uploads/// year bond yield LT

Bonds Get Slammed on FOMC Minutes

By

May. 19 2016, Published 10:44 a.m. ET

FOMC minutes from April 2016

When the Fed meets for its FOMC (Federal Open Market Committee) meetings, it usually puts out a press release that explains the highlights of the meeting. The Fed also gives a brief economic overview and sometimes hosts a press conference.

Analysts usually compare the current statement with the previous one, noting any changes in language. The FOMC meeting minutes are much more in-depth than the press release. They’re usually ten to 20 pages long.

The minutes include graphs and a two-sided discussion about the issues at hand. They explain the current discussions and give some idea about how popular certain views are within the Fed.

Article continues below advertisement

Bond reaction to the minutes

On May 18, 2016, the Fed released the minutes from the April FOMC meeting. The language of the minutes was more hawkish than expected. One statement got people’s attention: “Some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low.”

The Fed funds futures were pricing in about a 10% chance for a rate hike in June. Afterwards, that probability increased to 25%. Investors had perhaps been too complacent about the Fed, given the weakness overseas and the weakening economic data in the United States.

The ten-year bond yield was already pushing higher before the minutes were released. Bonds immediately fell on the announcement, pushing the ten-year yield from 1.8% before the release to 1.9% after. The two-year yield also spiked, rising from 84 basis points to 91 basis points. Stocks swooned on the announcement, with the S&P 500 falling 22 handles before recovering to finish the day unchanged.

Mortgage REITs such as Annaly Capital Management (NLY), American Capital Agency (AGNC), MFA Financial (MFA), and Two Harbors Investment (TWO) are hoping the Fed will maintain low rates for as long as possible. Increasing short-term rates will raise their cost of funds and could hurt the value of their MBS (mortgage-backed securities) portfolios if long-term rates rise. However, MFA Financial should be in a better position, given its book is comprised of adjustable-rate securities.

Investors who are interested in trading mortgage REITs through an ETF can look at the iShares Mortgage Real Estate Capped ETF (REM).

This series will take an in-depth look at the April 2016 FOMC minutes and their implications for investors.

Advertisement

More From Market Realist