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American Capital Agency Corp. Message Board

  • oldschoolbuilder oldschoolbuilder Jan 3, 2013 10:23 AM Flag

    Lower Refis = Lower CPRs = Lower premium amortization = Higher MBS prices, earnings, investor sentiment

    Refi volumes have been trending lower as mortgage rates have rebounded well off of their lows. CPR speeds are likely to trend lower in coming months as a result which should alleviate some of the premium amortization headwinds for the group and support MBS pricing. Earnings and, more importantly, dividends are thus likely to stabilize at current levels for much of the group although AGNC is probably still under-earning its dividend by 10-20% on a core portfolio basis (but ongoing gains on MBS/swaps could fill the gap).

    Earnings and dividend stability from here is also aided by repo rates that are 10+ bps lower thus far in 2013, a meaningful positive for new investment spreads.

    AGNC is still very cheap at the current discount to BV and the dividend yield is so darn juicy (and still attractive at a more sustainable $4 run rate).

    Sentiment: Strong Buy

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    • BTW - I have to disagree with you re: the premise that lower refis will lead to higher mbs prices and BV .... at least as far as agnc is concerned because agnc has invested heavily in prepayment protected mbs. If mtg rates rise the premium for prepayment protected mbs will decrease by a lot. In other words - in a rising mtg rate environment - legacy prepayment protected mbs won't sell for a premium since there won't be an incentive for anyone to refi in a rising interest rate environment. In fact, new issuance with higher rates will be deemed to be more valuable than existing prepayment protected mbs carrying perhaps lower interest rates. In fact, adjustable mbs may be deemed more valuable in such an environment. Of course - UNTIL the fed exits - mbs rates may not rise even if treasury rates rise as they are practically the whole mkt right now - buying 70 - 80 billion a month (new purchases plus reinvestment of payouts of existing portfolio - which keeps getting bigger). Given that most of the new issuance mbs is refis - and that refis will disappear if rates rise - there won't be ANY mbs to buy; the Feds will control the whole mkt and keet rates artificially low.

      Clearly the FED involvement is distorting the mkt .. but it is what it is.

      • 2 Replies to stockmeister3
      • Higher refis have depressed MBS prices to some degree post the announcement of QE3 and MBS prices have lagged swaps in 4Q as a result. That is reversing in 1Q. Pay-ups for prepay protected MBS will likely subside to some degree but higher base MBS prices and swaps are likely to be a significant offset, particularly as AGNC has a very high hedge ratio. Hence BV should be stable, give or take. Earnings, however, would benefit from lower CPR speed assumptions and lower premium amortization. Higher earnings and dividends (due to lower CPRs and lower funding costs) and a stable BV should be positive for investor sentiment. I like the set-up here quite a bit as a result.

        Sentiment: Strong Buy

      • Very Well said......Until the Fed gets their foot off of the pedal, we will not see any major increase in mbs rates.

    • don't doubt that repo rates will tick lower now that we're past yr end, but where are you getting your data to support your statement that it's 10+ bps lower? Note that the elimination of the transaction guaranty program may also increase the demand for secured (including mbs repo) funding which is a positive for mreit short term funding costs. I'm just curious as to where you are getting data to support the #s which you cite.

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