The basis for long-term interest rates

Ten-year bond yields influence everything from mortgage rates to corporate debt. They’re now the benchmark for long-term US interest rates. Some might remember when the 30-year bond was the benchmark, but that changed in the 1990s. When investors want to know what’s going on in the bond market, in essence, they want to know where the ten-year bond is trading.

Bond Yields Fall as Retail Sales Disappoint

Note that short-term rates are still important, particularly the LIBOR (Intercontinental Exchange London Interbank Offered Rate), which is the base rate for almost all short-term rates. Rate information is relevant to REITs such as American Capital Agency (AGNC), Annaly Capital Management (NLY), Redwood Trust (RWT), and MFA Financial (MFA). Investors can trade in the REIT sector through the iShares Mortgage Real Estate Capped ETF (REM) or in the whole financial sector via the S&P SPDR Financial ETF (XLF).

Bond yields fall on disappointing retail sales

After closing out the prior week at 2.32%, bond yields, as tracked by the iShares 20+ Year Treasury Bond ETF (TLT), fell by 6 basis points for the week ending November 13 to go out at 2.26%. The jobs report–driven strength ended with disappointing retail sales numbers.

The mortgage REIT sector has been relatively underleveraged since the “taper tantrum” in 2013. The biggest change in the sectors has been the move to swap interest rate risk for credit risk. Given the strength of the jobs report, that appears to be the right call. Mortgage REITs have dry powder if they want to build up their balance sheets again.

Will we see a December move?

After the jobs report, numerous sell-side shops changed their interest rate forecasts and moved up their estimates for the first interest rate hike from March to December. The Fed funds futures contracts increased the implied probability of a December hike from 53% to 71%.

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