worthless ash interest rate swaps. I suppose you could say that it went to shareholders of stuff like PDI; as PIMCO was very much on the other side of the swaps/swaptions grab of Q2-Q4 2013; often offsetting them with a lower notional amount of longer dated swaps; but always positive carry. With many REITs, the way they mark/calc the negative duration contribution from interest rate swaps is a little bit wishful thinking. They are not inversely correlated to fixed rate securities, it may seem that way when everyone grabs for them while their fixed rate ports are selling off.. It is mainly to not be blindsided by a sharp rise in funding costs.. but since we're not dealing with chinese shadow banks.. I think it's safe to say that a large amount of fecal matter will hit the fan way before a pay 2% recv 1ML starts being positive carry. Meaning, the fixed rate portfolio will sell off and have itself a margin call way before the (floating) funding costs become a burden..
I think many were a little jaded by the high prepay environment of 2012.. and were a bit reluctant to turn to IOs and prepay-range based CMOs*. (as opposed to those awful high LTV agency PTs). They also paid premium (over par) willy fucking nilly. It matters. You pay premium over par and you can lose money with agency MBS... duration is not static and it is not based on 2, or even 3 variables. it's variables impacting variables impacting chance. With fixed rate CMOs, you can get some sense of the rules that will govern how principal is repaid.. In certain times, it may make sense to purchase a low coupon at a discount.. paired with a higher coupon IO (with price equiv to the discount to par you paid for low coupon fixed rate).. The cash flow from the IO will pad the bra of the low coupon security.. and a low prepay env will keep the IO alive long enough to matter.
*Or maybe they don't want/need to commit time to a thought process/strat
all that said. no.. they did not buyback at 18. silly.
These guys are smart, they are shorting treasuries. Everything is on schedule for first rise in rates June 2015 and it could be March 2015. We are almost in the 4th quarter 2014, the markets anticipate 6 mos. out, so there should be some hedging done by these big bond funds to protect their assets, PIMCO's Gross is going gangbusters in derivatives to hedge its massive PIMCO bond fund.
Dude, AGNC has moved steadily and deeply lower the past few days, and is down again TODAY. It's moving back down into the bottom of the toilet bowel. Should hit 18 on ex-div day.
Sentiment: Strong Sell
I dont see that hap[peni8ng. a republican is not going to get elected so we are going to continue to languish. I see more likely of an outcome being that they raise the rates and after 2 years the numbers go flat again and they have to drop them again.
You're exacty right, both the idiot part and slow, incremental rise in rates. Well, maybe I take that back, it's possible that the Fed wants to really shock the market with a "stratosphere" rate hike so that the entire economy collapses and we all resort to fighting for dog food to eat. Obviously Yellen has a ton of dog food stock.
Lol, that's hilarious, great comment. I'm surprised you were able to fight through Mr. Spinner's logic with all the facts that he presented.
Has anyone worked up an estimate of the Book Value loss from treasury yields going to 4%? Back in May 2013, when we have a laddered inverse head & shoulders pattern in 10 yr. yields, AGNC took a hit from $36 per share down to $18. Could we see another hit from the convexity, although not as extreme or maybe even more extreme, because that we just an announcement of ending QE. Now that QE has ended, the actually raising of the FED FUNDS RATE, could be even more extreme to traders in short term carry trade. I would like to converse on how big of a hit will occur to actual book and then actual market prices. BV was = $26 and market price dipped to $18, $8 under book, I believe we will actually retest these ratio's when rates start to rise. My guess, BV = $22, market price to $15 in the dip.
It is a laddered bullish head and shoulders liftoff, 4%, 7%, 11%........very similar to lates 1970's early 1980's after record stimulus. If things go crazy like the 6 year bull market in equities, we could see 15-19% yields for a very short period of time, rememeber, once the bull market in yields starts, it will probably last a good 5-10 years before a market topping pattern.
Technical bullish inverse head and shoulders pattern in yields suggest another spurt up to 4% area, then some backpedalling and then another spurt up to 7% for the 10 year treasuries is highly likely. Being an investor, I want to deploy capital at or above the average over the next 5-10 years, hence, 2.5% + 4% + 7% = 13.5%/3 = 4.5% is a modest estimate for long term average. But this is no ordinary QE program, lots of easing was done, a more likely scenario is 2.5% + 4% +7% + 11% = 24.5%/4 = 6.125% is the most likely long term average.
10-Year Yield could move up 150%+ says Joe Friday
The Power of the Pattern suggested that interest rates were about to blast off in May of 2013, because it looked like a bullish inverse head & shoulders pattern in yields was in play. (see post here) What happened right after that posting? Interest rates experience the largest 18-month rally in yields in the past 30-years, beating the next biggest rally by 50%! (see rate aberation here)
Could an even larger bullish inverse head & shoulders pattern in yields be taking shape? The Power of the Pattern suggests it could be possible, if a few other developments take place.
It appears that a larger inverse H&S pattern in the 10-year yield could be forming. What needs to happen to make this huge rate rally possible? First step is to break above falling resistance in yields that has formed as rates have fallen this year. If a break of that resistance takes place, the next huge step is to see if rates can break above very stiff & heavy resistance at the neckline of this potential bullish yield pattern.
Joe Friday says…..If it does push above the neckline, the “measure move projection in rates” suggests that the yield on the 10-year note could reach almost 7%.
Besides bonds (TLT), watch Utilities (XLU) and Real Estate (IYR) to see if these interest rates sensitive sectors reflect concerns about rising rates.
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Once again, a little mis-information spread by the financial commentators is TOTALLY WRONG. Your statement "the govt can not afford the cost of borrowing that a rising intest rate would bring" is not very valid at all, in fact the government coins gold if interests rates rise, low rates is costing the government big time with treasury and MBS purchases and lower tax revenue from interest and dividend income. If rates rise from 2.5% to 4.5% on the 10 yr. treasury auction market, it does not rise on the existing TRILLIONS of 10 yr. treasuries already issued, those are fixed at 1.5-2.5% whatever they got issued at. The 30 yr. treasury rate will move up moderately, from 3.5% to 4.5%. The only increase in govt. interest payments is any new debt the issue for maturing debt, which is a few % of the total debt outstanding. The Federal Treasury Management will refinance debt coming due with the lowest cost option, IF THEY NEED TO. I believe they won't need to due to the INCOME TAX REVENUE coming in instantly from the higher interest income being paid at banks, bonds and dividends.
Example: Interest Rate on CD is 1% now, 5,000,000,000,000 ($50 TRILLION) on deposit equals 50,000,000,000 (50 BILLION) in Interest Income for the average Joe Passbook Holder. The income tax with average (15-20%) or 17.5% times $50 billion = $8.75 Billion in tax revenue
Interest Rate on CD (Normalized per Yellen) is 5%, SO THE Interest Income for Joe Passbook Holder is 5 times the 1% amount or $250,000,000 Billion. The average income tax on interest is 15-20% or 17.5% time $250 Billion = $43.75 Billion in tax revenue, a five fold increase.
Treasury Management for the Government would replace maturing debt with short term debt 2 yr, 3 yr, 5 yr. yield 1.75-2.5% which would be neutral to the gross debt cost.
GOVERNMENT GAINS BIG TIME, JUST LIKE EARLY 1980'S when deficit disappeared with high rates.