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 pretty dull as far as market-moving data. Durable Goods disappointed on Monday, although the Dallas Fed came in slightly stonger. On Tuesday, Case-Shiller showed a 12% year-over-year increase in real estate prices, while the Richmond Fed was better than expected, as was consumer confidence. On Thursday, GDP came in better than expected, although Friday’s personal income and spending data seemed to indicate that much of the growth was inventory build, and will therefore “borrow” growth from Q3.
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 REITs will focus on reading the tea leaves ahead of the September FOMC meeting. For the REITs, the big question will be, “Who will replace the demand from the Fed when it begins to taper purchases?” With everyone deleveraging, foreign investors will need to pick up the slack.
Implications for homebuilders
Homebuilders, like Lennar (LEN), KB Home (KBH), and Standard Pacific (SPF), are more sensitive to general economic strength. The durable goods report was disappointing, but the consumer confidence numbers were better. As rates fall, that is good news for builders.
- Part 1 - Why you should follow this week’s Realist real estate roundup
- Part 2 - Fannie Mae TBAs flat as rates stabilize, good for mortgage REITs
- Part 3 - Ginnie Mae TBAs flat, low volatility good for mortgage REITs
- Part 4 - Mortgage rates decline over the week, good for homebuilders
- Part 5 - Preview of the bonds week ahead: All about Friday’s jobs report
- Part 6 - Week in review: Why we saw a quiet bonds week ahead of Labor Day
© 2013 Market Realist, Inc.