Assessing the Risk of a Flattening Yield Curve
St. Louis Fed president and CEO James Bullard gave a presentation at a regional economic briefing on December 1. Throughout this series, we’ll analyze Bullard’s take on the risks of an inverted yield curve.
Low volatility investment strategies don’t need high levels of market volatility to do well. Market volatility tends to cluster: it can be subdued and then burst higher.
A REIT (or real estate investment trust) is a company that owns and manages income-producing real estate.
Mortgage REITs such as Annaly Capital Management (NLY), MFA Financial (MFA), and American Capital Agency (AGNC) are big holders of Ginnie Mae TBAs.
For the week ending August 19, Fannie Mae TBAs ended at 103 17/32—down 7 ticks for the week. The ten-year bond yield rose by 7 basis points to 158 basis points.
Mortgage rates and bond yields have shown a weak correlation. Treasury yields have fallen over the past month, while mortgage rates have been steady.
Ten-year bond yields influence everything from mortgage rates to corporate debt. Now, they’re the benchmark for long-term US interest rates.
The highlight of last week was the FOMC minutes. Bonds rallied on the FOMC minutes, but a global bond sell-off reversed the gains on Friday.
QE increased the size of the Fed’s balance sheet almost eightfold since the turn of the century. Currently, the Fed’s balance sheet holds around $4.5 trillion.
In the FOMC’s June meeting, members reviewed the financial situation. Members discussed the state of the credit markets and the interbank market.
The FOMC minutes noted that inflation has remained well below the Fed’s 2% target. Consumer prices rose by 1% over the past year.
The big takeaway from the Fed’s economic analysis is that two downside risks—the Brexit vote and the weak May payroll numbers—turned out to be non-events.
Some Fed members argued that while unemployment is low, the overall labor utilization rate is low. The Fed has more work to do to achieve full employment.
On August 17, 2016, the Fed released the minutes from the July FOMC meeting. Overall, bonds took the FOMC minutes to be relatively dovish.
The ten-year bond yield fell by 8 basis points to 1.51% for the week ending August 12, 2016. Ginnie Mae TBAs rose by 4 ticks and closed at 104 28/32.
For the week ending August 12, 2016, Fannie Mae TBAs ended at 103 24/32—up 4 ticks for the week. The ten-year bond yield fell by 8 basis points to 1.51%.
Lately, mortgage rates and bond yields have shown a weak correlation. Treasury yields have fallen over the past month, while mortgage rates have been steady.
After closing the previous week at 1.59%, bond yields—as tracked by the iShares 20+ Year Treasury Bond ETF (TLT)—fell by 8 basis points to 1.51% last week.
Last week didn’t have much data—typical for the week after the jobs report. There was a negative productivity reading for the third quarter in a row.
The FOMC minutes are potentially the biggest market-moving event. How close is the Fed to hiking the interest rate at the September meeting?