The Fed Chairman along with his fellow policymakers are scheduled to meet next week
for two days to consider going ahead with their unprecedented easing or not. The debate on when to end bond purchases began in December last year, however, the US labor market has yet to show significant gains Fed wants to see before halting bond purchases. While unemployment hovered around 7.8% since the beginning of 2009, the Federal Open Market Committee participants see no immediate threat from inflation, which has reached 1.4%.
At least two district bank presidents who have advocated record easing gained voting rights this year, while six Fed officials have indicated their willingness in allowing the bank to continue easing. Therefore, I believe the Fed Chairman can count on the FOMC to endorse the current programs of buying $40 billion in mortgages and $45 billion in treasuries each month.
The markets overreacted when the minutes from last month’s meeting showed differences on how long the easing should last. The S&P 500 index fell 0.2% while the yields on 10-year treasuries edged up 0.07%. Supportive outcomes of the FOMC’s two day meeting would push stocks up and the yields down. However, one sector, the US Agency mortgage REITs might get hit further. Agency Mortgage REITs have been taking since the launch of the third round of quantitative easing (QE3). Annaly Capital Management, Inc. (NYSE:NLY)
, Corp. (NASDAQ:AGNC)
and ARMOUR Residential REIT, Inc. (NYSE:ARR)
are the major players.
Annaly Capital Management, Inc. (NYSE:NLY)
At the end of the third quarter, Annaly Capital owned 93% fixed rate securities, while the rest were adjustable rate securities. The average maturity of the company’s securities was 4.93 years, while the conditional prepayment rate increased from 19% in the linked quarter to 20% at the end of the third quarter. Due to the actions of the Fed, Annaly experienced a 52 basis point year over year decline in its annualized interest rate spread. As a result Annaly was forced to decrease its quarterly dividends 10% to $0.45 per common share.