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Why the September 2014 FOMC meeting offered good news for REITs

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Highlights of the September 2014 FOMC Statement

Yesterday, the Federal Reserve ended its September Federal Open Market Committee meeting and decided to continue to reduce asset purchases. It will reduce purchases of Treasuries by $5 billion a month. It will also reduce purchases of mortgage-backed securities by $5 billion. Quantitative easing should end this year.

The Fed also clarified its stance regarding its balance sheet. For the time being, the Fed will continue to re-invest maturing Treasuries and MBS (mortgage-backed securities) back into the market. At some point, that will stop. The Fed also said it doesn’t intend to sell off its MBS portfolio but to let it mature.

fed funds dot graph Sep 14

Market reaction

Bonds sold off on the news, with the ten-year closing at 2.62. Stocks rallied on the report, with the S&P 500 rising above 2010 before giving back the gains. Stocks took comfort in the language of the statement, which remains dovish.

The consensus is forming that the first rate hike will be at the June 2015 FOMC meeting

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The attached scatter chart shows where the individual FOMC members see the federal funds rate at different periods. If you compare the last chart (after the June FOMC meeting), you’ll see that the consensus has moved to an earlier forecast of tightening and the expected rate is higher. This is what caused the bond market to sell off.

Note that the set of members who will make the actual decision next year will be different than the current group. The incoming group is more dovish.

Implications for mortgage REITs

For mortgage REITs like Annaly Capital (NLY), American Capital Agency (AGNC), MFA Financial (MFA), Hatteras (HTS), and Capstead (CMO), the news that the Fed intends to hold its MBS portfolio was welcome.

At the margin, that means less pressure on mortgage-backed securities and a lower likelihood of capital losses—especially as rates begin to increase. That said, the forecast that short-term rates are going up sooner than expected wasn’t good news for the sector.

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