In recent months, there has been a sharp decline in the financial markets as a whole. Increasing signs of recession.. This trend has accelerated in recent weeks as almost all assets, including stocks and bonds, have declined rapidly.Almost all equity sectors Decline, technology, and more recently Finance It’s the worst.
The housing and mortgage markets are exciting today as they have transitioned from a strong boom to a bust in a very short period of time. When the Federal Reserve began buying mortgage-backed securities two years ago, mortgage rates fell extremely low and the housing market soared. Conversely, when those purchases are complete, mortgage rates soar and Housing market Slow down. Mortgage lenders, especially mortgage REITs, are facing extreme declines.
A year ago, I was one of the few analysts to ring the alarm when many were longing for high-yielding mortgage REITs. This view is mainly (NASDAQ:AGNC) “AGNC: Rising mortgage spread signals are trouble for agency REITs“Most mREITs with significant agency mortgage-backed securities assets or” MBS “have high exposure to” mortgage spreads “or the difference between mortgage and Treasury interest rates. My view at the time was that when the Federal Reserve slowed down MBS purchases and ended, mortgage rates soared, spreads returned to normal levels, and AGNC’s book value was “20-40%.“”
Since then, mortgage spreads have normalized and AGNC prices have fallen 40%. AGNC is at the end of its previous target range. Still, the overall situation has changed as energy costs and the extreme surge in mortgage rates have driven the economy into recession.Based on a sufficient supply of recent data on Both banks And that Real estate marketThe technical recession is my basic outlook, and a significant slowdown is not unlikely. Undoubtedly, this exacerbates a difficult situation for AGNC. The mortgage-backed securities market tends to freeze as risk awareness increases. In my view, this could cause AGNC and its associates to experience a wave of forced asset sales.
AGNC’s NAV volatility is growing with rates
Like most MBS-oriented mREITs, AGNC’s business model is relatively simple. Buy low-yielding mortgage-backed securities and use significant leverage to increase yields. At the time of Q1, Most of AGNC’s portfolio (More than 90%) consisted of 30-year fixed mortgage-backed securities. These are Fannie Mae (Fanny Mae (OTCQB: FNMA) And Freddie Mac (OTCQB: FMCC). If the borrower does not meet the payment, Fannie Mae and Freddie May will make up for the difference.
This guarantee reduces the credit risk of government MBS assets. That is, the yield is often not much higher than the US Treasury yield. Still, given that Fannie Mae and Freddie May do not have a good track record in the event of a significant decline in the housing market (see 2008), the mortgage and Treasury yield gap tends to widen as risk increases. there is. Higher mortgage rates can increase AGNC’s income in the long run, but it can also lead to lower book values in the short run. 7.8X Leverage About tangible net book value. See the close inverse relationship below.
At the end of the previous quarter, AGNC’s tangible book value was $ 13.21. At that time, The basic 30-year fixed mortgage rate was about 4.67%, while the 30-year US Treasury rate was 2.44%. The difference between the two, the mortgage spread, was 2.23%.At the end of the company Quarterly filingThey reported the mortgage interest rate spread sensitivity and interest rate sensitivity shown below:
If the mortgage spread rises by 50bps (0.5%), the book value of AGNC is expected to decrease by about 30%. In particular, mortgage spreads widened dramatically to about 30 bps in the week leading up to the end of the first quarter and about 50 bps from March 15th to 31st.Since then May The company’s reported book value may not fully take into account recent shocks, as it will take some time for AGNC’s MBS assets and many interest rate hedges to be revalued.
Still, as of the last data, the basic 30-year mortgage rate was much higher at 5.23%, and the current Treasury interest rate (at the time of writing) was 3.37%.. The spread between the two is slightly lower at 1.86% and may benefit AGNC’s book value. However, mortgage rates are published weekly while the Treasury is daily, and this week’s agency MBS ETF has fallen sharply (MBB) Means that the spread has risen sharply. refer to the following:
Mortgage interest rate data is also delayed because it is not based on actual market prices like MBS ETFs. However, given the relationship between MBS ETFs (MBB) And mortgage rates, we estimate that this week’s 30-year base mortgage rates are close to 5.7% today, potentially slightly higher. This will increase the estimated spread to 2.33% (5.7% minus 3.37%).Recently Survey also suggests Mortgage rates of about 5.7% to 5.8%.
Overall, at the time of writing, MBS spreads have increased slightly from the end of the first quarter to today. This is important because today’s markets are very volatile and their potential day-to-day changes change as both mortgage rates and the Treasury rise. Recently, mortgage spreads have shown a significant rise and fall of 15-30 bps. This means that the net asset value of AGNC can fluctuate by 5-15% in a particular week.
Since the end of the first quarter, Treasury rates have risen by about 1% and AGNC’s book value could fall by about 8% (if Treasury rates rise by 75 bps, they are given -5.5% BV exposure. increase). Mortgage spreads, on the other hand, can be about 10-20 bps higher than when AGNC valued the portfolio, meaning a further increase in book value of about 15%. Combined with the expected 23% decline, AGNC’s estimated NAV per share is $ 10.17 (23% below $ 13.21). This is about the same as the current stock price.
Best Avoidance of AGNC-MBS Liquidity Concerns
Based on my rate estimates, AGNC may be trading almost exactly at the current net asset value per share. The company’s yield is also 13.5%, and as long as Fannie Mae and Freddie May continue to make a profit, some of that revenue should remain. Of course, AGNC borrows under a short-term repurchase agreement, 0.37% Last quarter. Today, after the Fed’s recent rate hike, its borrowing rate has been around 1.5% to 1.75%, putting pressure on AGNC’s rate of return. Given that the federal funds rate could be around 3.5% to 4% in the coming months, especially by the end of the year, I think this factor will reduce dividends.
Given the expected decline in AGNC’s rate of return and its significantly and increasing volatility of NAV, I think it’s best to avoid this stock. In 2020, the value of MBS assets plummeted as the spiral economic outlook led to a sharp decline in market liquidity.Virtually all MBS mREITs are subject to tight contracts due to their high leverage, and many people Margin call During March 2020.
Most mREITs, including AGNC, have a slightly lower leverage level, but the likelihood of repetitive scenarios seems to increase day by day.MBS market last week It became “no bid” Because the high CPI data relaxed the market. Not completely related, but using floating rate ETFs (FLOT) As an indicator of financial market liquidity. The fund has plummeted at a relatively extreme pace over the past week and a half. This shows that banks and other large investors are in a hurry for liquidity.
In my view, this creates significant potential for the mortgage-backed securities market to be immediately shocked. Unlike 2020, inflation will prevent the Federal Reserve from rushing in quickly to save the market.In my view, unless it’s a large Fed $ 2T Most mREITs, including the MBS Purchasing Program, AGNC, cannot be resolved today. Indeed, such actions by the FRB may only have delayed or exacerbated unavoidable problems by artificially raising home prices (mortgage rates during MBS QE). Due to extreme decline).
Overall, I’m bearish on AGNC and believe it’s a very risky bet in today’s volatile market. Mortgage spreads are now just above long-term levels, so my bearish paper on AGNC from last year was carried out. If house prices start to fall as the unemployment rate rises (I expect) (I expect)It may be), Then there is a great potential burden on these institutions. Due to recent rule changes, taxpayers can no longer easily bail out agents.Given what they carry Debt of about $ 6T with 140 to 1 leverage.. In my view, the potential repetitive failure of these institutions is probably AGNC and its companion Annaly (NLY), from now on.