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American Capital Agency Initiates Ginnnie Mae Positions in 1Q15

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American Capital Agency’s primary investments

As one of the largest agency REITs, American Capital Agency (AGNC) invests primarily in MBS (mortgage-backed securities) that are guaranteed by the US government. This means primarily Fannie Mae, Freddie Mac, and Ginnie Mae securities.

American Capital Agency tends to stick to fixed-rate MBS. This makes the company similar to Annaly Capital Management (NLY). While American Capital Agency has some exposure to adjustable-rate MBS, they’re a tiny part of its portfolio. This separates American Capital Agency from other agency REITs such as MFA Financial (MFA), Capstead (CMO), or Hatteras (HTS).

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The basics of American Capital Agency’s portfolio

In 1Q15, the company’s balance sheet decreased from $71.5 billion in assets to $66.2 billion in assets. At the end of the quarter, 30-year fixed-rate mortgages accounted for 58% of the portfolio, but they dropped in nominal terms, from $41.6 billion to $38.5 billion. Accounting for 37% of the portfolio, 15-year MBS fell from $26.4 billion to $24.3 billion. The rest of the portfolio includes some 20-year mortgages, collateralized mortgage obligations, and hybrid adjustable-rate mortgage securities, most of which also saw slight decreases.

Portfolio adjustments during the quarter

One of the biggest adjustments for AGNC concerned its Ginnie Mae MBS. During the quarter, the White House and the U.S. Department of Housing and Urban Development decreased the annual insurance premium for FHA (Federal Housing Administration) loans from 130 basis points to 80 basis points. The effect of this was to make refinancing FHA loans more attractive.

To an MBS investor like AGNC, this means higher expected prepayments on their existing MBS holdings. Ginnie Mae prices were hammered on the announcement. AGNC decided that the market reaction was overdone and established a position in Ginnie Mae TBAs (to-be-announced). Some of that has been unwound, but they still hold $3.7 billion worth.

As an aside, this move was noticed by mortgage originators, and the movements in the TBA market more or less offset the hoped-for policy impact of lowering insurance premiums.

Investors interested in making directional bets on interest rates should look at the iShares 20+ Year Treasury Bond ETF (TLT). Investors interested in trading the mortgage-REIT sector as a whole should look at the iShares Mortgage Real Estate Capped ETF (REM).

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