Week in review
Last week, stocks and bonds both rallied. Commodity markets improved and global interest rates fell. The initial catalyst was Janet Yellen’s speech. It soothed the markets with a dovish take. While we had some mixed economic data, the jobs report was the highlight of the week. We also heard from Lennar (LEN) last week. It reported good numbers. Read What’s the Deal with Lennar’s Strong Q1 Earnings? to learn more about Lennar’s earnings.
Decent jobs report
The jobs report was the highlight of the week. Payrolls increased by 215,000. This is an okay number. The labor force participation rate inched up for the fifth month in a row. It actually increased the unemployment rate. An increase in the unemployment rate is being driven by previously uncounted “discouraged workers” re-entering the labor force. It’s actually good news. The average hourly earnings ticked up as well.
Implications for mortgage REITs
Last week, bond yields fell to 1.8%. Strategists have been taking down their forecasts for 2016 rate hikes based on economic weakness and the latest dot plot from the Fed. Federal funds futures contracts aren’t expected to move until 2018.
A more dovish Fed is generally good news for agency REITs like Annaly Capital (NLY) and American Capital Agency (AGNC). Rate increases impact the REIT sector mainly by increasing the cost of funds. Recently, the FHLB (Federal Home Loan Bank) tightened its eligibility requirements. REITs that have been using the FHLB will lose access to a particularly cheap cost of capital.
Investors interested in making directional bets on interest rates can look at the iShares 20+ Year Treasury Bond ETF (TLT). If you’re interested in trading in the mortgage REIT sector through an ETF, you can look at the iShares Mortgage Real Estate Capped ETF (REM).