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American Capital Rises After Mortgage REIT Minimizes Losses

American Capital Agency Corp., the second-largest real estate investment trust that buys mortgage debt, jumped 5.7 percent after reporting a smaller drop in its book value than some analysts estimated.

The REIT climbed to $23.09 as of 4:30 p.m. in New York, after earlier reaching $23.34. Shares of the Bethesda, Maryland-based firm had declined 31 percent from the end of April through yesterday, including reinvested dividends, as speculation that the Federal Reserve will reduce its debt buying roiled the market for government-backed home-loan bonds.

The company, led by Chief Investment Officer Gary Kain, suffered a 12 percent drop in its book value, a measure of its assets minus its liabilities, during the second quarter to $25.51 a share, it said in a statement yesterday after the close of regular trading in New York. That’s less than the decline to $23.44 estimated by Compass Point Research & Trading LLC.

Kain said today that he added hedges against rising interest rates, sold down holdings and shifted the firm’s investments into less-risky assets, such as 15-year agency mortgage securities, rather than 30-year debt.

“I would be very, very uncomfortable walking into a week like this” with larger potential losses from increasing rates, Kain said on a conference call with analysts and investors.

Fed policy makers are meeting today and tomorrow, and economic data scheduled to be released later this week include information on second-quarter U.S. growth and July employment.

‘Off Base’

American Capital Agency’s greater defensiveness pushed down its net interest-rate spread to 1.59 percent on June 30, from 1.71 percent on March 31, the company said. That represents the difference between the yields on its assets after hedging, and borrowing costs.

It’d be “off base” to consider the recent slump in REITs that use mainly borrowed money to buy agency mortgage securities as showing the strategy is flawed, Kain said. Even amid a “really bad” period recently, net changes in American Capital Agency’s book value and its dividends produced a 3.1 percent return to investors in the 12 months through June, he said.

“The current environment proves that the agency REIT model is in fact durable,” said Kain, whose firm disclosed that it ended last week with assets that were eight times its equity.

Annaly Capital Management Inc., the largest mortgage REIT, rose 0.9 percent today to $12.01 a share, after falling 23 percent from the end of April through yesterday. The New York-based company hasn’t disclosed when it plans to announce second-quarter earnings.

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