For American Capital Agency Corp. (NASDAQ:AGNC), portfolio rebalancing was the key under the given situation. Therefore, its management was not late in taking the decision. Management decided to get rid of some of its exposure in the 30-year fixed rate Agency MBS in order to reduce its exposure to interest rate moves. Further, management decided that it will continue to manage its assets and hedges actively.
While this will create attractive opportunities for the company, it will also increase costs. Therefore, American Capital Agency’s investors must keep a close eye on costs and the resultant lower earnings potential in the coming quarters.
Another measure American Capital Agency could take is to add some adjustable rate securities to its portfolio, like Capstead Mortgage Corporation (NYSE:CMO).
Adjustable rate securities safer
Given the volatility in the mortgage rates, the longer-term fixed rate agency securities are most vulnerable to moves in interest rates. However, adjustable-rate agency securities are the least vulnerable. That’s because their interest payments are adjusted on the most recent reset date to the most current rates. So, the book value fluctuations are least.
Capstead Mortgage Corporation (NYSE:CMO) is one such Agency-only mREIT that is exclusively invested in the adjustable-rate securities. It’s considered a safer option under the given situation. Capstead Mortgage benefits from lower book value fluctuations and higher asset yield.
For Capstead, asset yields adjust to the more current interest rates, causing the company to benefit from the current higher rates. Since the asset yields adjust the more current market rates, fluctuations in the book value of Capstead are only minimum, that too between the reset dates only.
Conclusion
Annaly Capital Management, Inc. (NYSE:NLY) is no doubt the best in agency mREITs league. It has a strong earnings potential and is best positioned to preserve its book value within fixed rate agency mREITs. Therefore, I am bullish on the stock. While American Capital Agency has rebalanced its portfolio, these efforts might lead to lower earnings potential for the company. Capstead Mortgage is another safer option due to the design of its investment portfolio.
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The article Annaly Capital Is Down, But Not Out originally appeared on Fool.com and is written by Adnan Khan.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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