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American Capital Agency Corp. Message Board

  • zosimomaximo zosimomaximo Sep 3, 2013 9:44 AM Flag

    Relation between rise in rates and leverage.

    If rise in rates leads to widening of net interst spread, then it will also lead to lowering of leverage to achieve the same earnings. Lower leverage should protect book value. Right or wrong assumption?

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    • You are correct and that is about the only good thing happening right now but I believe that this is a temporary reprieve. They need to lower their leverage or they will get decimated when the Fed starts to increase the funds rate. The worst case scenario is that they end up paying more to borrow money than the average interest that they earn on their portfolio. Granted it would take a rather rapid increase in rates for this to happen but certainly the BV would go down significantly and dividend would decline even if they do manage to not go bankrupt.

      The best case scenario for investors under these circumstances is still a net loss even after dividends. It would be wiser to wait it out and then get in after the dust settles. Even if you have lost money because you bought high this is still the most profitable strategy. It makes no sense to hold during this part of the interest rate cycle. And those that do hold through this will learn this lesson the hard way. But that is the only way many people learn. They have to feel the pain. These are the kind of people that should never take up rock climbing as a sport where anticipating danger and acting preemptively is a matter of life and death. But maybe that is the problem. Many people will take undue risk if it is only money but will act logically when their life is at stake. But it should not make a difference. One should act as if they are standing at the edge of a cliff in all decisions they make, relatively speaking. Otherwise you just give your money away.

    • Rising interest rates may eventually result in falling MBS values, thereby lowering book value.

    • The market is answering your question now. The 10Y is soaring so NLY and AGNC are tanking. Hopefully you're paying attention!

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