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Here's Why You Should Retain AGNC Investment (AGNC) for Now
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In a bid to navigate the monetary policy transition, AGNC Investment Corp (AGNC - Free Report) has defensively positioned itself with prudent asset-selection efforts and timely portfolio adjustment. However, in the near term, market conditions are likely to remain challenging as the Fed shifts from quantitative easing to tightening policy and raises short-term interest rates.
AGNC Investment adheres to an active portfolio-management policy, which includes re-evaluation and adjustment of its portfolio, as well as hedges, amid a varying interest rate and mortgage market environment. In light of the Fed’s sooner-than-expected balance sheet reduction, the company aims to operate with a more defensive position with significant hedge protection and lower leverage. Such prudent asset-selection efforts offer greater stability of cash flows and bode well for long-term growth.
As of Mar 31, 2022, the company had $47.4 billion of Agency mortgage-backed securities (MBS) in its investment portfolio. Amid the ongoing volatility, Agency MBS might be a safer investment choice due to the Government-sponsored enterprises’ guarantee for the principal and interest payments.
While Fed’s ongoing balance sheet normalization has been affecting Agency MBS, the central bank’s prior asset purchases acted as tailwinds for the Agency mortgage market amid the pandemic. The investment outlook for the company’s existing and new Agency MBS investments remains positive despite the near-term underperformance. Hence, AGNC Investment is expected to enjoy attractive risk-adjusted returns within the fixed-income markets.
AGNC also enjoys a decent financial position. It has solid access to attractive funding across a broad spectrum of counterparties and financing conditions. As a result, it has flexibility in the opportunistic enhancement of its portfolio. AGNC Investment’s liquidity as of Mar 31, 2022, including cash and unencumbered Agency assets, was $3.5 billion.
This will enable the company to deploy capital in investment opportunities in the upcoming period. The decent liquidity position will also support its capital deployment plans.The company has a buyback program in place, which will enable it to respond to the volatility in its stock and boost shareholders’ wealth.
In first-quarter 2022, the investment environment was challenging due to elevated geopolitical risk, inflation concerns and the expectation of a tighter monetary policy. This resulted in yield curve flattening, spreads widening and Agency MBS valuation declining. Any volatility in the mortgage market, unfavorable change in the shape of the yield curve, interest-rate volatility and the deterioration of the generic financial conditions might affect the performance of the company's investments, hindering its book value.
The company has been trimming its investment portfolio, with Fed accelerating its Agency MBS purchase tapering, expected spread widening and higher volatility. Moreover, as it prioritizes risk and liquidity management over incremental returns amid the volatility in the current market, at least in the short term, robust returns are expected to remain elusive.
Any increase in prepayment rates might be a near-term headwind to book value growth, NII, spread and asset yield. Higher premium amortization costs, resulting from faster prepayment expectations and portfolio turnover being reinvested at lower prevailing asset yields, are likely to lead to asset yield erosion in the upcoming period.
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Here's Why You Should Retain AGNC Investment (AGNC) for Now
In a bid to navigate the monetary policy transition, AGNC Investment Corp (AGNC - Free Report) has defensively positioned itself with prudent asset-selection efforts and timely portfolio adjustment. However, in the near term, market conditions are likely to remain challenging as the Fed shifts from quantitative easing to tightening policy and raises short-term interest rates.
AGNC Investment adheres to an active portfolio-management policy, which includes re-evaluation and adjustment of its portfolio, as well as hedges, amid a varying interest rate and mortgage market environment. In light of the Fed’s sooner-than-expected balance sheet reduction, the company aims to operate with a more defensive position with significant hedge protection and lower leverage. Such prudent asset-selection efforts offer greater stability of cash flows and bode well for long-term growth.
As of Mar 31, 2022, the company had $47.4 billion of Agency mortgage-backed securities (MBS) in its investment portfolio. Amid the ongoing volatility, Agency MBS might be a safer investment choice due to the Government-sponsored enterprises’ guarantee for the principal and interest payments.
While Fed’s ongoing balance sheet normalization has been affecting Agency MBS, the central bank’s prior asset purchases acted as tailwinds for the Agency mortgage market amid the pandemic. The investment outlook for the company’s existing and new Agency MBS investments remains positive despite the near-term underperformance. Hence, AGNC Investment is expected to enjoy attractive risk-adjusted returns within the fixed-income markets.
AGNC also enjoys a decent financial position. It has solid access to attractive funding across a broad spectrum of counterparties and financing conditions. As a result, it has flexibility in the opportunistic enhancement of its portfolio. AGNC Investment’s liquidity as of Mar 31, 2022, including cash and unencumbered Agency assets, was $3.5 billion.
This will enable the company to deploy capital in investment opportunities in the upcoming period. The decent liquidity position will also support its capital deployment plans.The company has a buyback program in place, which will enable it to respond to the volatility in its stock and boost shareholders’ wealth.
In first-quarter 2022, the investment environment was challenging due to elevated geopolitical risk, inflation concerns and the expectation of a tighter monetary policy. This resulted in yield curve flattening, spreads widening and Agency MBS valuation declining. Any volatility in the mortgage market, unfavorable change in the shape of the yield curve, interest-rate volatility and the deterioration of the generic financial conditions might affect the performance of the company's investments, hindering its book value.
The company has been trimming its investment portfolio, with Fed accelerating its Agency MBS purchase tapering, expected spread widening and higher volatility. Moreover, as it prioritizes risk and liquidity management over incremental returns amid the volatility in the current market, at least in the short term, robust returns are expected to remain elusive.
Any increase in prepayment rates might be a near-term headwind to book value growth, NII, spread and asset yield. Higher premium amortization costs, resulting from faster prepayment expectations and portfolio turnover being reinvested at lower prevailing asset yields, are likely to lead to asset yield erosion in the upcoming period.
Shares of AGNC Investment have gained 2.1% against the industry’s decline of 2.1% in the past month.AGNC Investment currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Image Source: Zacks Investment Research
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ARR currently sports a Zacks Rank of 1. ARMOUR Residential’s 2022 earnings estimates have moved up to $1.08 per share in the past month.
MFA carries a Zacks Rank of 2 (Buy) at present. MFA Financial’s 2022 earnings estimates have been unchanged at $2 per share in the past month.
Hannon Armstrong currently carries a Zacks Rank of 2. HASI’s 2022 earnings estimates have moved marginally north to $1.98 in the past month.