Although this strategy will help the company insulate its investments from substantive unrealized losses, in case the U.S. Treasury yields and mortgage rates continue increasing at a modest or rapid pace, the lower-yield 15-year MBS is likely to negatively impact its cash interest income.
American Capital Agency reported an enormous $2.8 billion MBS valuation loss in the second quarter. The firm had earlier projected a $1.3 billion valuation loss on its MBS portfolio in the first week of the current quarter (third quarter). The valuation loss reversed course in the following week and had, in fact, netted itself out by July 19, 2013.
From around mid-July to mid-August, cumulative quarterly 15-year and 30-year MBS price valuations had been ranging from slightly negative in the MBS coupon spectrum’s lower end to slightly positive in its higher end. From the way the firm’s MBS portfolio has panned out thus far, American Capital Agency Corp. (NASDAQ:AGNC)’s MBS portfolio could likely book a $1 billion-plus valuation loss in the first half of the third quarter.
Bottom line
The Fed’s announcement that it was comfortable with a tapering timeline will not help ease matters for mREITs such as American Capital Agency, although the firm’s derivatives will help offset some of the MBS losses. Although the firm reported an industry-high 18.9% dividend yield in the second quarter, the overall outlook for the remaining weeks of the third quarter is not good.
Maybe American Capital Agency should learn from CYS Investments Inc (NYSE:CYS), whose hedging experience proved to be a nightmare in the second quarter. CYS Investments Inc (NYSE:CYS) still manages to record a respectable 17.5% dividend despite the setback. ARMOUR Residential REIT, Inc. (NYSE:ARR), with monthly dividend payouts, could be among the first to announce cuts. But all is not lost. Annaly Capital Management, Inc. (NYSE:NLY) was a victim of paying out piddling dividends in 2005 when its dividend dipped to just $0.10, yet the firm survived and is still one of the most-respected mREITs in the market. Of course, such low dividends can sound the death knell for an mREIT.
Annaly Capital Management, Inc. (NYSE:NLY) sports a near-14% annualized dividend yield, which is considerably lower than American Capital Agency. Its vast experience; however, may make it a better long-term investment for those looking for capital appreciation.
The article American Capital Agency: No Respite in Sight originally appeared on Fool.com is written by Boniface Murigu.
Boniface Murigu has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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