Agency Bond Values Boosted By Falling LT Treasury Rates


Sterne Agee analysts Henry J. Coffey, Kenneth James, and Calvin Hotrum take a close look at American Capital Agency and Two Harbors Investment leading up to their quarterly reports, while discussing Agency Bond Values.

While we have more insight into the factors driving value for our MSR/Credit mortgage real estate investment trusts (M REITs), we would remiss if we did not point out the benefit to the agency M REITs of falling long term treasury rates. The two agency only M REITs we follow, American Capital Agency Corp. (NASDAQ:AGNC) and Annaly Capital Management, Inc. (NYSE:NLY), are selling at ~ 85% of book value and while dividends could move lower, current yields in this whole sector remain high.

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10-Year Treasury & Agency Bond Values

The expected gains in agency bond values and related boost in book values should show up in the March period, if treasury rates remain low and bond values hold at current levels. Since the end of the September quarter, the rate on 10-year treasury bonds moved up 40 bps. Since the end of December the rate on the 10 year is down 37 bps. While not a perfect indicator of trends in agency backed mortgage backed security (MBS) values trends in long term treasuries are indicative of trends in agency MBS values. December’s sell off in longer-term treasury values has all but been reversed in January. Reported book values could be down a shade in 4Q13.

Credit/MSR REITs hold Agency Bonds as Well

For a number of reasons, one of which is REIT qualification requirements, the credit M REITs we follow generally hold agency MBS. Holdings of agency MBS for CHMI, MFA, NRZ, and Two Harbors Investment Corp (NYSE:TWO), recently ranged between 38% and 70% of total investments. Book values should benefit from gains in these holding during the March quarter if long-term treasury rates and bond values remain at current levels. PMT’s holding of agency MBS were relatively small at the end of September, 5.2% of total investments.

American Capital Agency and Two Harbors earnings preview 4Q13

American Capital Agency Corp. (NASDAQ:AGNC) reports after the close on Monday (2/03/14) and Two Harbors Investment Corp (NYSE:TWO) should be reporting on Wednesday after the close. We are looking for American Capital Agency Corp. (NASDAQ:AGNC) to report quarterly EPS of $0.56, vs. consensus expectations of $0.64; estimates range between $0.55 and $0.72. We are looking for TWO to report quarterly EPS of $0.21, $0.23; estimates range between $0.20 and $0.26.

See attached exhibits for information on valuation, estimated bond values, investment mixes, etc.

Any Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment Banking, Ratings Definitions, and any potential conflicts of interest may be found by clicking on the report link below. Past performance is no guarantee of future results.
Specialty and Housing Finance Note