This Funny Speech Could Have Serious Consequences for ARMOUR Residential REIT and American Capital Agency

President of the Dallas Federal Reserve spoke recently about why interest rates should be increased. Here's what that could mean for ARMOUR and American Capital Agency.

Jul 18, 2014 at 9:59AM

Because mortgage real estate investment trusts have historically performed poorly in rising interest rate environments, ARMOUR Residential REIT (NYSE:ARR) and American Capital Agency (NASDAQ:AGNC) investors have been comforted by the Federal Reserve suggesting interest rates are likely to stay low for the next year, or perhaps longer.  

Richard Fisher Dallas Fed Pic

Source: Dallas Fed.

But in a speech on Wednesday referencing "beer goggles", how systemically important financial institutions, or "SIFI," sounds like a venereal disease, and included comparisons between monetary policy and duck hunting, the president of the Dallas Federal Reserve, Richard Fisher, explained that allowing interest rates to stay low for too long could cause a recession. 

Fisher concluded his speech suggesting he will argue for interest rates be increased in early 2015, rather than the Federal Open Market Committee's current consensus of mid-to-late 2015. The difference may seem small, but it could make a huge difference for ARMOUR and American Capital Agency.

Why interest rates should be increased
The Federal Reserve has suggested it will gradually increase the federal funds rate, or short-term interest rates, when inflation is stable at 2% and we reach maximum employment. 

While "maximum employment" is difficult to define, the labor market has made enormous strides. According to Fisher, the unemployment rate (6.1%) is six-months ahead of schedule, nonfarm payroll employment growth has been strong, and "quits" has been trending upward, suggesting workers are confident they will find new, or better, jobs.

Moreover, if unemployment is due to lack of necessary job skills or educational shortfalls -- and considering many of today's fastest growing careers require higher education, there is evidence to support this -- no amount of bond buying or interest rate manipulation will improve employment.

On the inflation front, Fisher said it's "clearly rising toward our 2% goal more quickly than the FOMC imagined." While some believe allowing inflation to run above the target will give the labor market an extra boost, Fisher explained that "tightening monetary policy once we have pushed past sustainable capacity limits has almost always resulted in recession." 

Lastly, Fisher echoed comments made during the FOMC's June meeting noting that extremely accommodative monetary policy (aka, super low interest rates) encourages excessive risk taking. Ultimately, Fisher believes that the Federal Reserve has crossed the line from "reviving markets to becoming the bellows fanning the flames of the "Booming and Bubbling."

Now what? 
Whether interest rates rise in early 2015, late 2015, or sometime after that, it will happen. This is an inevitability ARMOUR and American Capital Agency have been preparing for by adding a ton of hedges -- or, locking in borrowing costs by trading their floating interest rates for fixed rates.  

But both companies' are still exposed on the asset side. When long-term interest rates rise, it reduces the market value of ARMOUR and American Capital Agency's currently held fixed-rate securities (their largest asset class). Since mREITs trade based on the value of their assets, there would be a drop in both companies' stock price. 

Historically, the fall in stock price has mirrored the rise in mortgage, or long-term, rates. Because long-term rates are market driven, rather than being controlled by the Federal Reserve, a change in the current "path of policy" could cause market panic, and lead to volatility and sharply rising rates. This could potentially mimic the "taper tantrum" witnessed in 2013, a year in which ARMOUR and American Capital Agency generated dismal total returns of -35% and -29%, respectively. 

The good news is despite President Fisher's compelling arguments, his opinions remain within the minority. If the labor market and inflation continue to improve at an accelerated pace, however, that might change.

With that in mind, I do not see now as an attractive time to buy. But for long-term investors willing to ride out the adversity, I like American Capital Agency's stronger track record over ARMOUR.

Is this a better high-yielding dividend option than mREITS? 
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers