Wellington Denahan discusses Fed policy

On Annaly Capital Management’s (NLY) 2Q15 earnings conference call, CEO Wellington Denahan laid out the company’s viewpoint on rates as well as the Fed’s current policy and economics.

Denahan noted, “We are encouraged by the strength in the labor markets, the recent stability in inflation indicator, and the generally stronger economic growth that in our opinion solidly support an adjustment of the zero-bound by the Federal Reserve later this year. Our conservative leverage stands will allow us to better navigate the potential impact of increased market volatility, the effects of reduced liquidity and the untested market functioning in a less accommodative monetary policy environment.”

Comments from the Annaly 2Q15 Conference Call

Global equity markets

Since 2009, when the great monetary experiment began, global bond markets have increased in value by about $17 trillion. Global equity markets have increased by about $40 trillion. The average worker has seen wages increase by about $722 billion, which means about 2% of the benefit of QE (quantitative easing) went to workers. The rest went to asset prices.

The bigger question is whether the Fed has engineered an unsustainable situation in asset markets that require 0% interest rates. Annaly’s view is that the Fed will start increasing rates later in 2015 and that it should proceed at a cautious pace.

The outlook for interest rates is probably going to be volatile. Agency REITs like Annaly Capital Management (NLY) and American Capital Agency (AGNC) are most exposed to a churning bond market. REITs with adjustable rate mortgage-backed securities (or MBS), like MFA Financial (MFA), are a little more insulated. Finally, originators with large mortgage servicing rights portfolios, such as Nationstar (NSM), might actually benefit from increasing rates.

Investors interested in making directional bets on interest rates should look at the iShares 20+ Year Treasury Bond ETF (TLT). Investors interested in trading the mortgage REIT sector as a whole should look at the iShares Mortgage Real Estate ETF (REM).

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