uploads/2016/05/Housing-starts2.png

Week in Review: The FOMC Minutes Shocked the Bond Market

By

Updated

Week in review

The week ending May 20 was dominated by the FOMC (Federal Open Market Committee) minutes. The sentence that got everyone’s attention was the following: “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.” Bonds immediately sold off, and the Fed funds futures increased the probability of a June hike from 10% to 25%.

Aside from the FOMC minutes, we had a lot of housing data last week with the NAHB Housing Market Index, housing starts, building permits, and existing home sales.

Article continues below advertisement

Implications for mortgage REITs

Last week, bond yields rose to 1.84% on the FOMC minutes. Note the Fed has set up the Market for rate hikes several times in the past couple of years only to get cold feet at the last moment.

A more hawkish Fed is generally bad news for agency REITs such as Annaly Capital Management (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 the housing starts data. Homebuilders 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).

Advertisement

More From Market Realist