Good luck with your AGNC puts. I'll take the other side of the trade.
I like CYS and AGNC here. CYS is cheaper, but AGNC has better BV protection in an environment where CPR speeds may be somewhat elevated near term on generic collateral. CYS does have a lot of newly originated product that is likely to have more moderate CPRs than most generic pools, so I think investors have oversold that one in grouping it with the NLYs of the world. AGNC stands in a class by itself in navigating through this environment in great shape (highly predictable cash flows plus excellent BV protection).
I disagree with your assertion that AGNC's hedges aren't working. Your BV estimate of $27 is seriously detached from reality. I think BV is around $32 at the moment. MBS collateral (MBB is not a good proxy for what AGNC holds) has cheapened a bit vs. Treasuries in 4Q but only by a moderate degree (and with the aggressive Fed bid that may reverse somewhat into 2013), and pay-ups on prepayment protected MBS pools (70% of AGNC's portfolio) have risen to largely offset this divergence. AGNC is underearning its dividend at the moment but part of this is due to much higher assumed lifetime CPR than the current speeds suggest, temporarily elevated funding costs due to repo rates being 10-15 bps above normal (which should reverse in early 2013), as well as relatively low leverage (7.0X). If AGNC decided to take advantage of wider spreads so far in 4Q and added 1X turn of leverage it would be earning well north of $1 in EPS. Also, AGNC can book gains on its significantly appreciated MBS portfolio to keep taxable earnings up, and it has $1.50ish in UTI to supplement the higher dividend. I agree that the quarterly dividend is probably headed toward $1.00-1.10, but that may be a 2013 event, and still equates to a 13+% dividend yield with decent BV protection.
Well said! The competition from the Fed should drive the MBS prices up reducing yield( and therefore the spread) but increasing the value of the portfolio thereby increasing BV. With the UTI you mentioned there should be plenty of extra moolah to cover the 1.25 for Dec.
Management is well hedged for this scenario and will most likely feed the Fed with the right members of their portfolio. Shed high, scoop low...;-)