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American Capital Agency Corp. Message Board

  • eyesandears51 eyesandears51 Feb 28, 2013 2:18 PM Flag

    AGNC: The Positive Impact from FED Policy

    Let's update the prospects for MREIT's now that the Federal Reserve Open Market Committee has specific targets for exiting a highly accomodative monetary policy, widely called QE....X. The policy of direct purchases increases the FEDS balance sheet by approximately $ 1Trillion/year. Secondly, the continuation of the Fed's purchase $ 40 Billion/month of Mortgage Backed Securities and the specific targeting of 6.5% real unemployment, factoring in Labor Participation as part of the unemployment rate, is directly relevant to MREIT's. These firms now have substantial clarity about the continuing magnitude of FED purchases and the specific conditions for the program to end. As previously indicated, keeping rates artificially low raises the value of the MREIT's existing portfolio of government guaranteed MBS's, adjusted for the decay, or early payoff of their holdings. Keep in mind payment on the MBS's is government guaranteed, not the early termination or refinancing of mortgage securities. This favors the larger older MREIT's, such as AGNC, that have a larger percentage of older higher yield MBS's. Since the MREIT field has become a bit crowded over the past two years with newer entrants, we will likely see some healthy consolidation, favoring the better performing firms including AGNC, MTGE, PMT and others. MREIT's attain their margin from the difference between their lower cost of borrowing and the higher percentage realized from monthly mortgage payments. These results are increased or diminished by leverage and hedging. Again the larger and more experienced companies are advantaged. AGNC, for instanced, increased its spread in Q-4 to 1.63% from 1.42% in Q-3. Additionally their prepayment decay, called CPR improved from 10% to 9% Q over Q. In summary, I believe that the greater visibility into the size and conditionality of Fed involvement in MBS asset purchases is a net positive for the larger, older, and more agile MREIT's. Even if they experience some margin compression resulting in lower yields, 15+% is comparatively attractive and difficult to replicate. Additionally CPR decay or early payment, requires borrowers to refinance, a cumbersome, difficult, and unattainable process for many who have impaired credit, underwater equity, are retired, or changed employment status.

    AGNC, in particular, after today’s secondary, has strong technical’s that portend positively for future share appreciation. MACD is positive, the 5 day EMA is above the 13 day EMA, the stock is above the $ 31.63 secondary print on extraordinarily high confirming volume. The stock could soon approach the $ 36.77 high reached September 19.

19.33-0.16(-0.82%)Jun 27 4:00 PMEDT