But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
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The ten-year bond is the basis for all mortgage pricing
Long-term interest rates are priced off the benchmark long-term bond, which is the ten-year Treasury. These days, the ten-year bond reacts to economic data through the Federal Reserve’s asset purchase program, also known as quantitative easing (QE). As a general rule, economic data that shows weakness is bond bullish (positive). However, data that shows strength isn’t necessarily bond bearish (negative).
The week in review
Last week was a data-intensive week with some major economics reports and a FOMC (Federal Open Market Committee) meeting thrown in for good measure
On Monday, we saw pending home sales slip by 0.4% due to higher interest rates, and the Dallas Fed report showed manufacturing is still expanding moderately. Tuesday, we got the Case-Shiller real estate index, which showed prices increasing 12% year-over-year, and consumer confidence dipped slightly. Wednesday was big with a better-than-expected GDP report, while Q1 was revised downward by a lot. The Fed kept rates unchanged and fiddled with the language of the FOMC statement. On Thursday, we had a strong ISM report, which showed manufacturing accelerating. Finally, on Friday, we got a disappointing jobs report. So overall, interest rates were more or less unchanged for the week, but the trading range was wide at 2.57% to 2.74%
Implications for mortgage REITs
Mortgage REITs, like Annaly (NLY) and American Capital (AGNC), are driven by interest rates. The mortgage REITs have been crushed as the ten-year bond has sold off, but they’ve been trying to form a bottom here. For REITs, it’s all about the Fed’s exit of QE. The FOMC statement was relatively dovish (not aggressive) and didn’t specifically mention tapering QE purchases. For that matter, given the downward revision in GDP, it has averaged 1.07% for the past three quarters. It makes you wonder why the Fed is so eager to trim back asset purchases. MFA Financial reported decent numbers last week—book value dropped, but not by as much as some of the other REITs.
Implications for homebuilders
Homebuilders, like Lennar (LEN), KB Home (KBH), and Standard Pacific (SPF), are more sensitive to general economic strength. The strong ISM report showed employment starting to pick up in the manufacturing sector, which was good to see. The jump in house prices helps too, although the builders that focus on the entry-level homebuyer are starting to see sticker shock out of the first-time homebuyer. Both Pulte and Beazer (BZH) noted this trend.
Continue to Weekly Realist real estate roundup (Part 6)
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