“On the heels of last week's downdraft in the space, we think today's action has been driven overwhelmingly by the retail community through reactionary selling as well as stop loss triggers which have only intensified the pressure,” Jason Weaver and Calvin Hotrum, analysts at Sterne Agee & Leach Inc., wrote in a research report.

The Fed's mortgage-bond buying has reduced yields on the REITs' new investments, while sending home-loan rates to record lows and refinancing applications to the highest level in more than three years.

The firms have more to lose from rising prepayments after paying more above face value for their holdings, according to the Baltimore-based Stifel Nicolaus analysts.

Eoin Treacy's view I highlighted the threat posed by early prepayments on the mortgages held by REITS such as American Capital Agency Corp (AGNC) as early as May 29th . With the Fed's commitment to buy mortgage securities, yields continue to contract. The Freddie Mac National Mortgage 30-year rate is currently at 3.36% and represents a significant reduction in yields over the last year. This is a potential issue for mortgage REITs since they will be reinvesting in higher priced assets which will have a considerable effect on the yield's they receive on their leveraged investments.

Nevertheless, rising interest rates would pose a significantly more challenging environment for mortgage REITs and their yields are still at multiples of other asset classes. This suggests that while increased volatility is likely to become an ever more present factor, investors are likely to still find double digit dividends attractive.

AGNC found support yesterday in the region of $30 and a sustained move below that area would be required to question potential for some additional steadying. Please note, I added a sentence to David's copy yesterday stating AGNC pays monthly dividends when in fact their distributions are quarterly. The copy has since been corrected.