10-year bonds and commercial REITs react to the FOMC minutes
The Federal Reserve usually releases a more detailed account of its Federal Open Market Committee (FOMC) meetings a month or two after the initial meeting
When the Fed meets for its FOMC meeting, it usually puts out a press release that hits the highlights of the decision and gives a brief economic synopsis. Sometimes the release accompanies a press conference. Analysts will usually compare the current statement with the previous one and try to divine the Fed’s thinking by noting any changes in language. The FOMC minutes of the meeting are much more in-depth. They’re usually ten to 20 pages long, with graphs and a discussion of both sides of the argument.
Instead of simply giving the argument for dissenters, the minutes give you a feel for the current discussions. Commercial REITs like Simon Property Group (SPG), Boston Properties (BXP), Kilroy (KRC), Vornado (VNO), and S.L. Green (SLG) are highly interest rate–sensitive. So they’ll parse the minutes to get a read on the economy and the Fed’s intentions.
Interested in BXP? Don't miss the next report.
Receive e-mail alerts for new research on BXP
Bonds react to the minutes
Bonds (TLT) have been strong since the weak industrial data last week. The day began with the ten-year bond yielding 2.56%. Bonds sold off ahead of the minutes and then rallied about 7 basis points on the actual release. Then they gave back a basis point going into the close.
The new buzzword for Fed policy: “Normalization”
With “tapering” now a common term in Fed-speak, we need a new word to address when we eventually step away from ZIRP (zero interest rate policy). That word is “normalization.” It’s become the euphemism for “raising the Fed funds rate.” If you read the Fed minutes—and I’ll talk about this more in depth later in this series—we’re truly in uncharted waters. The Fed’s contemplating increasing interest rates with a massive balance sheet. Remember that increasing interest rates hurts the value of fixed income assets, and the Fed isn’t immune to this pain.