Perhaps one of the trickiest publicly traded companies to navigate is Invesco Mortgage Capital (NYSE:IVR). Personally, I probably haven’t made too many friends with the folks over there. That’s because when the novel coronavirus pandemic upturned our society, I put IVR stock on my list of investments that could be on a deathwatch.
The last time I updated that gallery was around the midpoint of last year. To be sure, many if not most of the companies I included on the list have gone on to beat the negative prognostications of the early pandemic. This includes IVR stock. However, Invesco shares are up less than 7% from the price of that publication.
For a long time, IVR stock was under water as the issuing company worked its way through the mortgage industry slog. Undoubtedly, monetary policy helped shake things up for Invesco. Benchmark interest rates fell last year, dramatically reducing the cost of borrowing and thereby making home purchases via mortgage loans very attractive.
Of course, this didn’t help the millions of workers who have been severely impacted by Covid-19. But it did trigger a “buy, buy, buy” signal among the more affluent households. As the Washington Post reported, the affluent rang up their real estate agents, purchasing homes and advantaging the cheap money environment.
Another point is that with the remote work phenomenon, many other households realized that they don’t necessarily have to be in a high-priced metropolitan area. They could live in a cheaper part of the country and still log in their hours remotely. In fact, relocation trends show a migration of millennials from major cities to the suburbs.
Due to lower costs of living, this migration helps boost the underlying business of IVR stock. However, you’ll want to carefully consider the economic environment before jump aboard.
Interest Rate Drama Puts IVR Stock on Notice
Presently, the key headwind preventing all-out confidence in IVR stock is rising bond yields. Obviously, this has a direct impact on mortgage rates, which the Wall Street Journal recently reported were rising.
Does this mean that the housing market will cool down following its remarkable ascent from what initially appeared to be an apocalyptic event? It’s one of many possibilities which, on the surface, wouldn’t be great for IVR stock in the long run.
You’d figure it’s probably going to be harder to convince home buyers to purchase real estate amid an economic recession and higher borrowing costs.
At the same time, you don’t want to assume that rates will continue to rise to dramatic and stifling levels. Keep in mind that foreign powers, particularly Asian countries, buy U.S. debt all the time. Contextually, it’s in their best interest to keep the bond market relatively stable with a bit of inflationary pressure.
True, exporting nations don’t want their currencies to be too strong against the importing target nation’s currency – otherwise, it’s tough for the importing nation’s consumers to purchase those goods. At the same time, if the latter’s currency was extremely strong against the exporting nations’ currencies, that wouldn’t necessarily be good for the exporters, as target consumers would have an incentive to hold cash.
In other words, the U.S. government and its international partners have an interest toward keeping yields stable but with a slight inflationary bias to motivate consumers to purchase now due to the risk of higher prices later.
If this scenario were to play out, IVR stock would presumably benefit. As the U.S. economy (hopefully) recovers, American consumers will enjoy a backdrop of stability, relatively low borrowing costs and an inflation rate that provides the right motivation to consider putting money to work as opposed to holding it.
My Take on Invesco
Ah, if only it were that simple! Sure, I can appreciate what the Federal Reserve is trying to do, basically engineering a recovery without overcooking its monetary tools. However, the overriding reality is that money velocity – or the rate each unit of currency is circulated throughout the economy – is near all-time recorded lows.
You know what that means? Deflation. Corroborating evidence comes from the personal saving rate, which currently stands at an annualized rate of 20.5%. At its lowest point during the pandemic, the annualized saving rate was 12.5% (in November 2020).
This is my interpretation – after the holiday season, American consumers started saving money like mad. And that means fear (which is deflationary) is widespread. That could change tomorrow, no doubt. But until it does, IVR stock may be too risky for conservative investors.
In a short article like this, it’s impossible to conduct an exegesis on mortgage rates. Therefore, perform your due diligence before staking a claim on IVR stock. But if you want my take, I’m going to be cautious due to the consumer deflationary pressure.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.