Oct. 3 (Bloomberg) -- At current price/spread levels, REITs
will have to either increase leverage or take on additional
duration risk to generate returns similar to what they generated
over past 2-3yrs, Nomura MBS strategy team led by Ohmsatya Ravi
write in a client note.
• According to Nomura models, new production MBS pools (FNCL3, 3.5s) at projected 1-yr prepay speeds were offering 12-13% ROE and now are 5.4-8.1%
• Given current very low absolute yields and tight MBS spread levels, REITs may find it unattractive to raise new capital
• Likely to let their mortgage portfolios runoff to an extent (or let leverage decline through paydowns) and settle for lower expected returns vs replacing monthly paydowns with agency MBS or increasing leverage to generate higher returns
• YTD REITs have bought $80-90b agency MBS, demand had been higher than expectations
Last quarter AGNC posted 1.58 comprehensive income per common share with a net spread income of common share of 94 cents. The remaining balance was realized gain on sale of appreciated MBS.
Net Interest Income 384M
Gain on sale of agency securities. 417M
I would think AGNC will make up for loss in spread with sale of agency securities as last quarter.
The big kick in the pants was the loss on derivative instruments of (1,029M). With interest rate stability maybe AGNC can get hedges under control.
Next earnings will be telling as to the strategy going forward.