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Participant ○○○

has DMO delevered?

DMO NAV dropped sharply yesterday: down 10.5%.

MBB was up 1% on the day. Only CMBS was down.

MBB
ISHARES MBS BOND ETF
$109.58+0.84%$21.5B
 
VMBS
VANGUARD MORTGAGE-BACKED SECURITIES ETF
$53.90+2.94%$11.3B
 
LMBS
FIRST TRUST LOW DURATION MORTGAGE OPPORTUNITIES ETF
$50.48+1.16%$5.0B
 
CMBS
ISHARES CMBS ETF
$50.46-3.41%$388.1M
 
GNMA
ISHARES GNMA BOND ETF
$50.92+0.90%$195.5M
 
MBSD
FLEXSHARES DISCIPLINED DURATION MBS INDEX FUND
$23.76+0.93%$59.5M
 
MTGP
WISDOMTREE MORTGAGE PLUS BOND FUND
$49.73+0.83%$24.7M
 

 

Other mortgage-heavy funds did not suffer to the same extent: BKT NAV was flat. DBL NAV was down 2%. 

As of Dec 31 DMO held :

71.15%RMBS
16.73CMBS
9.03Asset backed
0.18High Yield Corporate Bonds
2.91Cash & Cash Equivalents

 

Stale data, I know, but the amount in CMBS cannot explain the NAV drop. 

Coverage ratio data is also stale. Leverage as of Dec 31 was 98MM and yesterday, assets were 245MM. It is possible that they have fallen below the coverage limits for asset coverage over the past several days. I'd like to think that they might have started deleveraging early enough to blunt the impact, but this doesn't look good.

Could the NAV drop reflect asset sales to pay down debt? Hard to say, given the stale leverage data, but certainly a possibility. 

15 Replies
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Contributor ○

Re: has DMO delevered?

Good questions, I was just looking at the same thing -

DMO’s NAV went from $13.99 on 3/23 down to $12.52 on 3/24. That’s a $1.47 or 10.5% drop.

Anyone know what’s going on there?

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Contributor ○

Re: has DMO delevered?

My guess is it's exposure to non-agency MBS. Delevering wouldn't cause a >10% drop.

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Frequent Contributor

Re: has DMO delevered?

Some mortgage derivatives went kaput? There is a whole alphabet soup of them.

YBB
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Contributor ○○

Re: has DMO delevered?

IOFIX and SEMPX had drops in that zone too

 


@PN wrote:

Good questions, I was just looking at the same thing -

DMO’s NAV went from $13.99 on 3/23 down to $12.52 on 3/24. That’s a $1.47 or 10.5% drop.

Anyone know what’s going on there?


 

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Contributor ○

Re: has DMO delevered?

Their NAV drops yesterday -

IOFIX down 1.31%

SEMMX down 2.95%

 


@aubergine wrote:

IOFIX and SEMPX had drops in that zone too

 


@PN wrote:

Good questions, I was just looking at the same thing -

DMO’s NAV went from $13.99 on 3/23 down to $12.52 on 3/24. That’s a $1.47 or 10.5% drop.

Anyone know what’s going on there?

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Frequent Contributor

Re: has DMO delevered?


@yogibearbull wrote:

Some mortgage derivatives went kaput? There is a whole alphabet soup of them.


@aubergine wrote:

IOFIX and SEMPX had drops in that zone too


 


This was why I did not invest in higher yield SEMPX. Not that I had any insight into the ramifications of the virus on the market, just I worry about mortgage derivatives.

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Contributor ○

Re: has DMO delevered?

I haven’t owned any CEFs in a couple years and this week I bought PDI, PCI and DMO. These were the last 3 CEFs that I used to own and I didn’t think they would behave as dissimilarly as they have. I had limit orders that caught some of the low pricing on Monday on all 3 of these CEFs (In fact with DMO, I had a limit order for $12.79 which was the exact Monday low).

My current Gains from these purchases -

-7.51% DMO based upon cost per share of $12.79 (the Monday low – I nailed it!)

+21.29% PDI based upon cost per share of $17.52

+14.03% PCI based upon cost per share of $14.18

A marked contrast!

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Contributor ○○

Re: has DMO delevered?


@PN wrote:

Their NAV drops yesterday -

IOFIX down 1.31%

SEMMX down 2.95%

 


@aubergine wrote:

IOFIX and SEMPX had drops in that zone too

 


@PN wrote:

Good questions, I was just looking at the same thing -

DMO’s NAV went from $13.99 on 3/23 down to $12.52 on 3/24. That’s a $1.47 or 10.5% drop.

Anyone know what’s going on there?


take a look at their moves over the last week.  possible that DMO marked their portfolio in a lagging fashion, and had to catch up all the value drop in one day, while the OEFs were being forced to account for things real time since they were paying out based on those values

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Follower ○○

Re: has DMO delevered?

Another 7% drop in NAV today (to $11.63) according to yahoo finance.

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Contributor ○

Re: has DMO delevered?

Thanks aubergine, I greatly appreciate your expertise, but realize this gets into a touchy area as to what is the duty of a fund company to disclose information in a timely manner and did the fund company breach that duty in this case?

yogi and FatKat - saying the derivatives are the problem. What does that mean? I do miss the days when Cape Cod would explore these little mysteries. Definitions from -

https://homeguides.sfgate.com/definition-mortgage-derivatives-6617.html

Mortgage-Backed Securities - Individual residential mortgages are purchased from lenders and pooled by mortgage aggregators such as Ginnie Mae, Fannie Mae and Freddie Mac. These agencies divide the pools into mortgage-backed securities that are sold to investors and that can be traded on the securities markets. Mortgage securities that take the mortgage payments coming in from homeowners and send the interest and principal straight out to securities owners are called mortgage pass-through securities. If a financial company takes the money stream coming into a mortgage pool and changes the way the money goes out to different investors, the result is derivative mortgage securities.

Constructing Derivatives - To produce derivative mortgage securities, a financial firm takes the interest and principal streams coming into a mortgage pool and divides them into tranches. Each tranche will have specific claims on the principal and/or interest payments, with some tranches receiving priority over others to receive money. Each tranche is assigned an interest rate, credit rating and expected principal repayment date.

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Frequent Contributor

Re: has DMO delevered?

Some derivatives can have binary outcomes - you either make lot of money or there is almost nothing left. 

It is a complex subject, so simple examples are difficult.

Besides rates, risks in mortgages come from prepayment risks and hedging with Treasuries gone wrong.

When there are faster prepayments than anticipated, those go first to higher quality CMO tranches and there may be nothing left for lower quality tranches. The IOs get interest only and the POs get principal prepayments only, but if the pool is depleted faster due to prepayments, the IOs can vanish much sooner than expected while the POs get made whole. Think of mortgage servicers who purchase rights to service mortgages, but if the pool is prepaid too early, much of their purchase cost is sunk. I recently learned about CRTs/CRDs [in the context of IOFIX] where their holders bear the entire risk of slow payments, temporary nonpayments, defaults - the GSEs use these to offload risks from them to private investors.

Hedging is long mortgage, short Treasuries and those went wrong in a big way.

And if the portfolio is leveraged, mistakes get magnified.

YBB
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Contributor ○

Re: has DMO delevered?

Last year, DMO shareholders approved a number of proposals, including allowing DMO to invest in mortgage whole loans, which DMO did not previously invest in. Could those be what are driving DMO's NAV down? I'm guessing they're less liquid even than non-agency MBS? I don't see any on the 2/29 holdings page yet but maybe they wouldn't be listed there because they're individually too small or don't have CUSIPs or something.

Another CEF that invests in mortgage whole loans is VCIF but it isn't going to report NAV any time soon.

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Contributor ○

Re: has DMO delevered?

Acamus, I noticed on another thread that you own both IOFIX and DMO.

My concern here with non-agency MBS is that there may still be portions of the portfolio that have not been priced recently.

Are you adding to these? Any thoughts?

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Explorer ○○

Re: has DMO delevered?

A good sign is IOFIXs NAV posted higher yesterday by 4.6%.  Let's see if the asset flight has slowed.

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Contributor ○

Re: has DMO delevered?


@PN wrote:

Acamus, I noticed on another thread that you own both IOFIX and DMO.

My concern here with non-agency MBS is that there may still be portions of the portfolio that have not been priced recently.

Are you adding to these? Any thoughts?



I don't own IOFIX, SEMPX or DMO anymore but currently have IHIT, TSI, PKO and PCM, which have some non-agency exposure.

NAV for all of these funds was up yesterday, perhaps a sign that the strain on liquidity is improving. I'm not adding exposure to any asset class at the moment, just doing swaps based on relative valuation and for tax harvesting.

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