It’s official.

The volatility earlier this month pushed real estate investment trusts (REITs) into official bear market territory. During the selloff, the Vanguard Real Estate ETF (NYSEArca: VNQ), a popular proxy for the broader REIT market, closed down 22% from its old highs. And the sector is still down just shy of 20% even after a modest rally.

But, as you can see, the downtrend started long before… and it has a lot more to do with the bond market than the stock market.

In the low-yield post-2008 world, investors have used REITs – which traditionally sport high dividend yields – as a substitute for bonds. As goes the bond market, so go REITs.

Bond yields started rising in the months before the 2016 presidential election and shot sharply higher after Trump’s surprise win. Yields spent most of 2017 easing, which was broadly positive for REITs. But bond yields shot higher again in the last quarter of 2017, as the economy started heating up and investors began to fret about inflation making a comeback.

We’ll see if the much-feared inflation really does make a comeback. But if you believe, as I do, that the spike in bond yields is probably close to running its course, then REITs as a sector might soon be a fertile field for bargain-hunting.

I have no current REIT positions in Peak Income or Boom & Bust. But you can bet that the sector is on my radar screen.

Charles

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Charles Sizemore
Charles Sizemore is the editor of Peak Income, a monthly newsletter focusing on income and retirement strategies.