The government officially closed its doors today as Congress failed to avert a shutdown as it runs out of cash. Some things won't change -- planes will still take to the skies, the postal service will continue to move packages across the country, and Social Security checks will still go out.
But the slight economic disruption some expect may curtail the need for the Fed's taper. Interest rates could stay low for even longer.
Why Bernanke won't pull the trigger now
Some 800,000 people on the federal payroll won't receive a paycheck until Congress and the president can reach a deal to fund the government. That's a significant number of people who will likely cut back on their spending, forgoing everything from meals out to eat or car washes.
To put the numbers in perspective, the civilian labor force totaled 155.4 million people in August. With 800,000 employees off the payroll temporarily, a full 0.5% of all employed people won't be getting a paycheck.
Does that matter?
In a word, yes. It matters insofar as there are 800,000 budgets out there indefinitely strained until politicians can come together to compromise. That's 800,000 people less confident about their economy -- the economics of their personal bottom line. And that means some will undoubtedly cut back on their spending.
But most importantly, the Fed won't even have the employment data it needs to make a decision about its asset purchases because the government is closed for business.
"No taper" stocks rocking
We're seeing some unusual movers as the government shuts down. First, the 10-year U.S. Treasury note yield is up only modestly, reflecting the market's confidence that the government will sort this out.
But some unusual stocks are rallying alongside a rise in the 10-year yield. Mortgage REITs American Capital Agency (NASDAQ: AGNC ) and Annaly Capital Management (NYSE: NLY ) were both up more than the broad S&P 500 index (NYSEMKT: SPY ) in a post-shutdown rally.
Equity REITs were also on the move – Realty Income Corp (NYSE: O ) soared more than 3%.
REIT price movements are strongly correlated to the expectations of future interest rates. If Treasury yields move higher, REIT value dip. Lower Treasury yields bring higher stock prices.
Investors are clearly anticipating that a government shutdown will delay tapering in 2013, if it comes at all. The longer Bernanke waits to taper, the closer we get to a critical fourth-quarter holiday shopping season, a time when the Fed would prefer not to make confidence-rattling moves like tinkering with interest rate policy.
Embracing no tapering
While it's certain the Federal Reserve will have to cut back on quantitative easing eventually, delays are great for REITs. American Capital Agency and Annaly Capital have seen significant book value erosion since rates pushed higher. The two most recently cut their quarterly dividends in response to changing interest rates.
Likewise, stocks like Realty Income Corp. tend to trade so that their dividend yields are 2.0%-3% higher than the 10-year U.S. Treasury note yield. As investors ponder the reality that a taper may not come, they become more confident buying into a perpetual income stream like an equity REIT.
For the REITs, a government shutdown couldn't come at a better time. Tapering may have to wait until 2014, when a new Fed chief takes the role as the world's most important banker. That's giving many investors the confidence to make big buys now.
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