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. They include 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 Mortgage (CMO), and Hatteras Financial (HTS).
The basics of American Capital Agency’s portfolio
During the third quarter of 2015, American Capital Agency’s balance sheet fell from $62.9 billion in assets to $62.2 billion in assets. At the end of the quarter, 30-year fixed-rate mortgages accounted for 66% of the portfolio, an increase from 61% at the end of June.
In nominal terms, the 30-year fixed rate MBS increased from $35.9 billion to $40.9 billion. Fifteen-year MBS, which accounted for 29% of the portfolio, fell from $20.1 billion to $18.2 billion. The rest of the portfolio includes some 20-year mortgages, collateralized mortgage obligations, and hybrid adjustable-rate mortgage securities, which didn’t change much.
American Capital Agency also invests in the to-be-announced (or TBA) MBS market. It ended the quarter with a net long position of $7.4 billion, consisting of $7.7 billion long in 30-year TBAs and $300 million short in 15-year TBAs.
MBS performance over the quarter
Mortgage-backed securities had a rough go of it in the third quarter. The volatility in emerging markets and a slowdown in the US economy hit risk assets all across the board. While MBS struggled, they did outperform many other fixed-income instruments.
During the quarter, OAS (option-adjusted spreads) widened for Agency MBS from 19 basis points to 33 basis points. This offset the positive impact of falling interest rates. Investors interested in making directional bets on interest rates should look at the iShares 20+ Year Treasury Bond ETF (TLT).