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American Capital Agency Corp. Message Board

  • iokuok007 iokuok007 Jun 1, 2012 9:21 PM Flag

    I Think The Yield Spread Has Widened

    Looks like short term rates are dropping more than longer term mortgage rates. The value of the existing portfolio of mortgage backed securities should have increased in value due to the drop in long term rates, so, why haven't the reit stocks gone up more? What do I have wrong? A slightly higher spreaad and a higher book value should move the stocks up some.

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    • Thanks for looking up the numbers Ephort. You are a great asset to this board!!


    • OK -- that original table about percent decreases was incorrect, I copy/pasted the wrong numbers. Here it is corrected:

      One_Year / One_Month / Rate
      -51.82% / -23.96% / 10-Year Treasury
      -40.57% / -18.97% / 30-Year Treasury
      -18.48% / -3.35% / 30-year mortgage

      Still tells the same story.

    • Right -- I wasn't trying to predict earnings, just to look into the relationship between T-bill rates, mortgage rates, and AGNC gross asset yield. There are of course many more parameters that determine earnings, as you say.

      BTW -- one more table from me -- a comparison of T-bill rates with AGNC asset yield:

      Quarter / 10-yr T-bill / AGNC Asset Yield
      1Q_2011 / 3.50% / 3.39%
      2Q_2011 / 3.25% / 3.35%
      3Q_2011 / 2.60% / 3.14%
      4Q_2011 / 2.10% / 3.06%
      1Q_2012 / 2.10% / 3.14%

      Of course one reason that the asset yield is holding up so well compared to the T-bill is that asset turnover is not annual. So we can expect further deterioration going forward, but given the fact that mortgage rates decrease much more slowly than the T-bills, it is probably nothing that a small increase in leverage cannot deal with. We'll see.

    • "Does anyone know how short-term rates affect AGNC's funding cost?"

      It is my understanding that AGNC sells the MBS's to a repo provider with a contractual agreement to buy them back in 1 - 6 months for a premium which is effectively interest expense. The premium charge is based on the LIBOR rate which is like the Euro equivalent of our Fed Funds rate. Watching the LIBOR rates give a more accurate picture of AGNC's funding costs than the short T-bill rates, although our short rates affect the LIBOR rates. They have stayed the same for months now. Therefore, one could conclude that AGNC's cost of funding is not changing, except that:

      There are two important variables that we have no visibility into: [1] current AGNC leverage, and [2] the effects and costs of interest rate hedging. These effects can be very substantial. AGNC has, in the past, sold assets for capital gains as well, but that seems to be unusual, and I won't expect it even though their portfolio has been building up unrealized gains.

    • Hey Sleger! I read an anecdote once about two farmers, one Amish and one being a homesteader. They both owned five acres. The Homesteader says to the Amish man, "I think I need to expand my farm." "Why?", asks the Amish gentleman. "Because I'm not making any money with a farm of only five acres." answers the Homesteader. The Amish farmer then asks,"If you cannot make money with what your five acres, what makes you think that you will make money with a larger farm?" That story always stuck with me. It might have helped keep me from buying a house that was too expensive for my means, a house that today I probably would still owe on, and even possibly owe more now than what is currently worth. Hey, those Amish! Maybe no television to cloud one's mind is a good thing.

    • 10 year yield is at 1.45% AGNC cost of funds is 1%.

      If you take away the seasoned MBS AGNC holds, that's a spread of 0.45%...

      Spreads are not increasing. Book value yes, but book value doesn't mean squat if you can't make money. Take a good look at CWH. They are trading under half book value because commercial real estate has been decimated.

    • If you are talking about what has happened in just the last couple of weeks, then the reason is [1] market is down big time, and [2] most people won't know this until the earnings announcement for the second quarter.

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