I avoided referring to the hedging,as I simply wanted to get the main explanation across. AGNC and its new sister, MTGE, for example, hedge extensively against surprise interest rate changes. It's a cost of business for that eats some of the profit, but serves to prevent larger costs from any large surprise rate changes. AGNC/MTGE have in fact traded their derivarives for substantial profit.
You might recall a few years ago what happened when Long Term Capital Managment's calculated price swing limits for their day trading securities were breached (recall it might have been the Russian market crashing that was the trigger?). They were going to get wipped out, and take down the market, much as actually happened when Lehman and then AIG could not meet their counterparty calls (Fed to the rescue, as AIG was too big to fail).
You may recall as well when many municiple bonds were guaranteed, but then when their value dropped to hard too quick, the market crashed with them.
Point is that the hedging works if the market does not engage in wild swings, but it occasionally does.
Jack....great post and it helps answer questions I've posed on other boards as to why an increase in interest rates hurt mReits. As a follow up to your post where do the hedges come into play? If the risk of a rapid increase in the rates is bad wouldn't that be what the hedge is used for?
Thank you all, for the responses...very civil and responsible...yeah!
The two the I have that went up today were TWO and NYMT...not much, but a little, while the other 4 AGNC, ARR, CYS and AMTG all were down, again only a little except for AGNC.
Most of these have been close to 52 week highs lately, so maybe the upward movement is due for a bit of reversal. At first, I thought it was heavy-weight AGNC dragging everyone down, too, but now I wish I understood Jack's response better. Care to elaborate, Jack? Also, Jack, if you have the right answer, do you think it marks the beginning of the end for agency reits or is it just a temporary setback?
Thanks again to everybody...you guys should see what's happened to the AGNC board, and you would really appreciate what we have here!!