Week in review
The week after the jobs report is typically data-light, and last week was no exception. The biggest number last week was the JOLTS job openings number, which came in at 5.7 million, well in excess of the 5.3 million estimate. Without much in the way of economic data or earnings to trade off of, markets remained largely in thrall to the volatility of emerging markets. Stocks had a decent week, and Monday and Tuesday had some big moves in the S&P 500. The risk-on trade added a few basis points of yield to the 10-year bond.
Inflation remains calm, with import prices falling and the producer price index coming in flat. Certainly there is no inflation-related reason for the Fed to move next week.
Implications for mortgage REITs
Bond yields rose about 15 basis points last week on the risk-on trade. This was bad news for mortgage REITs, particularly agency REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC). REITs exposed to adjustable-rate mortgages, such as MFA Financial (MFA), are a little more insulated from interest rate moves.
Investors interested in making directional bets on interest rates can look at the iShares 20-year bond fund (TLT). Those interested in trading in the mortgage REIT sector through an ETF can look at the iShares Mortgage Real Estate Capped ETF (REM).
For mortgage REIT investors, the markets will turn inhospitable as the Fed begins the normalization process. That being said, taking credit risk through non-agency REITs will probably be the best strategy in an environment of rising yields driven by economic strength.
Implications for homebuilders
Homebuilders were encouraged by the strong jobs data. You can invest in homebuilders through the SPDR S&P Homebuilders ETF (XHB).