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American Capital Agency Corp. Message Board

  • yahutag yahutag May 25, 2013 9:37 AM Flag

    AGNC and RMBS prices

    AGNC is being affected by some pretty dramatic price drops in Agency RMBS. The RMBS price drops are believed related to the anticipated end of QE. Production of Agency RMBS was $150 billion in April, of which the Fed purchased about $60 to $70 billion. Although the Fed adds $40 billion to their RMBS holdings each month, they are also reinvesting the principal repayments on their existing inventory, boosting total purchases by $20 to $30 billion.

    Imagine the Fed suddenly withdrawing from the market. The shock would be overwhelming. So my belief is that those who typically purchase RMBS have temporarily withdrawn from participation to avoid being caught in a shock wave should the worst actually occur. Those buyers may temporarily be moving into 5 and 10 year treasuries as a way to store their money, which explains the unusually high spread between RMBS and 10 year treasuries.

    Although I believe the Fed is trying to do the best they can, I have for a long time believed that this Fed has a poor understanding of the markets. (That's why they missed the housing crisis, which I thought at the time was quite obviously going to occur. The same thing has happened, on a much smaller scale, many times in California. ) Their current participation in the Agency RMBS market is becoming quite disruptive. Hopefully, they will soon realize that their involvement in RMBS has become counter productive, and begin to exit immediately.

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    • Historically, the Fed has been considered to be unable to control long term rates. We have; though, the first attempt to do so in QE. I submit that controlling long term rates is a completely different animal from controlling short term rates, and that the Fed doesn't have the market savvy to become involves. The downside risks greatly outweigh the upside potential.

      Long term rates, by their very definition, are affected by long term considerations. The Fed has no intention of being a long term player, so the market is going to discount its contribution. What we see as a result of QE is just what one would expect. When launched, rates are affected, but the effect then tapers off to restore the previously established equilibrium. There is then no net change in rates, but the Fed has created a potential disequilibrium with its larger balance sheet, and must eventually withdraw its support from the markets.

      I think we've seen the majority of the RMBS repricing that is likely to occur as a result of QE tapering, but some additional weakness may result from fundamental changes accompanying the strengthening economy.

    • As long as interest rates keep going up and bond prices going down, mREITs will continue to tank (esp. the ones holding large amounts of agency debt). Institution holders knows this and had been dumping the past couple of months, hence the spike downs, and no recovery. I think holders will be in a world of hurt this summer. Stupid Ben had put in the idea in ppl's head that over the several FOMC meetings, the Fed can evaluate slowing down the bond purchases if unemployment improves. If the June reports is good, then interest rates go over 2% and you can only expect mREITs another leg down. What happens during the FOMC in June? I really don't know. It just takes some stupid talking head like Ben to throw markets in woild swing, so I intend to stay out until then (I got burned last week - learned never to trust this stupid talking head of the Fed).

      • 3 Replies to the_nerdy_guy
      • As long as interest rates keep going up and bond prices going down, mREITs will continue to tank (esp. the ones holding large amounts of agency debt). Institution holders knows this and had been dumping the past couple of months, hence the spike downs, and no recovery. I think holders will be in a world of hurt this summer. Stupid Ben had put in the idea in ppl's head that over the several FOMC meetings, the Fed can evaluate slowing down the bond purchases if unemployment improves. If the June reports is good, then interest rates go over 2% and you can only expect mREITs another leg down. What happens during the FOMC in June? I really don't know. It just takes some stupid talking head like Ben to throw markets in woild swing, so I intend to stay out until then (I got burned last week - learned never to trust this stupid talking head of the Fed)

        Sentiment: Strong Sell

      • As long as the overnight rate stays low while the fed exits QE3 the spread on mREITS will widen.
        AGNC positioned themselves to become "ASSET SENSITIVE" after Q1 meaning if rates rise their BV will increase. Simply means they put on longer term liabilities. Makes sense: if LT rates rise then lower rate LT liabilities are worth more.
        I am not saying AGNC will be good forever because once the overnight rate starts rising their spread will get crushed. But for now...I think it is a buy at this price.

      • 'If June jobs report is good, then interest rates go higher into 2%, and you can expect mREITs another leg down". Sorry typo.

    • The Fed thinks they can exit the RMBS market without disruption, but have yet developed no plan to do so. Without a plan, they are essentially asking the markets to trust them to do the right thing. I have never found the markets capable of trusting anyone or anything, so that brings me back to my earlier assertion that the Fed is out of touch with the markets they're trying to influence.

      It's my personal intention (and there was never any doubt) to hold on through this adjustment period because I'm convinced that these circumstances are very unusual and of short duration. There is no expectation that short term rates will rise anytime soon. Since short term rates are an important factor in the pricing of Agency RMBS, they will not continue to drop in price as they have over the past couple weeks.

 
AGNC
23.30+0.01(+0.04%)3:07 PMEDT

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