American Capital Agency Corp. (AGNC), ARMOUR Residential REIT, Inc. (ARR), Annaly Capital Management, Inc. (NLY): What Barclays Expects From Your Agency mREIT

Despite a heavy reliance on the 30-year fixed rate residential Agency MBS, the company is expected to report 10% decrease in its book value. This is still lower than American Capital Agency Corp. (NASDAQ:AGNC) and ARMOUR Residential REIT, Inc. (NYSE:ARR).

CYS Investments Inc (NYSE:CYS) is another Agency-only mREIT. However, the nature of its investment portfolio is very different from that of the aforementioned mREITs. Besides owning fixed rate MBS, CYS Investments Inc (NYSE:CYS) has investments in hybrid adjustable-rate MBS. These are securities for which the interest payment is fixed for an initial period and thereafter resets as it does on the adjustable-rate MBS. The company has a higher concentration (51% of its portfolio) in the 15-year and 20-year fixed rate Agency paper, which is why its book value should experience comparatively less decline. Barclays expects the company to report a book value decline of 10%.

Barclays believes that CYS Investments has benefitted from wider spreads during the second half of the first quarter and during the entire second quarter. Further, the company’s participation in forward settling market should provide it with additional returns. Therefore, analysts expect a wider net interest rate spread with an upside in dividends.

Conclusion

Given the uncertainty around the unwinding of QE3 and the widening of the spreads, Barclays is bearish on the Agency mREIT space. However, I believe Annaly Capital Management, Inc. (NYSE:NLY) and CYS Investments are better positioned to outmaneuver the prevailing challenges. Besides, further widening in the spreads could mean an upside for their investors. Therefore, I recommend investors buy Annaly Capital Management, Inc. (NYSE:NLY) and CYS Investments.

The article What Barclays Expects From Your Agency mREIT originally appeared on Fool.com and is written by Adnan Khan.

Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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