REIT ETFs In Trouble As Rates Rise?

reitThe going wasn’t easy for the REIT industry in 2013, particularly in the latter part of the year which saw some volatile business. The sector had held up pretty well till mid May. Then came taper talks and with it, rising interest rates. This by and large impacted the performance of the REIT sector.

Finally the Taper 

After months of speculation, the Fed finally announced that it was beginning to taper its QE bond buying program in its last FOMC meeting. On a monthly basis, the Fed will now buy $75 billion in monthly assets, down from the current rate of $85 billion a month.

A gradually improving economy and lower levels of unemployment were cited as the chief reasons by the Fed to start tapering (read: Fed Tapers Bond Purchases: 3 ETFs in Focus on the News).

However, the best part of the taper news is that the Fed would continue to keep interest rates low throughout 2014 in order to boost economic growth. In other words, the Fed made it very clear that ‘Taper’ and ‘Rising Rates’ are not synonymous. The Fed will be following an accommodative monetary policy stance until the unemployment rate drops below 6.5%.

Impact of Fed Outcome on Interest Rates & REITs

The news of tapering has seen a mixed reaction from market experts. A section of analysts believe that 2014 will definitely be positive for REITs as the Fed will continue to keep interest rates low through the year.

However, some experts believe that tapering by the Fed will cause interest rates to rise. In fact, the rates for the 10-year U.S. Treasury have jumped to 2.94% as of Dec 23, 2013 from 2.89% as on Dec 18 (read: Rising Rates and Soaring Stocks:Time for Convertible Bond ETFs).

This represents a modest jump, as current yields are almost at a two-month high. The rise in yields implies that investors are not convinced that the Fed will succeed in keeping interest rates at rock bottom for long.  Though the Fed might keep short-term rates near zero, an improving economy would definitely lead to a rise in 10-year Treasury yields.

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