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American Capital Mortgage Investment Corp. Message Board

  • oldschoolbuilder oldschoolbuilder Jun 27, 2013 1:41 PM Flag

    MBS rallying and soundly trouncing treasuries for past few days

    This is positive for BVs but also positive for investor sentiment that we're not running off to the races on rates and/or mortgage spreads will not continue to widen (both of which would pressure BVs further). Mortgages tend to outperform when volatility calms down. Then spreads tighten and buyers feel more comfortable engaging (and taking on leverage). If this persists it's very good news for MTGE, especially given the ridculous discount to BV.

    Let's not forget that the carry on 30yr agencies is incredible currently--20% ROEs at 8X leverage with a high hedge ratio--given the steepness of the yield curve and very stable funding rates at the short end (which the Fed said it will hold constant into 2015). If you feel better about long rates not skyrocketing or volatility calming down then this is a very juicy spread that you should pursue as a risk tolerant investor.

    Sentiment: Strong Buy

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    • "If you feel better about long rates not skyrocketing or volatility calming down then this is a very juicy spread that you should pursue as a risk tolerant investor." very true osb, but that has always been the case for mreits. stable to slightly rising rates is the goldilocks situation. declining rates leads to prepayment problems - and increasing rates leads to BV hits and increasing funding costs. Of course, the Fed seems to be on the sidelines re: increasing short term rates for awhile here, but we've seen the pressure on BV created by rapidly increasing rates.

      Unfortunately - the Fed has ensured that we will have uncertainty re: the rates until they exit the mkt. In fact - there will be more uncertaintly at the beginning of the taper than at the end when they will be a smaller % of the overall mkt and the mkt will have likely priced in their exit.

      IMO the Fed made a huge mistake going into QE3 in the 1st place - and they made things worse by going in big rather than just on the margin. Realize that rates were 1.80-1.90 when QE3 started - and going lower due to Greece, Italy, Spain and Portugal issues in EU and the Bush tax cuts/payroll tax cuts issues here in the US. i.e. - there was already downward pressure on rates - and the Fed piled on - but only getting maybe 5-10 bps of extra oomph. However - on the way out - they want to taper into strength - what a mistake! they will be putting extra pressure to move up at the same time as economic strength puts pressure on rates to move up. They should taper into strong external demand rather than weak external demand - common sense you'd think - if the Fed wants to limit volatility. I don't have nearly as much of an issue with the Fed funds rrate policy - as I do with QE, but even then - I don't think that a long term 0 rate policy is a good thing. An ideal situation would be fed funds at 25-50 bps and the 10 yr at 3-3.25 - with the Fed ending their ir policy of paying interest on reserves.

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