American Capital Agency Corp. (AGNC) Reports: Capstead Mortgage Corporation (CMO) Still Better?

CYS Investments has a large portion of fixed rate Agency paper in its portfolio with some adjustable-rates securities. During the quarter, CYS Investments accumulated the 30-year fixed rate security after getting rid of some of the 15-year security. I believe this move resulted is much of the decline in the book value as the prices of 30-year MBS are more vulnerable to changes in interest rates. This led the company to report a 26% decline in its book value over the linked quarter, which is much higher than the decline experienced by American Capital Agency. On the revenue side, CYS Investments Inc (NYSE:CYS) experienced some gains as its net interest rate spread increased 20 basis points over the prior quarter.

Capstead Mortgage Corporation (NYSE:CMO) is an exclusively adjustable-rate MBS investor. Despite having adjustable-rate securities in its portfolio, the company did not benefit from the rising rates as I had imagined. It reported a decline in its net interest spread and book value during the quarter. The company reported a book value that was 5.9% below the prior quarter’s figure. However, this was much below American Capital’s and CYS Investments’ book value erosion. On the revenue front, the company’s net interest spread plunged 15 basis points. However, the stock is still trading at an attractive 35% discount to its book value.

Conclusion

While American Capital Agency Corp. (NASDAQ:AGNC)’s re-balancing efforts capped its book value erosion at 12%, I believe the current scenario demands Agency-only mREITs to include adjustable-rate securities in their portfolios. Since American Capital’s charter doesn’t allow it, Capstead Mortgage Corporation (NYSE:CMO) and other mREITs with a similar portfolio design and structure are more preferred. These mREITs will report lower book value erosion with some expansion in their spreads.

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.

The article American Capital Reports: Capstead Still Better? originally appeared on Fool.com and is written by Adnan Khan.

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