Investing in shorter-term agency adjustable-rate mortgage securities has proved to be a good move for Capstead Mortgage Corp., which recorded a consecutive-quarter earnings gain.

The real estate investment trust net income increased to $37 million or 35 cents per diluted share in the fourth quarter from less than $25 million in income and 23 cents per diluted share in third quarter.

Capstead's net income in 4Q 2012 was slightly lower at $35 million and 31 cents per diluted share.

Prepayment rates that declined significantly to levels last seen in early 2012 and stable borrowing rates under its repurchase arrangements drove the increase in the fourth quarter of 2013, according to the company.

"Higher prevailing rates for mortgage loans" that "sharply" reduced mortgage refinancing activity led to the decrease in prepayments, president/CEO Andrew Jacobs said during the company's conference call Thursday.

The Federal Open Market Committee's actions is tapering rate-lowering purchases of fixed-rate agency securities on the long yield of the yield curve, but has committed to holding shorter-term rates low for a longer period of time. Shorter-term rates likely will be more stable as a result, executive noted during the call.

"We are looking at a favorable environment for our portfolio for the year," says EVP/CFO Phillip Reinsch.

Fixed and adjustable-rate product have been scarce and what ARM originations there are generally trend toward 5/1 and 7/1 loans with relatively longer terms for that part of the market, executives say. They have been refraining from investing in 7/1 products.

Secondary trading also has been light, the executives said during the call. They characterized available product as generally too expensive for them to buy.

While market conditions bode well for the value of the company's portfolio, analysts had questions about how executives would replace runoff.

Executives downplayed the concern and noted they have refrained from selling in the past year, unlike their peers.

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