The Fed’s Humphrey-Hawkins testimony and its implications for REITs (Part 6)
Impact on mortgage REITs
Bernanke’s testimony touched on the environment for mortgage REITs like Annaly (NLY), American Capital (AGNC), MFA Financial (MFA), and Hatteras (HTS) in several ways. Here are the main points.
- Don’t fear a deluge of mortgage-backed securities (MBS) supply when the Fed ends quantitative easing.
This is probably the biggest effect. There was a fear that the Fed would unwind its balance sheet by selling its holdings into the market. In fact, Bernanke said that he would re-invest maturing paper back into the mortgage market. This should keep a Fed bid under MBS paper for a while. Definitely good news for the REITs. When asked whether the Fed was losing money on its MBS purchases after this hike in rates, Bernanke dissembled about the uncertainty regarding the mix of Treasuries, duration, et cetera. Basically, he dodged the question. Given the stock market performance of the REITs, that question isn’t going to go away.
- A tapering of quantitative easing isn’t a done deal, but changes are a long shot.
Bernanke laid out his economic forecast and said that if things played out as the Fed expects, it will begin to slow purchases of MBS and Treasuries this year and probably end quantitative easing fully by mid 2014. He made the usual caveats that he will be guided by the data, but the message was still that the economic data would have to worsen markedly for there to be any changes.
- Low interest rates are here to stay for a while.
It’s important to distinguish between quantitative easing and the Fed Funds rate when listening to Bernanke. While he’s anxious to normalize Fed operations (meaning ending extraordinary measures like quantitative easing or Operation Twist), he’s not necessarily pushing to raise interest rates. The Fed seems to be treading carefully here, and if inflation stays at these sorts of levels, he’ll keep rates here as long as it takes.
This should provide some comfort to REITs (and mortgage originators) that an exit from asset purchases won’t cause dislocation in the TBA market. If anything, I think the REITs got a pleasant surprise when Bernanke said the Fed would continue to roll over MBS. If anything, that’s also good news for borrowers, and it shows that the Fed is concerned about how high mortgage rates have risen.