two Harbors Investment Corp. (TWO), was up only slightly on average volume.

Mortgage REITs such as Two Harbors, AGNC and Annaly borrow short-term to buy longer-dated mortgage-backed securities. When rates go up, it harms their businesses. That's because borrowing costs go up quickly while the longer-dated mortgage-backs on their balance sheets decline in value.

Regulators have expressed concern over the vulnerability of mortgage REITs to sudden moves upward in interest rates, in part because, unlike banks, those entities aren't subject to much regulation.

In its Global Financial Stability Report last  month, the International Monetary Fund alluded to possible systemic threats from mortgage REITs, or mREITs. "Although mREITs are not large holders of MBSs on a relative basis, they have grown in importance since the global financial crisis, and their business model layers on other risks that could amplify market dislocations," the report stated.

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-- Written by Dan Freed in New York.


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