Yahoo Finance Annaly’s Outlook on Interest Rates and the Fed
Annaly Capital's 1Q15 Dividends, Assets, and Liabilities
Wellington Denahan discusses Fed policy
On Annaly Capital Management’s (NLY) 1Q15 earnings conference call, CEO (chief executive officer) Wellington Denahan laid out the company’s viewpoint on rates as well as the Fed’s current policy and economics. She mentioned an IMF (International Monetary Fund) report that looks back at incidents of deflation over the past 140 years. Deflation is what the Fed fears so much.
The IMF report breaks down deflation into commodity price deflation and asset price deflation. During the Great Depression, which was the guiding light for Ben Bernanke and is today for Janet Yellen, the United States experienced both asset price deflation and commodity price deflation. However, the study points out that the link between asset price deflation and commodity price deflation is weak, and commodity price inflation is not necessarily a bad thing. Look at how the economy does better when energy prices are low.
Denahan also discussed the “great monetary experiment” that began in 2009. It was predicated on the idea that deflation is a menace that leads to depressions and must be avoided at all costs. The Fed has been very successful at boosting asset prices, but this has not translated into much benefit for the average worker.
Since 2009, when the great monetary experiment began, global bond markets have increased in value by about $17 trillion. Global equity markets have increased by about $40 trillion. The average worker has seen wages increase by about $722 billion, which means about 2% of the benefit of QE (quantitative easing) went to workers. The rest went to asset prices.
The bigger question is whether the Fed has engineered an unsustainable situation in asset markets that require 0% interest rates. Annaly’s view is that the Fed will start increasing rates later in 2015 and proceed at a cautious pace.
The outlook for interest rates is probably going to be volatile. Agency REITs like Annaly Capital Management (NLY) and American Capital Agency (AGNC) are most exposed to a churning bond market. REITs with adjustable rate mortgage-backed securities (or MBS), like MFA Financial (MFA), are a little more insulated. Finally, originators with large mortgage servicing rights portfolios, like Nationstar (NSM), might actually benefit from increasing rates.
Investors interested in making directional bets on interest rates should look at the iShares 20+ Year Treasury Bond ETF (TLT). Investors interested in trading the mortgage REIT sector as a whole should look at the iShares Mortgage Real Estate ETF (REM).
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