"What are the risks in investing in REITS like American Capital Agency? They seem to be able to borrow at very low interest rates and invest in government guaranteed mortgages."
Eoin Treacy's view Mortgage REITS rely on the ability to borrow at low interest rates so that they can invest in mortgage securities on a leveraged basis. Some of the more secure trusts only invest in government backed securities which helps to hedge default risk. It is their ability to leverage their investments that allows them to pay such impressive dividends. Therefore the greatest risk attached to such investments is their exposure to interest rates. When interest rates eventually begin to rise, leveraged mortgage REITS are likely to experience an outsized decline. At present that appears to be a medium-term rather than short-term concern.Back to top