The unemployment rate
The unemployment rate is probably the most visible and important economic indicator in the United States. A person’s perception of the economy’s health is driven first and foremost by where unemployment stands.
Gross domestic product, or GDP, growth is generally considered the barometer of the economy. But the biggest jumps in GDP growth often occur just as recessions end, before indicators such as unemployment come back.
The official definition of “unemployment”
People are classified as unemployed if they meet all of the following criteria:
- They had no employment during the reference week.
- They were available for work at that time.
- They made specific efforts to find employment sometime during the four-week period ending with the reference week.
People laid off from a job and expecting to be recalled don’t need to be looking for work in order to be counted as unemployed. The unemployment data derived from the household survey in no way depend upon the eligibility or receipt of unemployment insurance benefits.
Highlights from the survey
The unemployment rate was unchanged at 5.5% in February. The underemployment rate includes discouraged workers, or people who want to work but have given up looking. It also includes people marginally attached to the labor force and people employed part-time who want to work full-time. In February, the underemployment rate decreased to 11%, from 11.3%.
Implications for mortgage REITs
Mortgage real estate investment trusts (or REITs) such as Annaly Capital Management (NLY), American Capital Agency (AGNC), and MFA Financial (MFA) are highly sensitive to interest rates and will probably be vulnerable as the Fed starts increasing short-term rates. This is because the yield curve could flatten, meaning long-term rates could stay the same while short-term rates increase.
This means interest rate spreads will narrow. In the alternative, the yield curve could make a parallel shift, which would result in increased funding costs and capital losses on these REITs’ portfolios.
Investors who are interested in trading the mortgage REIT sector as a whole should look at the iShares Mortgage Real Estate ETF (REM). Investors who are interested in making directional bets on interest rates should look at the iShares 20-year bond fund (TLT).