Annaly Capital (NLY) shares have been sliding since longer term rates started to move higher in early May. Rising rates were sparked by chatter about the Federal Reserve potentially shifting gears away from its expansionary efforts. The Federal Open Market Committee (FOMC) meeting minutes release in mid-May offered confirmation for some of just that. However, I'm suggesting that events around this Wednesday's Federal Open Market Committee (FOMC) policy release could change everything for Annaly shares. NLY investors could see a turnaround if things evolve as I believe they should, because it is in the Fed's interest to head off the trend in mortgage rates.
The yield curve has been steepening and mortgage rates have been climbing since the start of May on speculation about a change in Federal Reserve policy. The steepening yield curve has in turn put pressure on the mortgage REITs as the market has grown concerned about risk to the values of assets held by the institutions.
From April Close to Now
American Capital Agency (AGNC)
Two Harbors (TWO)
CYS Investments (CYS)
The shares of Annaly Capital , American Capital Agency and other major mortgage REITs have been on the downslide since the close of April. Another factor assisting the trend has been an improving market perspective of the economy, supported by Federal Reserve forecasts and discussion. That has led capital flows to shift out of the high dividend paying issues like the mREITs and consumer staple shares into more cyclical ideas.
In my last article about Annaly Capital, I suggested that the decline in the shares were both ironic and mistaken, and I noted that they were mistaken because of my view that the economy was not as healthy as the market and the Fed thought. I believe the Federal Reserve should temper its forecasts for the economy this Wednesday when it makes its quarterly update, for reasons outlined within the linked article. Briefly, the Fed has never accounted for the 1.5% impact to GDP growth that Chairman Bernanke has suggested in sworn testimony should result from the Sequester spending cuts and the expiration of the payroll tax break. Also, major institutions including the Conference Board and the World Bank have significantly lower GDP growth forecasts for the American economy this year than the Fed.
Mortgage activity has concurrently fallen off with rising mortgage rates. When the Federal Reserve could have changed the trend in mid-May, the release of its meeting minutes only confirmed the market's concerns. So, the Fed, seemingly asleep at the wheel, could derail the real estate recovery if it does not get its act together and change the trend. Therefore, it is in the Fed's interest to curb mortgage rates, which I believe it can do by reassuring the public that it would not be ending its purchases of mortgage-backed securities anytime soon. Wednesday is a great time to do that, when the FOMC issues its monetary policy and Chairman Bernanke holds a follow up press conference. If the Federal Reserve were to also reduce its economic forecasts, it would also have reason to reassure the public about the ongoing purchases of treasury securities. These actions would likely halt the recent rise of long rates, and that would probably serve mortgage REIT shares. Annaly, being one of the most widely followed mortgage REITs and having seen significant decline due to the rate trend, should benefit more than most if the Fed acts as I expect it should.