Summary of AMERICAN CAPITAL AGENCY CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of American Capital Agency Corp.'s consolidated financial statements with a narrative from the perspective of management. Our MD&A is presented in five sections:
• Executive Overview

• Financial Condition

• Results of Operations

• Liquidity and Capital Resources

• Forward-Looking Statements

EXECUTIVE OVERVIEW
American Capital Agency Corp. ("AGNC", the "Company", "we", "us" and "our") was organized on January 7, 2008 and commenced operations on May 20, 2008 following the completion of our initial public offering. Our common stock is traded on The NASDAQ Global Select Market under the symbol "AGNC". We are externally managed by American Capital AGNC Management, LLC (our "Manager"), an affiliate of American Capital, Ltd. ("American Capital").
We operate so as to qualify to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). As such, we are required to distribute annually 90% of our taxable net income. As long as we qualify as a REIT, we will generally not be subject to U.S. federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders. It is our intention to distribute 100% of our taxable income, after application of available tax attributes, within the limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year. We earn income primarily from investing on a leveraged basis in agency mortgage-backed securities. These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations ("CMOs") for which the principal and interest payments are guaranteed by government-sponsored entities, such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or by a U.S. Government agency, such as the Government National Mortgage Association ("Ginnie Mae") (collectively referred to as "GSEs"). We may also invest in agency debenture securities issued by Freddie Mac, Fannie Mae or the Federal Home Loan Bank ("FHLB"). We refer to agency mortgage-backed securities and agency debenture securities collectively as "agency securities" and we refer to the specific investment securities in which we invest as our "investment portfolio".

Our principal objective is to preserve our net book value (also referred to as "net asset value", "NAV" and "stockholders' equity") while generating attractive risk-adjusted returns for distribution to our stockholders through regular quarterly dividends from the combination of our net interest income and net realized gains and losses on our investments and hedging activities. We fund our investments primarily through short-term borrowings structured as repurchase agreements.

Our Investment Strategy
Our investment strategy is designed to:
• manage an investment portfolio consisting of agency mortgage-backed securities, agency debenture securities and other limited investments entered into for hedging purposes that seeks to generate attractive risk-adjusted returns;

• capitalize on discrepancies in the relative valuations in the agency securities market;

• manage financing, interest and prepayment rate risks;

• preserve our net book value;

• provide regular quarterly distributions to our stockholders;

• qualify as a REIT; and

• remain exempt from the requirements of the Investment Company Act of 1940, as amended (the "Investment Company Act").

The size and composition of our investment portfolio depends on investment strategies implemented by our Manager, the availability of investment capital and overall market conditions, including the availability of attractively priced investments and suitable financing to appropriately leverage our investment portfolio. Market conditions are influenced by, among other things, current levels of and expectations for future levels of, interest rates, mortgage prepayments, market liquidity, housing prices, unemployment rates, general economic conditions, government participation in the mortgage market, evolving regulations or legal settlements that impact servicing practices or other mortgage related activities.
Trends and Recent Market Impacts
Movements in interest rates impact the value of our securities and the amount of income we can generate from our portfolio of investments. Accordingly, one of the primary goals of our hedging activities is to protect our net asset value against significant fluctuations due to market risks, including interest rate and prepayment risk. We utilize a variety of strategies to aid us in this objective, which are summarized in Notes 3 and 6 of the accompanying financial statements.
The table below summarizes interest rates and prices of generic, fixed rate, agency MBS as of March 31, 2012 and December 31, 2011.

Interest Rate/Security Price (1)   December 31, 2011   March 31, 2012   Change (bps)
LIBOR Rate:
1-Month                                  0.30%             0.24%           -0.06
3-Month                                  0.58%             0.47%           -0.11
U.S. Treasury Security Rate:
2-Year U.S. Treasury                     0.24%             0.33%           +0.09
5-Year U.S. Treasury                     0.83%             1.04%           +0.21
10-Year U.S. Treasury                    1.88%             2.21%           +0.33
Interest Rate Swap Rate:
2-Year Swap                              0.73%             0.58%           -0.15
5-Year Swap                              1.22%             1.27%           +0.05
10-Year Swap                             2.03%             2.29%           +0.26
30-Year Fixed Rate MBS Price
3.5%                                    102.88             102.72          -0.16
4.0%                                    105.03             104.86          -0.17
4.5%                                    106.42             106.38          -0.04
5.0%                                    108.03             108.03           0.00
15-Year Fixed Rate MBS Price
3.0%                                    103.28             103.56          +0.28
3.5%                                    104.58             104.92          +0.34
4.0%                                    105.50             106.00          +0.50
4.5%                                    106.59             107.20          +0.61


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1. Price information is for generic instruments only and is not reflective of our specific portfolio holdings. Price information can vary by source. Prices in the table above obtained from a combination of Bloomberg and dealer indications. Interest rates obtained from Bloomberg.

Our Manager views maintaining a portfolio of securities with favorable prepayment characteristics (such as lower loan balance and HARP securities) and lower coupons as critical to returns in the current market and to maintaining reasonable performance in a variety of potential market scenarios. A summary of our MBS portfolio composition as of March 31, 2012 is included below under Financial Condition. As of March 31, 2012, our agency MBS portfolio had a weighted average coupon of 3.99%, compared to 4.23% as of December 31, 2011. The table below summarizes the constant prepayment rates ("CPR") for our portfolio and for the Fannie Mae and Freddie Mac fixed rate universe for the quarter ended March 31, 2012.
Annualized Monthly Constant Prepayment Rates

(1)                                            January 2012   February 2012   March 2012
AGNC portfolio                                      8%             8%             12%
Fannie Mae and Freddie Mac fixed rate
universe (2)                                       23%             22%            24%


 ________________________

1. Weighted average actual one-month annualized CPR released at the beginning of the month based on securities held/outstanding as of the preceding month-end.

2. Source: JP Morgan.

As of March 31, 2012, the weighted average projected prepayment rate on our investment portfolio was 9%, a decrease from 14% as of December 31, 2011. The decrease in our average projected prepayment rate estimate was primarily due to a combination of the increase in interest rates during the three months ended March 31, 2012, changes in our portfolio composition during the period and changes in our underlying prepayment model assumptions to reflect prepayment behaviors observed in the current market.

FINANCIAL CONDITION
As of March 31, 2012 and December 31, 2011, our investment portfolio consisted of $80.6 billion and $54.7 billion, respectively, of agency mortgage-backed securities ("agency MBS"). The following tables summarize certain characteristics of our agency MBS investment portfolio as of March 31, 2012 and December 31, 2011 (dollars in millions):

                                                               March 31, 2012

                                                                                                                    March
                                                                                            Weighted Average        2012
Agency MBS Classified as                                                                                          Projected
Available-for-Sale                            Amortized     Amortized                                             Life CPR
("AFS")                       Par Value         Cost        Cost Basis     Fair Value      Coupon     Yield (1)      (2)
AFS Investments By
Issuer:
Fannie Mae                  $    55,938     $    58,526       104.6%     $     59,085      3.88%        3.09%        9%
Freddie Mac                      19,746          20,666       104.7%           20,998      4.02%        2.95%        12%
Ginnie Mae                          302             317       105.0%              320      3.78%        1.71%        17%
Total / Weighted Average
AFS Securities              $    75,986     $    79,509       104.6%     $     80,403      3.92%        3.04%        9%

AFS Investments By
Security Type:
Fixed-Rate
 ? 15-Year
Lower Loan Balance (3)      $    17,245     $    17,909       103.8%     $     18,404      3.74%        2.81%        10%
HARP (4)                          1,120           1,165       104.0%            1,193      3.80%        2.89%        9%
Other (2009-2012 Vintage)
(5)                               7,416           7,768       104.7%            7,790      3.64%        2.28%        15%
Other (Pre 2009 Vintage)
(5)                                  74              78       105.2%               78      4.30%        2.35%        15%
Total ? 15-Year                  25,855          26,920       104.1%           27,465      3.71%        2.66%        12%
Total 20-Year:                    5,429           5,628       103.7%            5,687      3.64%        2.99%        7%
30-Year:
Lower Loan Balance (3)           11,463          12,142       105.9%           12,191      4.09%        3.25%        7%
HARP (4)                         14,445          15,235       105.5%           15,378      4.14%        3.36%        7%
Other (2009-2012 Vintage)        15,055          15,666       104.1%           15,689      3.87%        3.27%        8%
Other (Pre 2009 Vintage)          1,164           1,248       107.2%            1,265      5.31%        3.50%        17%
Total 30-Year                    42,127          44,291       105.1%           44,523      4.06%        3.30%        8%
Total Fixed-Rate                 73,411          76,839       104.7%           77,675      3.91%        3.06%        9%
Adjustable-Rate                   2,357           2,446       103.8%            2,500      4.19%        2.70%        19%
CMO                                 218             224       102.9%              228      3.95%        2.81%        15%
Total / Weighted Average    $    75,986     $    79,509       104.6%     $     80,403      3.92%        3.04%        9%


                                                               March 31, 2012

                                                                                                         March
                              Underlying                                         Weighted Average        2012
                              Unamortized                                                              Projected
Agency MBS Remeasured at       Principal        Amortized                                              Life CPR
Fair Value Through Earnings     Balance           Cost          Fair Value      Coupon     Yield (1)      (2)
Interest-Only Strips
Fannie Mae                  $         636     $        82     $         80      5.57%        6.84%        26%
Freddie Mac                           394              64               53      5.55%       11.94%        17%
Principal-Only Strips
Fannie Mae                             37              33               34        -%         3.80%        20%
Total / Weighted Average    $       1,067     $       179     $        167      5.37%        8.12%        22%


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1. Incorporates a weighted average future CPR assumption of 9% based on forward rates as of March 31, 2012 and a weighted average reset rate for adjustable rate securities of 2.69%, which is equal to a weighted average underlying index rate of 0.93% based on the current spot rate in effect as of the date we acquired the securities and a weighted average margin of 1.76%.

2. Weighted average projected life CPR based on forward rate assumptions as of March 31, 2012.

3. Lower loan balance securities represent pools backed by a maximum original loan balance of ? $150 thousand. Our lower loan balance securities had a weighted average original loan balance of $101 million and $108 million for 15-year and 30-year securities, respectively, as of March 31, 2012.

4. HARP securities are defined as pools backed by100% refinance loans with loan-to-values ("LTV") ? 80% and ? 125%. Our HARP securities had a weighted average LTV of 95% and 92% for 15-year and 30-year securities, respectively, as of March 31, 2012.

5. Other 15-year securities include a total of $954 million of securities backed by loans with original loan balances ? $175 thousand.

                                                                 December 31, 2011

                                                                                                                December
                                                                                          Weighted Average        2011
                                                                                                                Projected
Agency MBS Classified                       Amortized     Amortized                                             Life CPR
as AFS                      Par Value         Cost        Cost Basis     Fair Value      Coupon     Yield (1)      (2)
AFS Investments By
Issuer:
Fannie Mae                $    37,232     $    38,891       104.5%     $     39,567      4.07%        3.02%        14%
Freddie Mac                    13,736          14,342       104.4%           14,664      4.21%        3.16%        14%
Ginnie Mae                        258             270       104.7%              273      3.74%        1.71%        25%
Total / Weighted AFS
Securities                $    51,226     $    53,503       104.4%     $     54,504      4.11%        3.05%        14%

AFS Investments By
Security Type:
Fixed-Rate
 ? 15-Year:
Lower Loan Balance (3)    $    16,033     $    16,626       103.7%     $     17,027      3.81%        2.84%        12%
HARP (4)                        1,160           1,208       104.2%            1,235      3.93%        2.87%        12%
Other (5)                       1,814           1,873       103.2%            1,898      3.54%        2.58%        15%
Total ? 15-Year                19,007          19,707       103.7%           20,160      3.79%        2.82%        13%
Total 20-Year:                  5,462           5,659       103.6%            5,710      3.71%        2.72%        16%
30-Year:
Lower Loan Balance (3)          4,577           4,847       105.9%            4,927      4.48%        3.40%        11%
HARP (4)                       11,676          12,318       105.5%           12,591      4.48%        3.50%        11%
Other (2009-2011
Vintage)                        6,987           7,307       104.6%            7,380      4.24%        3.17%        15%
Other (Pre 2009
Vintage)                          655             697       106.3%              715      5.59%        3.37%        25%
Total 30-Year                  23,895          25,169       105.3%           25,613      4.44%        3.38%        12%
Total Fixed-Rate               48,364          50,535       104.5%           51,483      4.10%        3.09%        13%
Adjustable-Rate                 2,627           2,725       103.7%            2,774      4.29%        2.58%        32%
CMO                               235             243       103.1%              247      3.74%        1.69%        29%
Total / Weighted
Average                   $    51,226     $    53,503       104.4%     $     54,504      4.11%        3.05%        14%


                                                            December 31, 2011

                                                                                                      December
                             Underlying                                         Weighted Average        2011
Agency MBS Remeasured at     Unamortized                                                              Projected
Fair Value Through            Principal        Amortized                                              Life CPR
Earnings                       Balance           Cost          Fair Value      Coupon     Yield (1)      (2)
Interest-Only Strips
Fannie Mae                 $         687     $        90     $         86      5.55%        6.62%        31%
Freddie Mac                          453              66               56      5.48%       10.35%        25%
Principal-Only Strips
Fannie Mae                            40              35               37        -%         5.40%        31%
Total / Weighted Average   $       1,180     $       191     $        179      5.33%        7.70%        29%


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1. Incorporates a weighted average future CPR assumption of 14% based on forward rates as of December 31, 2011 and a weighted average reset rate for adjustable rate securities of 2.71%, which is equal to a weighted average underlying index rate of 0.94% based on the current spot rate in effect as of the date we acquired the securities and an weighted average margin of 1.77%

2. Weighted average projected life CPR based on forward rate assumptions as of December 31, 2011.

3. Lower loan balance securities represent pools backed by a maximum original loan balance of ? $150 thousand. Our lower loan balance securities had a weighted average original loan balance of $102 thousand and $108 thousand for 15-year and 30-year securities, respectively, as of December 31, 2011.

4. HARP securities are defined as pools backed by100% refinance loans with LTVs ? 80% and ? 125%. Our HARP securities had a weighted average LTV of 98% and 97% for 15-year and 30-year securities, respectively, as of December 31, 2011.

5. Other 15-year securities include $687 million of securities backed by loans with original loan balances ? $175 thousand.

Interest-only agency MBS strips represent the right to receive a specified portion of the contractual interest flows of the underlying unamortized principal balance ("UPB" or "par value") of specific agency CMO securities. Principal-only agency MBS strips represent the right to receive contractual principal flows of the UPB of specific agency CMO securities. As of March 31, 2012 and December 31, 2011, the combined weighted average yield of our agency MBS portfolio was 3.06% and 3.07%, respectively.

The stated contractual final maturity of the mortgage loans underlying our agency MBS portfolio ranges up to 40 years. As of March 31, 2012 and December 31, 2011, the weighted average final contractual maturity of our agency MBS portfolio was 24 and 23 years, respectively.
The actual maturities of agency MBS are generally shorter than their stated contractual maturities primarily as a result of prepayments of principal of the underlying mortgages. The weighted average expected maturity of our agency MBS portfolio was 7.2 and 3.5 years as of March 31, 2012 and December 31, 2011, respectively. In determining the estimated weighted average years to maturity of our agency MBS and the yield on our agency MBS, we have assumed a weighted average CPR over the remaining projected life of our agency MBS portfolio of 9% as of March 31, 2012 and 14% as of December 31, 2011. We amortize or accrete premiums and discounts associated with purchases of our agency MBS into interest income over the estimated life of our securities based on actual and projected CPRs, using the effective yield method. Since the weighted average cost basis of our agency MBS portfolio was 104.8% of par value as of March 31, 2012, slower actual and projected prepayments can have a meaningful positive impact on our asset yields, while faster actual or projected prepayments can have a meaningful negative impact on our asset yields.
The following table summarizes our agency MBS classified as available-for-sale, at fair value, according to their estimated weighted average life classifications as of March 31, 2012 and December 31, 2011 (dollars in millions):

                                          March 31, 2012                             December 31, 2011
Estimated Weighted Average                                    Weighted                                    Weighted
Life of Agency MBS                              Amortized     Average                       Amortized     Average
Classified as AFS              Fair Value         Cost         Coupon      Fair Value         Cost         Coupon
Less than or equal to 1 year $          2     $         2      4.00%     $        283     $       274      4.75%
Greater than 1 year and less
than or equal to 3 years              629             614      4.20%           16,697          16,475      4.10%
Greater than 3 years and
less than or equal to 5
years                              22,287          21,740      3.99%           34,667          33,934      4.10%
Greater than 5 years               57,485          57,153      3.89%            2,857           2,820      4.15%
Total                        $     80,403     $    79,509      3.92%     $     54,504     $    53,503      4.11%

The weighted average life of our interest-only agency MBS strips was 4.2 and 2.3 years as of March 31, 2012 and December 31, 2011, respectively and the weighted average life of our principal-only agency MBS strips was 4.1 and 2.3 years as of March 31, 2012 and December 31, 2011, respectively.
As of March 31, 2012 and December 31, 2011, we held pass-through agency MBS collateralized by ARMs and hybrid ARMs with coupons linked to various indices. The following tables detail the characteristics of our ARM and hybrid ARM agency MBS portfolio by index as of March 31, 2012 and December 31, 2011 (dollars in millions):

                                          March 31, 2012                                            December 31, 2011
                                                                Twelve-Month                                                Twelve-Month
                      Six-Month     One-Year      One-Year        Treasury       Six-Month      One-Year      One-Year        Treasury
                        Libor         Libor       Treasury        Average          Libor          Libor       Treasury        Average
Weighted average
term to next reset
(months)                    32            75            49               25             33            75            45               26
Weighted average
margin                    1.59 %        1.79 %        1.59 %           1.83 %         1.59 %        1.79 %        1.72 %           1.83 %
Weighted average
annual period cap         1.09 %        2.00 %        1.14 %           1.00 %         1.08 %        2.00 %        1.31 %           1.00 %
Weighted average
lifetime cap             10.59 %        9.17 %        9.03 %          10.04 %        10.59 %        9.25 %        9.25 %          10.07 %
Principal amount     $      89     $   1,737     $     349     $        182     $       95     $   1,967     $     366     $        199
Percentage of
investment portfolio
at par value              0.12 %        2.29 %        0.46 %           0.24 %         0.19 %        3.84 %        0.71 %           0.38 %

The following table details the number of months to the next reset for our pass-through agency MBS collateralized by ARMs and hybrid ARMs as of March 31, 2012 and December 31, 2011 (dollars in millions):

                                          March 31, 2012                        December 31, 2011
                                                            Average                                Average
                                 Fair Value     % Total      Reset      Fair Value     % Total      Reset
Less than 1 year               $         27          1 %         4     $        29          1 %         6
Greater than or equal to 1
year and less than 2 years              126          5 %        16             156          6 %        17
Greater than or equal to 2
years and less than 3 years             329         13 %        28             397         14 %        28
Greater than or equal to 3
years and less than 5 years             436         17 %        51             479         17 %        48
Greater than or equal to 5
years                                 1,582         64 %        83           1,713         62 %        85
Total / Weighted Average       $      2,500        100 %        66     $     2,774        100 %        66

As of March 31, 2012 and December 31, 2011, we did not have investments in agency debenture securities.

RESULTS OF OPERATIONS

The following analysis of our financial condition and results of operations should be read in conjunction with our interim consolidated financial statements and the notes thereto. The tables below present our condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011 and our consolidated statements of comprehensive income and key statistics for the three months ended March 31, 2012 and 2011:

($ in millions, except per share amounts)
                                                         March 31, 2012     December 31, 2011
                                                          (unaudited)
. . .