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American Capital Agency Corp. Message Board

  • porkusbellus porkusbellus Feb 12, 2011 5:54 PM Flag

    Dynamic Yield Curve


    We all realize the bountiful 18.95% yield provided by AGNC is made possible primarily by the Fed's policy of a near zero interest rate.

    Mortgage REITs make money by borrowing in the short term and lending in the long term. Short term interest rates are typically lower than long term rates, so these entities make money on this spread. When the spreads are very wide mortgage REITs can make a lot of money, conversely when the spreads are small (or even negative) mortgage REITs have problems.

    So the question arises, just how long can mortgage reits like American Capital Agency and Annaly Capital Management continue to pump out this fantastic dividend? It all depends, of course, on spreads and how soon they begin to narrow.

    One item we can monitor on an ongoing basis is the Dynamic Yield Curve. An interesting feature is the tandem ganging of the yield curve and S&P 500 charts. When you click the animate button, the effect on the yield curve can be observed as the S&P 500 raises in 2007, then plummets in 2009.

    Pause the animate then drag the tail-length slider all the way left. Click various points on the S&P chart or drag the red vertical line left & right to observe that point in time.

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