Mortgage REITs have been getting savaged lately as chatter about an early end to the Federal Reserve’s QE3 program causes shares of American Capital Mortgage Investment Crp (NASDAQ:MTGE) American Capital Agency Corp. (NASDAQ:AGNC), CYS Investments Inc (NYSE:CYS), and ARMOUR Residential REIT, Inc. (NYSE:ARR) to see-saw, but mostly spend much of their time sitting close to their 52-week lows. Another agency-only mREIT, the venerable Annaly Capital Management, Inc. (NYSE:NLY) has been less bruised, perhaps because of its absorption of Crexus Investment Corp (NYSE:CXS)— now called Annaly Commercial Real Estate Group.
What Bernanke said, and didn’t say
Why are the markets so confused? Last week was a regular QE3 carnival, as the latest Fed meeting minutes were released and Federal Reserve Chair Ben Bernanke testified before a congressional hearing. The question of the day was, of course, “When will QE3 end?”
Unfortunately, no definitive answer was given, which made investors jittery. Down into the abyss fell the mREIT sector, particularly agency types, and so soon after it looked like a nice rally was taking hold.
It’s easy to see why everyone is so nervous. In Bernanke’s testimony before Congress, he was clear that his committee is planning to soldier on with MBS purchases until it sees that the labor market has improved “substantially.” He then went on to say that unemployment is still too high, and the job market too weak. The Fed will continue to monitor the labor and inflation situation, he said, basing its decision to reduce securities purchases on “incoming information.”
During the question and answer period, however, Bernanke refused to directly answer queries concerning when this tapering off might occur, except to say that the decision could be made in the next few Fed meetings. Not a lot of help, though he did say that a slackening of the pace won’t necessarily mean that QE3 is ending — only that it is slowing.
What does this mean for the agency mREIT sector?
For agency mREITs, the road definitely looks like it will become rougher, at least until anxieties subside. Granted, this will be a toughie, since Uncle Ben is obviously not going to tip his hand.
One thing that seemed very clear from Bernanke’s testimony, however, is the subject of unemployment — and the effect that lousy job numbers are having on the committee’s decision to stay the course. Until there is some real, sustainable improvement in that metric, I think QE3 will continue to exist in its current format. Once investors realize this, things should settle down.