So far, 2014 hasn't been too bad for the beaten-down mortgage REIT sector. Both 30- and 15-year mortgage rateshave been moving downward each week in January, and mREITs have responded. Annaly Capital Management (NLY 1.47%) is up more than 6% this year so far, as is American Capital Agency Corp. (AGNC 1.07%), by nearly 8%. CYS Investments (NYSE: CYS) has gained more than 7% as well.
Unfortunately, change is in the air, and it doesn't bode well for the mREIT sector. A lousy manufacturing sector report out of China and somewhat disappointing existing home sales data may have been responsible for a sweet rally late last week, but investors will likely be looking homeward this week, as taper worries once again come to the fore.
Will they or won't they?
The biggest event this week is the Federal Open Market Committee meeting, which begins Tuesday. The question of whether the Fed will continue with its current tapering of its quantitative easing program will, no doubt, be at the top of the agenda.
Despite the evidence that the falling unemployment rate is at least partly due to the discontinuation of emergency jobless benefits and an historically low labor force participation rate, many analysts think the Fed will vote to ramp up its tapering of QE3. Most feel that another $10 billion reduction in bond purchases is on tap for next month, which will bring the Fed's total monthly acquisitions to $65 billion, down from $85 billion in December.
Granted, $65 billion is still a sizable economic cash injection, but as the past months have shown, it is fear of the unknown that causes the most damage. Much of the losses mREITs incurred last year were due to the trepidation markets felt about exactly when the Fed would initiate the taper, which, of course, did not begin until recently.
President Obama may be adding to the general unease. The Wall Street Journal reports that Obama is planning to reveal an especially assertive agenda in Tuesday's State of the Union address, laying out his plan to push administration causes such as job training and other economic issues over the protests of Congress, if need be. He is also expected to announce a non-binding promise by big employers to not discriminate against the long-term unemployed.
The suffering may have already begun. Annaly, American Capital Agency, and CYS have all sunk into the red -- less than 24 hours before the FOMC meeting begins.
As the economy is dragged, ready or not, into recovery mode, expect to see more volatility in the mREIT sector -- with this week in particular shaping up to be especially edgy.
