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).
FOMC minutes dominate an otherwise dull, holiday-shortened week
Last week was relatively light data-wise, although housing starts and building permits disappointed. Inflation data was muted as well. The highlight of the week was the FOMC minutes, which showed the Fed remains committed to reducing MBS and Treasury purchases.
Commercial REIT earnings
Recently, we heard from mall REIT heavyweights Simon Property Group (SPG) and General Growth Properties (GGP). Overall, retail sales may have been slightly disappointing, but these mall REITs are reporting strong numbers.
Implications for mortgage REITs
Mortgage REITs, like Annaly (NLY) and American Capital (AGNC), are driven by interest rates. AGNC reported earnings and said that it was investing some of its portfolio in the stocks of its competitors. 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 minutes told investors that the bar is set very high with respect to changing the plan.
Implications for homebuilders
We heard recently from D.R. Horton (DHI) and PulteGroup (PHM). Both are diversified homebuilders that cater to the first-time and move-up buyer. While the first-time homebuyer remains on the sidelines, the move-up buyer has been active, and has been driving price increases. Both companies noted that traffic increased in January, which bodes well for the spring selling season.