Bonds Rally And Commercial REITs Analyze The October FOMC Minutes



FOMC minutes from October 2014

When the Fed meets for its Federal Open Market Committee (or FOMC) meeting, it usually puts out a press release that hits the decision highlights. The Fed also gives a brief economic overview and sometimes hosts a press conference.

Analysts usually compare the current statement with the previous one, noting any changes in language. The FOMC meeting minutes are much more in-depth. They’re usually 10 to 20 pages long. The minutes include graphs and a two-sided discussion about the argument.

10 year bond yield - LT

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The FOMC minutes go deeper than the FOMC statement and explain the current discussions. Commercial real estate investment trusts (or REITs) like Simon Property Group (SPG), Boston Properties (BXP), Kilroy (KRC), Vornado (VNO), and SL Green (SLG) are sensitive to the interest rate. So, these companies carefully analyze the minutes to understand the economy and the Fed’s intentions.

Bonds react to the minutes

As the above chart highlights, global economic weakness has caused bonds (TLT) to rally for the past few weeks. The day the Fed released the minutes began with the ten-year bond yielding 2.36%. Bonds rallied on the minutes, touching as low as 2.31% before selling off and finishing the day more or less unchanged.

“Normalization” is the new buzzword for Fed policy

With “tapering” now a common term in the Fed’s language, we need a new word to address when we eventually step away from the zero interest rate policy (or ZIRP). That word is “normalization.” It has become the substitute for “raising the Fed funds rate.”

The Fed minutes suggest that we’re truly in uncharted waters. The Fed is considering increasing the interest rates with a massive balance sheet. Remember that increasing interest rates hurts the value of fixed income assets. The Fed isn’t immune to this pain.

This series will take an in-depth look at the October FOMC minutes and their implications for investors.


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