Departing Federal Reserve Chairman Ben Bernanke and the Federal Open Market Committee gave mortgage real estate investment trusts a nice holiday gift yesterday: the announcement that tapering of the Fed's monetary easing program will begin in January.
Good news? You bet
The concept that setting a timeline for the tapering of quantitative easing could be good for mREITs may sound strange, but it's not. There are several reasons why this announcement will benefit these companies, not the least of which is the removal of uncertainty. As investors well know, the lion's share of damage to the sector has been inflicted not because of the taper per se, but because of the fear of the unknown. This ambiguity has now been removed, and that's huge.
Notably, shares of Annaly Capital (NYSE: NLY ) , American Capital Agency (NASDAQ: AGNC ) and Armour Residential (NYSE: ARR ) all spiked shortly after Bernanke's speech, while the Volatility S&P 500, the so-called "fear index", took a nosedive.
Slow and easy
In addition, the timeline presented for tapering was not only clear, but extremely conservative. The Fed will decrease its purchases of mortgage-backed securities and Treasuries by $5 billion each per month, starting next month. For mREITs, this is sweet, since the Fed won't exit the program too quickly -- which could cause a precipitous drop in the value of mortgage-backed securities. Book values may suffer, but not very much.
In a nod to housing, the FOMC noted that it will hold on to its stash of mortgage-backed securities for the foreseeable future, in hopes of keeping long-term rates from increasing. This is good news for book values, as well.
Most importantly, the Fed was clear regarding its stance on short-term rates, which it asserted will very likely stay low beyond the time at which unemployment reaches 6.5%. For mREITs, this is just the kind of news investors wanted to hear.
Despite its opinion that the economy has experienced substantial improvement, the Fed also said it will be monitor the economic situation closely and could "reduce the pace of asset purchases in further measured steps at future meetings" if economic indicators warrant such a move.
Time to plan for the future
While it seems unlikely that the Fed would need to revert back to full-tilt quantitative easing, the mention of such a possibility can only have a calming effect upon the sector, something that is sorely needed right now. The Fed's taper timeline also gives mREITs a full year to plan for the eventual demise of QE3, which will likely continue to be wound down slowly, since the Fed is trying its level best to avoid spooking the markets.
Keeping an eye on how Annaly handles the commencement of the taper will be particularly instructive, considering the senior status it holds among mREITs, and its historically conservative business approach. Peers American Capital Agency and Armour took steps this week to calm investors, with the former announcing that it has repurchased 43 million shares within the past year and the latter setting its dividend at $0.05 per share for the next 12 months. After Uncle Ben's speech, however, keeping investors relaxed should be quite a bit easier.
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