When it comes to investment management, interest rates play an integral part. Interest rates, according to Martin Zweig, serve to “exert an enormous influence on stock prices” and can decide which was the stock market is headed.
Companies like New Residential Investment Corp were able to beat the odds with interest rates and become successful.
Interest rates join fixed rates in what is called an inverse relationship. This is where, if something rises in interest rate, it drops in fixed rate and vice versa.
Whether or not something scarce is valuable affects the price. For example, higher fixed rates would cause lower interest rates and the inverse is also true.
Things like credit risks and the yield curve also affect changes in price. Bond credit ratings that drop or rise cause the market value to drop or rise as well. Yield curves deals with long-term and short-term rates. Long-term rates under the price of short-term rates are inverted yield curves.
New Residential Investment Corp has managed to generate revenue by handling scenarios that bring fluctuating interest rates. Timing is everything and not knowing when it’s needed makes for prime investment opportunities.
New Residential Investment Corp takes advantages of investments with mortgage servicing assets and residential mortgage-backed securities. There are four investment strategies the company follows to manage interest rate inconsistencies for example.
Asset Specialization is when New Residential uses assets like excess MSRs and RMBS outside the agency. The excess MSRs skyrocket in value as interest rates are on the incline.
Active Management places New Residential in a solid space for changes to portfolios when situations are different. This way, their portfolio managers can operate around refinance assets the way they need to.
Undervalued Assets show New Residential taking advantage of particular investment opportunities. New Residential purchases mortgage portfolios that don’t do as well and repurposes them for loan workout strategies.
That’s an example of undervalued assets.
New Residential purchased businesses that manages mortgage servicing and loan origination to lower worries about mortgage pipelines in the near future.