Week in Review: FOMC Minutes Were Less Hawkish

Week in review

The highlight of last week was the FOMC (Federal Open Market Committee) minutes. To learn more, read Insights for Investors: Analyzing the Dovish July FOMC Minutes. The FOMC minutes showed that the Fed is still nervous about the economy. However, two of its biggest fears—the Brexit vote and the weak May jobs report—turned out to be non-issues. Bonds rallied on the FOMC minutes, but a global bond sell-off reversed the gains on Friday.

Week in Review: FOMC Minutes Were Less Hawkish

In other news, housing starts came in at 1.2 million units—towards the top end of the range. Most of the growth was in multi-family construction. Building permits rose and exhibited the multi-family bias as well. To learn more, read July Housing Starts, Permits, and Sentiment.

Implications for mortgage REITs

Bonds were volatile again last week—the ten-year yield rose by 7 basis points. This is tough for mortgage REITs, although Annaly Capital reported decent earnings. To learn about Annaly’s quarter, read Broad Spectrum: Analyzing Annaly Capital’s 2Q16 Earnings.

That being said, recent volatility in the bond market isn’t necessarily good news for mortgage REITs. They hedge the interest rate risk of their portfolios—readjusting their hedges works against them. The perfect scenario for them is a Treasury market that moves very little and allows them a good yield pickup. For REITs, the good news is that the Fed is pretty much on hold.

A more dovish Fed is generally good news for agency REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC). It will also help mortgage originators like PennyMac Mortgage Investment Trust (PMT) and Redwood Trust (RWT).

Investors interested in making directional bets on interest rates can look at the iShares 20+ Year Treasury Bond ETF (TLT).

Implications for homebuilders

Homebuilders such as PulteGroup (PHM) and CalAtlantic Group (CAA) will benefit from stronger-than-expected economic data. In the long term, builders will have an opportunity to meet pent-up demand when the economy finally starts hitting on all cylinders. Homebuilders still lack the confidence to really push out the volume, as evidenced by the number of housing starts—they’re well below pre-bubble historical levels of 1.5 million units per year. Meanwhile, pent-up demand continues to build. You can invest in homebuilders through the SPDR S&P Homebuilders ETF (XHB).