ARMOUR Residential REIT Inc (ARR)

[Porgie Tirebiter]

When the geo-political scene gets a little "shaky", investors tend to pull money out of equity based investments and park the money in "safe" investments like US Treasuries. That pushes the price of bonds higher and the yields lower.

ARR borrows money based on short term yields, and uses it to invest in long term MBSs. Short term treasury yields have been pushed down so low that the effective rate of return on the 5 year is currently around negative .5%! That's cheap money.

So short answer: Cost to borrow goes down while the value of the MBSs they carry on the books rises.

Long answer is a cut and paste from the last 10-Q filing.

We seek attractive long-term investment returns by investing our equity capital and borrowed funds in our targeted asset class of Agency Securities. We earn returns on the spread between the yield on our assets and our costs, including the interest cost of the funds we borrow, after giving effect to our hedges. We identify and acquire Agency Securities, finance our acquisitions with borrowings under a series of short-term repurchase agreements at the most competitive interest rates available to us and then cost-effectively hedge our interest rate and other risks based on our entire portfolio of assets, liabilities and derivatives and our management’s view of the market. Successful implementation of this approach requires us to address interest rate risk, maintain adequate liquidity and effectively hedge interest rate risks. We believe that the residential mortgage market will undergo significant changes in the coming years as the role of GSEs, such as Fannie Mae and Freddie Mac, is diminished, which we expect will create attractive investment opportunities for us. We execute our business plan in a manner consistent with our intention of qualifying as a REIT under the Internal Revenue Code, (the “Code”) and avoid regulation as an investment company under the Investment Company Act of 1940 (the “1940 Act”).