September 20, 2012
In today's edition of Market Roundup, analysts Andrew Tonner and Anand Chokkavelu look at one way American Capital Agency is protecting its huge dividend. Because American Capital's short-term rates adjust much more quickly than the long-term interest rates, if rates increase rapidly, it can be a disaster for REITs like American Capital, and quickly compress that spread. The solution is interest rate swaps to hedge against the risks. Currently, American Capital has about 70% of their debt hedged.
As an investor, you have to keep an eye on how much of a REIT's debt is hedged, and also be aware that hedging isn't an end-all and be-all to diffusing risk, and doesn't always work.
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