But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
The Federal Open Market Committee determines interest rate policy
The June Federal Open Market Committee (FOMC) meeting was recently completed and the results of that meeting were released at 2:00 pm EST. The FOMC statement gives color on how the Fed views the economy, how they are thinking about moving forward, and some guidance regarding their intentions. After the release, Ben Bernanke usually holds a press release where he takes questions. This in a first from a Federal Reserve Chairman. In many ways, Bernanke is the polar opposite of Alan Greenspan, who preferred to be as inscrutable as possible.
The statement and the press conference
The market went into the statement worried about the end of quantitative easing (QE). Ever since the April jobs report, rates have been increasing globally. During testimony in front of Congress, Bernanke refused to rule out tapering quantitative easing by the fall. Yields had found a level in the 2.1% to 2.2% range and had been stable for a couple of weeks.
The language in the statement regarding QE gave no guidance regarding tapering QE. The statement was: The Federal Reserve “will continue its purchases of Treasury and mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.” The Fed took down their GDP estimates for 2013 slightly and cut their unemployment forecast slightly as well.
On the press release, bonds, stocks, and mortgage backed securities fell. Later, during the press conference, Bernanke put more meat on the bones with regard to tapering. The Fed is forecasting that the labor market will improve gradually and the economy will recover gradually, especially as the headwinds from fiscal policy abate. If the economy performs as they expect, the Fed will start reducing purchases this year and stop purchases by mid 2014. He added the usual disclaimers about the data, but the message was clear: The default path is to end QE partially by the end of the year and fully by mid 2014. It will take exceptionally weak economic data to change that. Bonds sold off further on that statement.
Finally, a reporter from Reuters asked Bernanke about the recent increase in interest rates and if the Fed was worried about it affecting the economy. Bernanke pointed out that the Fed forecast was done only a few days ago, so it was in the context of higher rates. He went on to say that he believed that the increase in interest rates was due to economic strength and the market anticipating movement from the Fed. He went on to say that he wasn’t worried about the effect on the housing market and that any negative effects from mortgage rates should be balanced out by increasing home price. Translation: I am completely comfortable with this increase in rates, and it will take exceptionally weak economic data to change that. The bond market sold off further on that exchange.
Implications for mortgage REITs
It has been a rough six weeks agency mortgage REITs like American Capital (AGNC) and Annaly (NLY), who have a concentration of 30 year fixed rate mortgage backed securities. The back up in rates has taken a toll on the value of their assets and their stocks have performed poorly. Agency REITs that focus on adjustable rate securities (ARMs) like MFA Financial (MFA) have performed better, but are still down. REITs that have exposure to mortgage servicing rights (MSRs), like Nationstar (NSM) and Ocwen (OCN) have rallied substantially since rates have increased.
The takeaway is to expect more of the same. Even since the bubble burst, the yield curve still isn’t all that steep. Also, not all REITs react to increasing interest rates the same way. Some will benefit from increases while others will get hit hard.
© 2013 Market Realist, Inc.