The ten-year bond is the basic driver of REITs and homebuilders
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 (or 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).
Bonds’ post-shutdown rally ends as the FOMC and the ISM point to future economic strength
Government shutdowns are invariably treated like once-in-a-century calamities. But in reality, we’ve had periods during the late ’70s and most of the ’80s where they happened almost every year. Markets tend to have a little more historical perspective than media types who have to hype a story, which explains why the market basically yawned at the whole affair.
On Wednesday, the FOMC decided to maintain current policy and made comments about the strength of the economy. Bonds sold off on the language, and then sold off further on Friday’s strong ISM report.
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 (quantitative easing). The fact that it got a break from tapering sent the mortgage REIT ETF (MORT) screaming higher after the September meeting. Recently, St. Louis Federal Reserve Chairman James Bullard characterized the decision as a close call.
Implications for homebuilders
Homebuilders, like Lennar (LEN), KB Home (KBH), and Standard Pacific (SPF), are more sensitive to general economic strength. The ISM report certainly was a positive for them. We had earnings reports from PulteGroup (PHM) and Meritage (MTH) last week, both of which were good, although orders are slipping.