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The Week in Review: The Fed Stands Firm

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Week in review

Last week, which ended April 29, 2016, was dominated by the FOMC (Federal Open Market Committee) meeting, where the Fed maintained its current Fed funds rate. The language of the statement calmed bond investors, which sent yields down for the week.

We had a slew of important economic data last week, with the advance estimate of first quarter GDP being the dominant issue. The first pass at first-quarter GDP came in at +0.5%, an anemic number. The New York Fed took down its number for second-quarter GDP to +0.8%, which adds up to a terrible first half of the year economically.

New home sales missed expectations. However, pending home sales came in better than expected. The Case-Shiller Home Price Index continued to rise, as tight inventory is driving prices higher and affordability lower.

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Implications for mortgage REITs

Last week, bond yields fell to 1.8%. Strategists have been taking down their forecasts for rate hikes in 2016 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 such as 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).

Implications for homebuilders

Homebuilders such as PulteGroup (PHM) and CalAtlantic Group (CAA) were focused mainly on disappointing new home sales data. The builders still lack the confidence to really push out volume. Meanwhile, pent-up demand continues to build. You can invest in homebuilders through the SPDR S&P Homebuilders ETF (XHB).

Next, let’s see why bond yields fall last week and why the FOMC statement is being interpreted as dovish.

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