The profitable short to long rate spread will hold or get even better as we approach the 2012 election.
When the long rates rise, AGNC (NLY) take a GAAP (theoretical) reduction in equity as the mark to market value of the maortgage portfolios is reduced by the higher rates available; but the mortgages continue to pay anyway.
In theory, there is then less equity to leverage for profiting from the short-long spread, although AGNC has been successful in hedging against rate movements.
Because of the weak economy, and especially the weak housing market, the Fed is compelled to keep the short rate as low as it can until there is sustainable job and overall ecnomic groth, to include inflation as a better alternative than risking a double dip or Depression.
The MREITs with fixed mortgages in their portfolios (AGNC and NLY) are in a historic sweet spot. In contrast, the MREITs with adjustable rate mortgages (HTS and CIM) will suffer early refies and defaults as the adjustables rachet higher.
Far down the road when the Fed can raise the short rates, the long rates, reflecting inflation) will have moved up to maintain or increase the rate spreads, so AGNC (and NLY) ought to continue to be very profitable. Very far down the road when the next down cycle is anticipated, so that the long rates are going lower while the Fed still has the short rates relatively high, then the spread narrows or even reverses-- but that possibility is years away.
You see you got me back into AGNC.
No, I'm not advocating the extreme policy perspective of the Libertarian Paul. Merely a bit frustrated by a presummed adult whose posts presume that the Fed is indifferent to politics.
Jack, I thought you were a smart guy but your doing a pretty good job of proving me wrong in this thread. Yourbestfriend has done a capable job of outlining the philosophical underpinnings for the isolation of the central bank from the political process. Your response is an ad hominem attack? I would suggest it is more likely that Ron Paul is from Mars.
Well, where were you when the Fed accomodated, first the internet bubble, and then the housing bubble that we yet suffer from.
Again asked, were you living on Mars rerading text books to pass the time away?
Correlation is not causation.
The Fed's interest is in keeping the growth-rate of the economy stable. They learned that decades ago. That strategy happens to be aligned with anyone who wants to get re-elected, and against anyone who wants to get elected, so they appear most often to be supporting the sitting government. But while they generally have the same goal, if their desired methods differ the Fed does not simply do what the pols want.
The rates will depend on the economy, which will drive politics. They will not be driven by politics; if that ever starts to happen we're in a world of total s#it.
"So the fed may or may not have a good reason to keep rates low all the way through the elections, but I'm pretty sure they don't play power politics with it. "
UBT, might we assume that you are a high school kid posting here, or perhaps have never lived in the USA? You really think that the the Fed ignores politics, ignores what the PRES WANTS DONE, WHAT THE CONGRESS WANTS DONE, AND IS INDIFFERENT TO THEIR POWER?
Perhaps you are from Mars.
But you are precisely correct that, " The only way rates will be kept this low through 2012 is if the economy doesn't show signs of broad price and wage increase ."
And that is the driving issue, for the Pres, the Congress and the rest of us, especially voters, that the Fed is sensitive to. THere is no reason to believe that the Fed is wrong in estimating that the economy and employment will show very ittle growth over the next several years. And the President's new budget is designed unwittingly to keep growth low, as it proposes wealth distribution with increased taxation instead of incentivizing risk taking for growth.
Best of luck investing
Mortgage rate increases on non-comprable MBS may not result in a market to market change, while a rate increase on like-for-like MBS might.
Whether the use of the comparable sales method or the discounted cash flow method on new MBS will led to significant mark downs on MBS held for sale remains to be seen. There is a challenge on fixed rate valuation of MBS, but they will be saved by the lower prepayments and lower and less frequent losses within the mortgage pools.
Just because rates rise doesn't mean there will be new MBS product with higher rates, because consumers must first take up those loans at the higher rates, the loans sold to the agencies and the agencies have to turn around and create the MBS. The MBS machines requires volume. So, if the increase in rates discourages borrowers and there is limited new supply of MBS, the market to market challenges will be limited to the exsting or seasoned MBS.
As far as comparable sales of MBS, that data will be evident as the MREITs will be using the money from the seocndaries to buy at (I am pretty sure) seasoned product at discount.
I am supporting your ongoing proposition that the interest rate environment on the short end of the curve will be friendly and the spreads will improve, as AGNC has just demonstrated. Whether all MREIT models will follow suit is questionable, and NLY just reported a decrease in its spread.
Also, at risk are repo rates, but I also believe that again that the short end of the curve will allow for level repo rates.
So, the MREIt's are in a good position and they can buy new product at better prices (I am certain the treasury will let some of it go, as it must do).
That is the gorilla in the room; the MBS held by the fed coupled with higher rates. LEt's hope they keep it or release it slowly. I think they have enjoyed getting the payments and using it for QE anyway.
I am only supportive of AGNC (for awhile), but it is great to trade until it is not.
If this thing
shows us anything, it's that the short-term rates are fluctuating much faster than the long-term rates are.
So I'm not sure your statement about anticipation of a down cycle makes sense. The long-term rates don't lead the short-term rates around. The short-term rates are adjusted quickly to moderate anticipations, and the long-term rates float with the economy, which in small part is affected by this short-term manipulation.
The other thing that widget tells us is that long-term rates are at 30-year lows. But a lot of things in the economy are at 30-year lows, so that's just the way things are.
Are yopu unaware that the 2012 election posturing is undeway, and that the weak economy and high unemployment are driving Fed behavioe, that and an itense motivation to avoid any appearance of frustrating a second term Presidential bid.
So, if you live outside of ther USA and have no undertstanding of Fed behavior, your uncertainty is sensible. Otherwise...