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Invesco Mortgage Capital Inc. Message Board

  • deeremanuk deeremanuk May 23, 2010 12:39 PM Flag

    Do Hedges Protect vs LIBOR Spikes?

    I want to buy a Mge Reit stock and I have narrowed it down to three potential buys: MFA, IVR & NLY. Attracted to MFA & IVR due to strong insider buying and to NLY due to best in breed status. I am leaning towards IVR because they look like they have studied the competition and taken a mixed strategy of what works best and then added interest rate hedges. As I understand it, if LIBOR spikes up they are hedged against this risk - am I correct?

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    • I love the managers over at NLY. But your question is very complex in a counter intuitive way.
      As we have seen libor can be driven by forces other than relational interests rates. A frozen non-functioning banking system can make it take on an independent life of its own driven by unquantifiable risk.
      Yes a way to mitigate libor specific rather than general rate risk can be fashioned. Will they work? No real way to know because nothing works as expected and by extension as they must when capital markets cease to function. BY definition when libor moves to other than relational interest rates the credit market is not working efficiently. This means every interest bearing security is impacted.
      So the best way to mitigate libor risk is to just tie the base borrowing to another anchor. It will probably cost more but is worth it. Look at the headlines for Brits or EU and there is good specific reason not to play in the London Inter Bank offer rate system right now.
      There is always risk. Human beings simply do not know the future with certainty let alone precision. However, I have come over time to respect the abilities and integrity of the team over at NLY.

      • 1 Reply to norrishappy
      • I agree with the previous poster. Every crisis is different but the NLY folks managed the last one very well. Take a look at DX, too. The dividend is lower because they have loss carryforwards from previous management but they are very conservative, underlevered, and managed the last crisis well.

        I got into IVR today but at $19.20 but anything highly leveraged with the need to continously roll debt should be viewed as part of your "risky" basket of investments.

 
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