I've been trying to determine what scenario is best and worst for AGNC. The frustrating thing is the articles I've read seem to be contradictory. One says if interest rates go up it's bad for AGNC. Another says because interest rates dropped, it's bad for AGNC. What the heck?
I understand AGNC makes money on the spread. I figured interest rates going up would be in general a good thing, but bad from the perspective of mortgages they own?
Thanks to all for the responses. It's helpful, but makes it sound like AGNC isn't very attractive. I read an article by one of the Seeking Alpha guys recommending at $25.00. If things go sideways for AGNC, meaning end of QE, does 25 still hold, or is it a downward plunge?
Stop reading Seeking Alpha..they are a bunch of shills for hedge funds..Read the SEC releases and make up your own mind. To me, AGNC has to cut their dividend. If they do not get out. They are playing with fire and need all the capital they can muster if things change radically. My biggest fear is a potential for them not to fund cheaply in the repo market. No one talks about that. That is what killed Lehman and almost Wall Street. The Fed will not rescue AGNC I promise you.
first, short term rates. if they go up the cost of AGNC's leverage goes up. simple enough.
second longer term rates like mortgages. if they go up, MBS they buy after an increase will yield more. sadly, the MBS they hold prior to an increase will decrease in market value and negatively impact book value. the yield of those securities will not change relative to their purchase price(unless they are variable rate securities that track mortgage rates).
now for the really bad news. AGNC has like 7X leverage, so for every 1% drop in their portfolio securities price, BV drops about 7%. few investors are willing to pay much of a premium to BV for shares. in fact, one of the best estimates of BV, absent a quarterly report figure, is an SPO price.
AGNC is in a tight spot right now. short term rates really cannot go much lower, but mortgage rates can. not likely, but possible. on the flip side, mortgage rates are likely to rise faster than the short term rates. expect the Fed to relax the long term QE but keep the short term rate low. bye bye book value.
Mr. Wizard has it right. in another perspective of the same end result. going lower. i wish to point out. aprox. 400% of agnc's meteoric sp. Rise and distributions.....all occurred during rates from fed at 0-.25% so, logic would have it. these m-reits all cropped up recently...except nly. and grew massive portfolios of combined , packaged debt. so in the inversion, or reversion. the sp. Should logically re-trace it's rise. And eventually close. due to 8 times leverage on depreciating assets. that's why the huge sell off on monster volumes. 8% down 1 day. 3 2% down days and several 1% down. so retracement and price corrections underway. as i foretold...after last div.