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Why Did Bonds Barely React to the FOMC Minutes?

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FOMC minutes from June 2016

When the Fed meets for its FOMC (Federal Open Market Committee) meeting, 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. They note 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.

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Bonds’ reaction to the minutes

As the above chart highlights, the Fed’s decision in December to raise interest rates caused bonds (TLT) to sell off as market participants started to discount more rate hikes.

On July 6, 2016, the Fed released the minutes from the June FOMC meeting. The Brexit vote mainly overshadowed anything that came out of the June FOMC meeting. The fear in global markets is that the Brexit outcome will depress demand. You can see that in how low interest rates have gone globally. The German ten-year Bund is trading at -15 basis points. Remember, bond investors want economic weakness. They generally avoid economies at or close to full employment. The FOMC minutes didn’t surprise anyone. The backdrop was largely irrelevant. Bonds barely moved on the announcement.

Mortgage REITs such as Annaly Capital Management (NLY), American Capital Agency (AGNC), MFA Financial (MFA), and Two Harbors Investment (TWO) are hoping that 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 mortgage-backed securities portfolios if long-term rates rise. However, MFA Financial should be in a better position—its book is comprised of adjustable-rate securities.

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

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

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