The fact that the 2-year US Treasury yield has been inversely relative to the 10-year US Treasury yield for some time is signaling concern for many investors and economists as historically it signals an imminent recession.
What happened: The two-year US Treasury yield is currently 3.437%, which is more than double the average corporate dividend yield SPDR S&P 500 SPYwhich stands at 1.57% on Friday.
With short-dated government bonds offering higher yields than companies in the S&P 500, this could help gain traction for the 60/40 portfolio that many investors have previously abandoned. Among the stocks affected by the market weakness are real estate investment trusts (REITs).
The BTIG Analyst: Eric Hagen demoted Redwood Trust RWT from its previous buy rating to neutral with a previous price target of $10.50 per share as they currently do not expect shares to fall below $7 per share.
The Redwood Trust Thesis: Due to the uncertainty about rising interest rates and mortgage Spreads, BTIG analysts do not recommend going long Redwood Trust and most non-agency mortgage REITs.
This is because the Fed’s hawkish stance and yield curve inversions have dragged the stock lower for most of the year and will mean that the prospects for capital appreciation will remain foggy in the second half of the year.
However, BTIG analysts still believe that certain elements could drive Redwood Trust’s earnings growth, particularly in its single-family home rental and transitional loan space, but are unable to provide an exact target price due to market volatility.
Also read: BTIG maintains buy recommendation for FREYR Battery: Here’s what you need to know
Dividend Yields: On Aug. 28, the Redwood Trust’s dividend yield rose to over 12%, but by Aug. 31, 2022, the dividend yield had declined to 11.3%, or 92 cents a share annually, as near-term Treasury yields remained high.
Hagen mentioned that redwood is trading at a deep discount to net asset value,…
