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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