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AGNC, Annaly: Financial Losers

Stocks in this article: AGNC NLY XLF

NEW YORK ( TheStreet) -- American Capital Agency Corp. (AGNC) and Annaly Capital Management (NLY) both set fresh 52-week lows Wednesday as the mortgage real estate investment trusts continued to be battered by concerns over rising interest rates, even as rates themselves have stabilized in recent days.

AGNC and Annaly borrow short-term to buy longer-dated mortgage-backed securities (MBS). When rates go up, it harms their business. That's because borrowing costs go up quickly, while the longer-dated MBS on their balance sheets decline in value.

However, MBS prices have rebounded somewhat since they started declining in May of this year, as shown by this Bloomberg MBS index. That ought to be positive for Annaly and AGNC, since it means the value of the bonds in their portfolio aren't declining.

Furthermore, short-term Treasury yields haven't risen that dramatically. One-year Treasuries, in fact, yield 0.14%, compared to 0.15% at the start of the year. Two-year Treasury yields, meanwhile, have risen to 0.34% from 0.27% at the start of the year. Though Treasury prices help determine borrowing costs for Annaly and AGNC, however, the perceived creditworthiness of the companies also factor in, so it is possible their borrowing costs are higher.

Another positive for Annaly is that it could soon be added to the S&P 500, according to Keefe, Bruyette & Woods, which would require more investors to buy it since many look to replicate the returns of the index.

"We favor NLY as a near-term add to the S&P 500 Index over AGNC given NLY's longer operating history as a public company, larger market capitalization, and higher trading liquidity. If added to the S&P 500 Index, we estimate index funds would need to purchase 112M shares of NLY, implying 7 days of buying volume, and purchase 47M shares of AGNC, implying 4 days of buying volume," KBW wrote in a note published Tuesday.

Regardless, AGNC shares fell 2.49% to finish the short trading day at $21.93 Wednesday, while NLY shares were lower by 1.22%% to close at $12.13. Financial stocks generally were lower, as measured by the performance of the Financial Select Sector SPDR (XLF), a popular exchange traded fund, which dropped 0.31% to close at $19.47.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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