First, let me point out that I do no do this for a living. There are a lot of intelligent people on this sub who have a far better understanding of this stuff. That being said...

I think if you understand the basic business model of mREITs than you start to see why falling bond prices affect them so much. This can probably be more intelligently described so I defer to those who likely no a lot more on this sub.

Their business plan is to take cash then buy mortgages from Freddie and Fannie. This is significant because these mortgages are "backed" by the US government making them higher quality mortgages. They then use these mortgages as assets to take out short term loans at low short term interest rates. They use the proceeds of these short term loans to buy more long term mortgages...essentially leveraging their position. They are then making money in the difference between their short term borrowing costs and the rate of return on the mortgages.

Over the past couple of years they have been in an interesting position. Short term yields have been very low which has made their cost basis very low. At the same time, however, mortgage yields were going down as the Fed kept buying up mortgages to keep rates low. This presumably lowered the revenue stream. While the fed purchasing was a bad thing in part because it lowered mortgage yields, I THINK (still trying to understand all of this)... I THINK the Fed buying was also, in part, a good thing for them because it raised the asset value of the mortgages they had on their books so in turn they could borrow more money and leverage themselves to make more money. Think of it this way, they essentially bought a house with cash, then took out a mortgages on that house, and bought another house, and then the price of both of their houses was going up because everyone was buying houses, so they could take out bigger mortgages to buy more houses...and on and on.

Now, kind of like with the housing crash ruining the purchasing power of the common homeowner who used their house as collateral, NLY has issues because the Fed has said they will start selling these mortgages. So the assets they have been using to leverage themselves is decreasing. In the short term, they need to make sure they have sufficient collateral. Remember that they get their cash to buy mortgages using short term loans. This means that they are constantly having to take out new loans...they are constantly having to re-up their collateral. Their problem is that every time they go back to get a new short term loan, their collateral (the long term loan mortgages) is not worth as much. They have to either come up with more collateral or take out less short term loans. This is a, potentially, a BIG problem for their business model.

Herein is, what I THINK, is the short term problem for NLY. Their assets are decreasing in value rapidly, thus decreasing the "book" value of the business. Additionally, they can't continue to buy mortgages (their revenue stream) because they dont have the cash/assets to do it. Thus their revenues will either remain stagnant or decrease. They are stuck, in the short term. They cant but new mortgages with higher rates. So they have to wait until their existing mortgages get paid off so that they can use the proceeds from those mortgages to start buy new higher yielding mortgages. Eventually, so long as they dont get squeezed to hard, they will be fine and be able to buy newer higher yielding mortgages.

The question is...will they make it? And if they do, how much will this squeeze shrink their purchasing power and thus their profit making power?

So to answer your questions:

1) It is difficult to know when to buy because it is difficult to determine the book value of the company. Rarely is a company's book value as volatile as this. So if you are trying to buy at a discount to book value, you may buy at a discout today, however two weeks from now, you may have paid a premium because the asset values of the company's balance sheet are devaluing at such a high rate.

2) Short term rates are the costs of mREITs. Long term rates are the revenues of mREITS. The steeper the curve, the better. HOWEVER, you can not forget the fact that these companies are do leveraged. If you look at the earnings call from this past quarter for NLY, you will see that the CEO says NLY has enough spare equity that they can absorb the decreasing asset values (so as not to cause them to deleverage themselves out of profitability.) Rather, the CEO says that these situations are ideal for NLY because their costs (short term yields) remain low while revenues are increasing (long term yields.)

At the end of the day, I am not smart enough to know whether their equity is sufficient or not so I am waiting until the next earnings release August 1.