NEW YORK--()--Fitch believes the Federal Open Market Committee's third round of quantitative easing (QE3) could have a positive influence on some structured products and equity real estate investment trusts (REITs). Beginning Friday, the Federal Reserve will buy $40 billion in agency mortgage bonds per month, increase its holdings of longer term securities by $85 billion monthly until year end, maintain exceptionally low interest rates, and continue "Operation Twist" through the end of 2012.
In our view, QE3 could have a more meaningful impact on some REIT sectors versus others. If QE3 achieves the desired effect on the U.S. economy, equity REITs would benefit in the long term, approximately 12 to 24 months later. We believe ownership and long-term financing of commercial assets ties equity REIT performance closely to the general economy. If the plan maintains or causes a decline in long-term U.S. Treasury rates, we would expect a drop in all-in borrowing costs for REITs. Lower long-term rates could also entice investors to allocate to REITs. With low interest rates in many other categories, the stable dividends paid by REITs could compare well.
We expect QE3 to have some positive, but more remote affects on sectors of structured products. The Fed's plan to lower or maintain the already low level of interest rates could help the recovery in the residential real estate market and, thereby, be positive for the private label RMBS market. While the plan to purchase $40.0 billion per month of mortgage backed securities will add to the Fed's approximately $869.5 billion in agency securities, we do not expect it to impact the credit of current private label RMBS transactions. The maintenance of low interest rate levels could have also have a remotely positive impact on sectors of the ABS market, including auto and credit card ABS by keeping borrower interest rates low.
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