So the Fed has spoken. We now have an open playbook until the economy turns around, the jobs picture brightens, and inflation rears its ugly head.
Not surprisingly, the Fed has extended the zero interest rate policy through at least mid to late 2015. Three years from now. They also will continue buying longer term Treasuries, and MBS's, to artificially keep the longer-term interest rates low.
They have taken this action to effectively keep the printing presses running at full speed until we actually have a full blown recovery. The main intent is to turn the housing market around completely by attempting to reduce mortgage rates to a level that will enable folks to afford monthly payments on purchases of new homes. The Fed also hopes it will help existing homeowners to refinance at lower interest rates, to reduce payments, and stop more foreclosures.
I am not so sure that there are that many more folks who will refinance that have not done so already, but maybe a slight increase in pre-pays and refi's will occur.
I am going to go out on a long limb here:
Not only will the Fed action eventually help the overall economy, but will also keep the mREITs on solid ground for as long as the policies stay in place. How does three more years of solid dividends from Annaly Capital (NYSE:NLY) and American Capital (NASDAQ:AGNC) sound to you? It sounds pretty darn good to me!
How The Yield Curve Affects mREITs Dividends
Taking the 2-year, 10-year, and 30-year Treasury interest rates as a guide, lets look at a 10-year history of them.
It is easy to see how the yields actually inverted back in 2006-2008. Longer-term rates were actually lower than short-term rates. One would have thought that this fact alone would end the mREIT business as we know it, right?
By overlaying the dividend rates (in dollars) of the two largest mREITs, NLY and AGNC, you can see two things. First, AGNC was not around during that time, and NLY still paid a dividend. It was a small one as they had to navigate the inverted yield curve environment, but they survived, made money, and paid the dividends.
Take another look at that chart. Today's interest rate environment is much more stable, more definable, and there is a decent "spread" between all three rates.
This is the embodiment of how the mREITs will continue to make money during our current interest rate environment. The Fed has opened its playbook to the mREIT sector as well as to every financial investor who pays attention.
Many folks will argue that this action is the doomsday scenario, but as any good investor will tell you, we will take what the market is giving us. For now, and for the foreseeable future, the market is giving us higher share prices and dependable dividends from Annaly Capital and American Capital. We can add Bank of America (NYSE:BAC) to that mix as well, for capital appreciation.
I will NEVER fight the Fed.
Disclosure: I am long BAC, AGNC, NLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.