FOMC minutes from March 2015
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 ten to 20 pages long.
The minutes include graphs and a two-sided discussion about the argument. They explain the current discussions and give some idea about how popular certain views are within the Fed.
Bonds react to the minutes
As the above chart highlights, overseas weakness has caused bonds (TLT) to rally for the past few weeks. Stocks have been getting hit on Chinese market fears, and as investors sell stocks, they have been buying Treasuries. This is generally known as the “flight to safety” trade or the “risk-off” trade.
The day the Fed released the FOMC meeting minutes began with the ten-year bond yielding 2.28%. Bonds had been supported by a falling stock market (the S&P 500 was down 30 points around noon), and the minutes, which were interpreted as reasonably dovish, pushed down bond yields, which put a bid under stocks.
Mortgage REITs such as Annaly Capital (NLY), American Capital Agency (AGNC), and MFA Financial (MFA) are rooting for the Fed to maintain low rates for as long as possible. Increasing short-term rates will raise their cost of funds and could possibly hurt the value of their MBS portfolios if long-term rates rise. However, MFA will be in a better position, given its book is comprised of adjustable-rate securities.
Investors who are interested in making a diversified bet on the mortgage REIT sector should look at the iShares Mortgage Real Estate ETF (REM). This series will take an in-depth look at the March FOMC minutes and their implications for investors.