At the end of the two-day meeting on Wednesday, the Federal Reserve noted that it will commence its balance-sheet normalization program this October. However, the central bank refrained from raising the benchmark interest rates for now.
The central bank will downsize its $4.5 trillion bond portfolio by allowing maturity of up to $10 billion of mortgage-backed securities and Treasury bonds every month, without reinvesting the proceeds. The monthly cap will gradually increase until it reaches $50 million.
Since an outright sale could cause major turbulence in the bond market, the Fed has resorted to the above-mentioned steady and gradual run-off process. This action is anticipated to put upward pressure on the long end of the yield curve.
Moreover, the Fed’s decision to keep the short-term interest rates unchanged will help steepen the yield curve.
This is a sign of relief for mortgage real estate investment trusts (mREITs), which typically borrow significant amount of short-term debt and invest in longer-term real estate debts, like mortgage backed securities (MBS) and mortgages. It will also enable these companies to earn higher yield spread.
Further, the prospects of a steepening yield curve will result in capital rotation from stocks to safe-haven bond markets. This is primarily because these markets will provide attractive returns at lower risks. This too can improve the performance of mREITs.
That being said, year to date, the Zacks Mortgage REIT industry has outperformed the broader Zacks Finance Sector. The industry rallied 11.6% versus the 9.6% growth of the broader sector.
Additionally, shares of Annaly Capital Management, Inc. (NLY - Free Report) , AGNC Investment Corp. (AGNC - Free Report) and ARMOUR Residential REIT, Inc (ARR - Free Report) have substantially outperformed the broader finance sector, year to date.
While Annaly carries a Zacks Rank #3 (Hold), AGNC Investment and ARMOUR Residential carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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