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Stocks and Bonds Rally on the April FOMC Statement Highlights of the April 2016 FOMC statement On April 27, 2016, the Fed ended its FOMC (Federal Open Market Committee) meeting with a statement. It contained language that was similar to its statement in March. Most of the changes to the language were cosmetic. However, the Fed removed language worrying about the global financial markets. Bonds rallied on the decision. The ten-year bond yield—which you can trade through the iShares 20+ Year Treasury Bond ETF (TLT)—fell from 1.89% to 1.85%. Stocks rallied on the news and closed near their highs for the day. Market expected no move, but more hawkish language While Fed Chair Janet Yellen always points out that all FOMC meetings are “live” meetings, in that they’re always prepared to act, the Market was handicapping a low chance of a rate hike. In the Fed’s “dot plot,” which you can see above, the participants lowered their forecast for the federal funds rate at the end of the year. Implications for mortgage REITs For agency mortgage REITs—including Annaly Capital (NLY), American Capital Agency (AGNC), and MFA Financial (MFA)—the Fed’s hawkish statements regarding the economy aren’t necessarily good news. Higher interest rates won’t be good news for their repo financing. The bigger question will be how a rate hike will impact the long end of the curve. During the last three tightening cycles, the yield curve flattened and even inverted once. This would imply lower net interest margins for mortgage REITs and banks. Investors who are interested in trading the REIT sector should look at the Vanguard REIT ETF (VNQ). Continue to Next Part Browse this series on Market Realist: Part 2 - Fed Noted Strength in the Labor Market despite Slowing Economy Part 3 - Why the FOMC Statement Is Constructive on the Economy Part 4 - Why Does Inflation Remain Too Low for the Fed? View comments
Understanding the Fine Line Between Certainty and Correctness
Exploring how our certainty can lead us astray, and the importance of remaining open to being wrong.