That divergence is not what's the real problem. Yes mbs cracked first but now we are seeing treasury as of may break down as well. So mtge's hedges have kicked in. And so has my TLT short position. Which I plan on doubling if we get bounce in treasuries.
You never have to be 100 percent hedged. You can hedge 50 percent and add 0.50 cents to cost basis.
You factor protection into your cost basis. Mtge long dated dec 22.50s used to trade at $1.00 when the stock was at $25. now they are worth $3.00.
I don't think they are scared lol. Only catalyst is the dividend run up. Bond markets likely get #$%$ again next week unless the economy gets worse. I think stocks sell off, bonds sell off at the same time. But I hope I'm wrong. Maybe agnc and mtge go up even as bond markets get #$%$. We will see. I'm short TLT 1000 shares.
Mtge is very much below adjusted q2 book value. I estimate mtge's book to be 3.3 percent lower today then q1 or about 0.80. So probably 23.60ish book value. 22.00 is a 1.60 discount to book and I think that should be bought up. The dividend for mtge will remain at 0.90 for the foreseeable future. So post dividend run up would take us to the 24s. Then we go ex in the 24s. Unless mbs prices go up, in which case it would be higher, or in the case mbs sells off more.. Then maybe a little lower. But 22.00 is dirt cheap.
If that was me, I would have bought long dated 22.50 puts when the stock was at $26. Why risk going negative if you can completely hedge out that risk via options?
It is more of a hedge on the book value then it is on the share price, but what is sad is all this selling is due to interest rates on the long end of the curve moving higher in may... Yet today we have interest rates moving lower for the moment and mtge still is getting slammed despite the fact that mtge has a higher book value today over yesterday. If you hedge 1:1, 75% of any book losses will be absorbed by the tilt hedge. (Meaning long mtge $ fixed as much #$%$ short TLT.)
From a cost point of view I find TLT cheaper and very effective at absorbing losses. Puts are expensive, but if purchased on a longer date and out of the money during times of decreased volatility they an be a nice tool to hedge. You can also sell covered calls above your cost basis as a hedge, be sure to pick durations of 30 days or less though if you go that route. I recommend the short TLT route, and focus on book value rather then short term stock price movements. If we do get a game changing move in interest rates, you will want the TLT hedge in place which is cheaper over a longer duration while still giving you plenty of upside and a strong net income.
lower interest rates reduce the spread income... higher interest rates increase the spread income on new purchases... Higher interest rates can negative effect book value... lower interest rates positively effect book values. The market can't make up its mind. Higher book values or Higher dividends... GAWD this looks like a hard one.
See MTGE message board for instructions.
So obviously, a short treasury position is a smart way to protect against long term moves in the stock price which follows book value. it's all about how much of a treasury position hedge do you want. How much coverage and how much you're willing to give back in terms of yield.
If you own 500,000 worth of a mortgage reit, you should short 100,000 of TLT. or 20% of the size of the mortgage reit position. You will end up paying about 2.6% interest on the treasury position, which equates to about 0.50% yield loss to your mtge position. The benefits are obvious... higher interest rates mean treasuries sell off, bonds sell off... and thus your short position gains value. In my situation, a $40,000 loss on MTGE 21,500 shares in the 24s.. was hedged by a 1000 share short position in TLT. TLT lost about $4 per share, thus I gained a hedge of $4,000.00 or 10% of my loss back. The cost to me is only 50 basis points of my MTGE yield.
Now we can't control the share price, and we are definitely trading well under book even with the sell off. But we can help protect against book value losses from interest rates. MTGE does trade at a multiple of book value based on what interest rates are doing. So... lets assume interest rates are going LOWER... TLT goes up in value by $4. so you lose 4,000.00 on paper for the TLT hedge. But Mtge will likely jump back to $26-27 because it will trade at a multiple to book value anticipating higher book values. so you're stock goes up by 40 to 60k. Even though the book probably only went up by $1 to $25.25. So $1 book move likely equates to $4 in the share price of TLT. So a $21,500 move in book value for me is hedged by a $4,000.00 move in TLT. However, still collect dividends the full 21500 shares but only give back 50 basis points of my MTGE yield. But what if i was short 4,000 shares of TLT instead of 1,000. Ok. So I give back 2% of my MTGE yield. Now a $40,000 drop in the share price of MTGE, i get back $16,000 in the TLT position.. pretty close to half of the losses are absorbed, yet my yield stands at 12.5% on a cost basis down from 14.5%. Remember, that's based on share price movements of MTGE.. A $1 book value loss for MTGE ($21,500) would be hedged by $16,000 of gains from the TLT short.
Hello. I have a fix to your problem. Short TLT. Consider shorting 20% of the size of your *CURRENT* valuation of AGNC. So if you have $500,000 in AGNC of value right now, SHORT $100,000 of TLT. Yes you have to pay the dividend at TLT, but its low... like 2.7%. It will reduce your yield from AGNC by a small 0.50 basis points just about. But you need to do this to protect against interest rate sell offs. Keep in mind you will STILL be net long bonds. Meaning... You will still have interest rate risk. However, Gary Kain is also managing the hedges at AGNC. But now, even with his hedges at AGNC, and your new hedges.. you are STILL net long bonds. You can't change that without meaningfully reducing the size of your dividend. Another thing you can do is sell your AGNC and swap to MTGE. MTGE is under book value even more the AGNC and it has the same manager. Also, non agency works as a hedge in a rising rate environment due to the improvements in housing. So consider selling AGNC, buying MTGE, and adding a 20% treasury hedge by shorting TLT. Whatever happens, don't exit the treasury hedge if you are still long MTGE.Don't speculate more then you have to ... just keep pocketing the dividends!
Arms are too hard to hedge and have high prepay characteristics. No thanks. I'd rather keep buying mtge.
Don't buy agnc. buy MTGE instead.. the ability to own non agency paper is a good one.. expecially since it really helped book values in Q1.. 5% loss vs 8+%. Non agency is a good hedge.
Today was about mbs prices again, massive selling. We are now at the lows for mbs again. I went short mitt at 25.50 for 2500 shares.
Oh and make sure you check the time stamp on the prices on the website.. sometimes it gives the wrong DATE if you are not a subscribed person. So best to look at the chart and dates to make sure it is on the correct date. The system can show incorrect dates when it is after hours sometimes.