American Capital Agency Earnings Call Nuggets: Spread Differential from the TBA Positions and Dollar Rolls

American Capital Agency Corp. (NASDAQ:AGNC) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Spread Differential from the TBA Positions

Joel Houck – Wells Fargo: I guess the first question is related to the spread differential from the TBA positions, it’s at the end of the quarter, it’s 22 basis point. How should we for modeling purposes think about that in 2013? I think you also made comments; you believe the strategy is sustainable. However, the relative advantage has also improved so is it one of those things where 20 or 22 basis points is having a starting point we build from there. How should we think about it?

Gary Kain – President and CIO, American Capital Agency Corp.; President, American Capital AGNC Management, LLC: Look Joel, it’s a good question and obviously relevant. I think what you are referring to, are you referring to the difference in the kind of net interest quarter end, net interest spread?

Joel Houck – Wells Fargo: Yes, the 139 versus the 161 including the TBA.

Gary Kain – President and CIO, American Capital Agency Corp.; President, American Capital AGNC Management, LLC: So, look, what’s going to happen there is it’s going to depend on a number of area, right. And you obviously alluded to one, which is how attractive is the dollar roll financing, assuming the dollar roll position remains the same size, right. The other thing – the other key variable is going to be just how big is the TBA position let’s say relative to the on balance sheet position and let’s be practical both of those are going to be could vary meaningfully during the course of the year. So, but what we would say and I just want to reiterate what Chris mentioned is that we do believe when it comes to the dollar roll situation, dollar rolls have been special in the past and plenty of times you look at that you ignore them, but what’s fundamentally different here is the driver is very straightforward. It’s QE3 and the fed. It’s having a very material impact. Even if the dollar roll levels could remain especially even after that program is done given the amount that the fed is purchasing. And it’s going to the absorbing in the lowest coupons and so we feel that those – that these favorable financing levels are really likely to be in place. They are going to bounce around. Could they be negative 20, could they be zero, could they be negative 50, where they are right now or if they go to go negative 70? They could be in all of those places, but I think we’re pretty confident that if you look at them over the course of this year, they are going to be very special using the term that people use in the market and the financing is going to be attractive. So, I would say look you always have noise when you model anything. We don’t know where our repo rates are going to be and there is variability there. There is clearly more variability in the case of where the dollar roll levels are going to be, but we do believe they are likely to be again well through repo rates for the entire year.