In recent weeks, REITs like other rate-sensitive sectors have been pummeled as long-term yields have surged higher due to the resilience of inflation, a hawkish Fed, and expectations of substantial Treasury supply hitting the market later this year.
But some contrarians are pointing out that there have been some positive developments for the sector on a long-term basis. First, most of the damage for the sector has come from high rates as earnings have continued to hold steady. This has led to valuations becoming quite attractive.
Additionally while the timing of the Fed’s pivot is unknown, it’s certainly close to the end of its hiking cycle. And just as the start of the hiking cycle led to steep losses for REITs, it’s likely that the start of rate cuts will send shares soaring higher.
Finally, it’s also interesting to note that at the start of the rate hike cycle, the sector was extremely correlated to Treasuries. But this relationship has considerably loosened and has led to a bullish divergence.
Remarkably, the broad-based Schwab US REIT ETF has been making higher lows, while Treasury yields have been making higher highs. This is an indication of demand and that institutions are using the weakness to accumulate shares.
Finsum: REITs are not making lower lows despite the breakout in Treasury yields. Some contrarians see this as a bullish signal from the market.