The big news today: 10-year Treasury yields are spiking – again. This time they're near 2.8 per cent, a level last seen in July, 2011, right before the U.S. saw its debt get downgraded.
On this side of the border, these spikes make many Canadians wonder the exact same thing: how badly have real estate investment trusts been hit?
This time the damage isn't too drastic. The S&P/TSX Capped REIT Index is off about 1 per cent Thursday, and some individual names have even climbed slightly higher.
The bad news is that the long-term trend is still intact. Pull up a two-year chart that compares the TSX Capped REIT index to 10-year U.S. Treasuries, and you'll see they are almost perfect mirror images of each other.
One big number stands out. At the start of August, 2011, the Capped REIT index stood at 146. It's the exact same value today. That means its rise and fall perfectly aligns with 10-year Treasuries' drop and recovery – with some discrepancies along the way.
The confusing thing is that many REITs are now much more profitable than they were two years ago. RioCan REIT's adjusted funds from operations per unit were up 6 per cent in the second quarter from the same period in 2012, and last year they jumped 7 per cent from 2011.
Frustration is now running rampant on Bay Street. "We are baffled by persistent weakness in [Canadian] REITs as big U.S. retailers come shopping for prime space," portfolio manager David Baskin tweeted a few weeks back.
But remember this: intrinsic values don't mean much anymore. Just look at Apple Inc., a classic example of mispricing. Were its shares really 'worth' $700 (U.S.) a piece if they lost nearly half their value in just eight months? The whole market's out of whack, and everything is a momentum trade.
The big problem for REITs is that retail investors are especially susceptible to momentum, and they make up a majority of the REIT investor base. The word on Bay Street is that they're nowhere to be found right now.
The hope is that this is just the August doldrums. The new marketing line is that these investors should be back in September. At a 7.65 per cent yield, Dundee REIT must look attractive to someone.
But here's the opposite side of the same coin: what if the glory days are over? Just because REIT balance sheets are strong doesn't mean they can't be shunned by investors.
You only need to look at the late nineties for proof. As the tech bubble took off, real estate was quickly cast side. The scary truth: it took years to recover the lost ground.
(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)
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