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American Capital Agency Corp. Message Board

  • hasagos hasagos Jun 24, 2008 10:53 AM Flag

    some general questions

    Does anyone know where I can download information on this stock? I couldn’t find a website or press releases that provide any details.

    I want to gain an understanding as to how much leverage they employ, what their spreads are,etc. Also I want to gain an understanding if they are reliant on short or long-term debt to fund their purchases, if there are interest rate risks, etc. Also I am curious how their deal was structured when they acquired the securities.

    If anyone can provide information or knows where it can be found it would be greatly appreciated.

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    • Company's website is at:

      http://www.agnc.com/

      GW

    • "I think LUM died a week or two after the Barrons favorable interview piece. They were a decent company....or so I thought. "

      They were. That's why I liked them and OPX.

      OPX had smart management that understood that not all Agency RMBS are alike, so they focused on small loan balance RMBS which tend to have slightly slower pre-pays.

      Ideally OPX's prime mortgage origination franchise would have been counter cyclical to the RMBS portfolio. That was the same strategy as NTR.

      LUM was a very careful Alt-A player, trying to become a mini-RWT.

      Good times, Good times.

      ------
      " When it does I don't understand how rates can stay <5%...but that's just my speculation...I don't know...but I think it could get really dicey."

      Stagflation. Against which TIPS are your only hope.

      What makes this so funny is that the inflation is in things that are not associated with bank credit (e.g food, energy, healthcare)

    • "How would you say that's going to affect their government backings? Are you talking tax payer money?"

      Probably, It's remote, kind of like prediciting recovery in default for an investment grade bond.

      I would think it would be some kind of explicit backstop or equity infusion.

      Whats surprising to me is that the GSE's never tried to lay off the risk by issuing cat bonds.

    • "Yes they are,"

      You're right, they're buying long rates...I was rather stupidly referring to duration.

      I think LUM died a week or two after the Barrons favorable interview piece. They were a decent company....or so I thought.

      "IMHO if there was a futures market for TIPS, you would see agressive arbing of the spread between long TIPS and Nominals."

      I use to think the long end was stupid for sitting so low (still do). Lehman and all the others seemed to know better as they created a steepner bond. Basically paying a multiple of the spread between the 10yr and 30yr CMS. I thought it was a decent way to play the long end moving up. They started at huge coupons for a year 14% or more and then reset to the formula. I went all of last year at around 2 to 3 percent and they just started doing good things the past 2 or 3 Qs resetting back to 8 and change and 11 and change but now they're back to 6.5%.

      Now to make matter worse I have a potential credit problem on top of it.

      "watch as wage demands go up due to gas prices)"

      This is big. The wage side will move eventually IMO, it has to. When it does I don't understand how rates can stay <5%...but that's just my speculation...I don't know...but I think it could get really dicey.

    • "People who buy IO strips either gambling fools, or else should have a very precise reason for doing so."

      I think you're probably right. It's like a call option; all premium.

      That said if the price is low enough and inside a PAC or TAC with a schedule, you could turn out alright. A friend of mine likes to buy those things. But he goes further and takes the IIO (inverse IO).

      "BTW: I also think there is an outside chance (1-5%) of some sort of distress/restructuring at the GSE's."

      How would you say that's going to affect their government backings? Are you talking tax payer money?

    • "The market sees it happening faster. That's why 5.5 strike GSE inverses with a 6 multiplier (18% current coupon) are trading in the low 80s. "

      I'm no longer involved enough to have acess to such data, but that makes sense.

      People who buy IO strips either gambling fools, or else should have a very precise reason for doing so.

      Negative duration is not a game for children.

      "No one is paying up for the 3% spread cause it's expected to be short lived. CPR isn't going to race up either though IMO unless the long end starts dropping which I don't expect we'll see."

      I don't see the housing market restarting till mid 2009 at the earliest.

      BTW: I also think there is an outside chance (1-5%) of some sort of distress/restructuring at the GSE's.

      They are undercapitalised, have **incredible** amounts of IBNR and are not profitable. I don't think they can patch that up with issuing huge amounts of AA preferred stock at T+400.

      Also TGIC just went under, and since MI is a short tail business (except now with incredible frequency/severity) the GSE's could be exposed to more first dollar risk than they bargained for.

    • "That said, AGNC probably isn't buying long end bonds either."

      Yes they are,

      The strategy is to buy Hybrid ARMs, and finance them with short repo borrowings. Duration miss-match and getting paid for volatility that never happens is the name of the game.

      I'm not going to get into the gory details but basicly: You get paid for taking on the spread risk between short term repo financing and HARMs.

      The HARMs and FRM's (Fixed rate mortgages) have brutal negative convexity due to the embedded call option (ability to prepay).

      What an RMBS investor wants is a wide spread between short term repo and HARM pricing *and* a stable interest rate enviroment (which should lead to stable prepayment profile).

      What you do not want are.

      1.) Declining long term rates (leads to prepays)
      2.) Inverted yeild curve.
      3.) Rapid changes in interest rates.
      4.) Hot housing markets (leads to prepays)

      The game is collecting the value of the embedded call option in the RMBS on a leveraged basis. E.g an Agency RMBS pool pays 50-60bp (normally) more than a Agency debenture due to the embedded call option.

      Right now is pretty much the golden age of RMBS investment.

      Right now you have

      1) Very wide spreads between repo and HARMs.

      2) Very slow prepays due to housing crisis. Borrowers are "locked in" and thus paying for a call option they can't use.

      The spreads/profitability of Agency REITs are at peak, thus you see so many IPO's. Of course it also means that everyone looks like a genius, even if they did very little if anything to deserve it.

      If you look way back on the old OPX/BMNM board you can see me talking about this back in 2006. Of course my investments in that sector OPX/LUM got wiped out due to the credit crisis. Had I bought MFA/CMO/NLY...

      Moral of the story: Never get fancy.

      " He wanted to play a steeper yield curve by buying short term bonds. "

      Mostly that's because if you buy long term bonds, you will be deeply underwater about 2 years from now. 3-7years is the sweet spot.

      "But IMO if the long bond is going to move it will likely be higher (higher yield lower prices bad for holders)"

      IMHO if there was a futures market for TIPS, you would see agressive arbing of the spread between long TIPS and Nominals.

      Right now the 20y CMT/TIPS spread is 2.57% which is far above the feds long term target for 2% inflation.

      Unless you expect a deflationairy period, IMHO high inflation over the next few years (watch as wage demands go up due to gas prices) will result in TIPS outperformance.

      TIPS basicly render all other forms of investment obsolete. The purpose of investing is to become wealthy enough that you can live comfortably on nothing but TIPS.

      " I would anticipate most with a WAL of 5 or less years."

      Aka 5/1 and 7/1 HARMs with 12-15% CPR. And, the occasional CMO put in to optimize the portfolio's durration/convexity.

      It will be very interesting to see who decides to lever up as the y/c flattens, vs who decides to pull in.

    • He wanted to play a steeper yield curve by buying short term bonds. These bonds sold off (higher yields) when everyone thought the fed was going to rise hard and fast. Now he sees buying those bonds as investors adjust the pace of the tightening (he feels more like DAs 3 to 5Qs probably). This will bring the yields down as the prices rise.

      He's not really bullish on the long bond because of inflation and many don't feel they're getting the appropriate risk adjusted returns there for the duration. But IMO if the long bond is going to move it will likely be higher (higher yield lower prices bad for holders).

      That said, AGNC probably isn't buying long end bonds either. They're looking for the shorter tranche, probably with some predictability built in with regard to prepays. I would anticipate most with a WAL of 5 or less years.

    • Todays Barron's, page M9, has a comment by a portfolio manager from PIMCO talking favorably about strategies that take advantage of a widening in the difference between short and long dated bonds..

      Isn't that essentially the strategy that we are using now? Long long term mortgages and short short term financing?

    • "Yep, I think there's about 3-5qtrs more of high spread's before things normalise."

      The market sees it happening faster. That's why 5.5 strike GSE inverses with a 6 multiplier (18% current coupon) are trading in the low 80s.

      No one is paying up for the 3% spread cause it's expected to be short lived. CPR isn't going to race up either though IMO unless the long end starts dropping which I don't expect we'll see.

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