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.
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 barely move
After closing out the prior week at 2.27%, bond yields, as tracked by the iShares 20+ Year Treasury Bond ETF (TLT), fell by 1 basis point for the week ending November 20 to go out at 2.26%. The FOMC minutes basically confirmed the Fed’s plans to move at the December FOMC meeting. Surprisingly, the stock and bond markets ignored the terrorist attacks in Paris. There was absolutely no flight-to-safety trade.
The mortgage REIT sector has been relatively underleveraged since the “taper tantrum” in 2013. The biggest change in the sector 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.