Trade of the Day: American Capital Agency (AGNC)

We’ve opened a bearish trade on American Capital Agency (AGNC). Interest rates are on the rise again as investors fret about what will come out later today after the Fed’s two-day meeting. REITs and other stocks that derive their value from their dividend yield have suffered recently as investors build in new expectations for interest rates to increase in the near term. If interest rates continue to rise, or the Fed is more hawkish than expected, the impact on REITs could be significant.

Sitting at a particularly fragile nexus in the current market environment are the so-called mREITs like AGNC. This company/fund owns mortgage-backed securities and pays for those assets with short-term borrowing. If interest rates rise, the value of AGNC’s holdings fall and the cost of new borrowings increases.

In the short term, this is likely to be a significant problem for AGNC, and we expect it to finally break lower out of its current consolidation range. The $23-$24 per share level has been resistance for a while, and a move to the downside is likely considering the general atmosphere in the market.

Buy to open the AGNC December 23 Puts (AGNC141220P00023000) near $1.25.

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