American Capital Agency Corp. (NASDAQ:AGNC)
American Capital Agency Corp. (NASDAQ:AGNC) is one of the largest mREIT that invests in Agency residential MBS. The company has a concentration in longer-duration fixed rate MBS with low loan balances and relatively low prepayment risk. This is why American Capital Agency Corp. (NASDAQ:AGNC) reports one of the lowest prepayments speeds for its investment portfolio.
While the company’s strategy is better in a low interest rate environment, I believe the company can experience a fall in the book value during times of rising interest rates. It was evident after the first quarter results that the company’s book value plunged over 8% after a small rise in the rates. Therefore, it appears that American Capital Agency Corp. (NASDAQ:AGNC) has positioned its portfolio in such a way that it will benefit if the QE stays intact longer than expected.
Annaly Capital Management, Inc. (NYSE:NLY)
Annaly Capital Management, Inc. (NYSE:NLY) Management also invests in fixed rate residential mortgage backed securities. It reported a 4.2% decline in its book value at the end of the first quarter. You can expect a further decline in the company’s book value as the Fed starts tapering off the QE. However, at the same time, you can expect an expansion in its net interest rate spread. According to the latest SEC filings of Annaly Capital Management, Inc. (NYSE:NLY), its projected net interest income would increase by around 17% if the rates surge 50 bps.
ARMOUR Residential REIT, Inc. (NYSE:ARR)
While ARMOUR Residential REIT, Inc. (NYSE:ARR) has some proportion of hybrid adjustable-rate securities in its portfolio besides the large concentration of fixed rate securities, it also reported an 8% decline in its book value during the first quarter. This was largely due to a higher level of leverage that ARMOUR Residential REIT, Inc. (NYSE:ARR) employs. Therefore, if the leverage remains at the same levels, you can expect the company to underperform as the Fed starts to exit bond buying.
Final Thoughts
I believe the Fed’s exit is already being priced in by the markets as the long-term rates have started climbing. Therefore, investors looking for the Fed’s eventual exit may reconsider and make their moves now. While the entire mortgage REITs sector will benefit from expansion in the spreads and low prepayment risks, you can expect Annaly Capital Management, Inc. (NYSE:NLY) to benefit the most. I believe American Capital Agency needs to reposition its portfolio, while ARMOUR Residential REIT, Inc. (NYSE:ARR) needs to de-leverage in order to handle a QE tapering.
The article The Death Of QE And Its Effects On Agency mREITs originally appeared on Fool.com and is written by Adnan Khan.
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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