It’s no secret that utilities and REITs have been two of the best-performing sectors in the market this year. They’ve been highly correlated to rates, generally rallying when rates moved lower as investors added high-yielding issues, and generally selling off when rates moved higher. Today is the latter situation as the 10 year Treasury yield hits a 2 month high.
IYR, the REIT etf, has been in a steady uptrend since the start of 2014:
The sector is testing its 50 day moving average on today’s weakness, but has bounced from there on several occasions so far in 2014.
One of our favorite stocks in the sector earlier this year was NLY, when rates were in a steady downtrend. We had a profitable trade in the spring on the thought that call optionality in NLY was too cheap given the way rates were moving. NLY has struggled along with the rest of the group this week, but has been especially weak given its sensitivity to rates:
The stock has sold off nearly 4% this week, and is now trading at a Price / Book ratio of 0.90. If that ratio nears 0.85, we might look at a longer dated long call position in the stock once again. Options pricing remains relatively cheap, particularly considering that interest rate volatility remains higher than stocks. 30 day implied vol in NLY:
Of course, NLY won’t find much footing if rates continue higher from here. At the moment, we’d rather watch and see how rates react over the next month, but if they stabilize even with the strong economic data, we might get involved on the long side in NLY calls once again.