As John Williams, president of the San Francisco Federal Reserve Bank, sees the need for QE3 well into 2013 and rates to be kept near zero until at least mid-2015, I see Anworth Mortgage Asset Corporation (NYSE:ANH) and CYS Investments Inc (NYSE:CYS) presenting an excellent buying opportunity. Despite the fact that both mREITs have an abundance of Agency MBS, these securities are either hybrid ARMs or 15-year fixed rates, which the Fed is not interested in buying. Therefore, I believe these companies will not experience much acceleration in prepayments and downward pressure on net interest spread as Annaly Capital Management, Inc. (NYSE:NLY) is expecting. Anworth and CYS Investments combined give the income oriented investors a dividend yield of 11.2%.
Anworth Mortgage Asset Corporation
After starting its operations in 1998, Anworth Mortgage has continued to provide its investors with high returns based upon the spread between the interest income on its interest yielding assets and cost of borrowing to finance their assets. The company seeks to invest largely in mortgage backed securities for which any of the US Agencies guarantees the principal and interest payments. However, part of the MBS holdings are invested in non-Agency MBS. The selection of Agency MBS reduces the default risk for Anworth. At the end of the third quarter of 2012, only less than 0.5% of the assets were non-Agency MBS.
The graph above divides the Agency MBS into each of the classifications. It is evident that around 58% of the entire Agency holdings are Hybrid adjustable-rate securities, followed by ARMs at 22% and 15-year fixed rate securities at 16%. The 30-year fixed rate MBS, which the Fed is buying under its QE3 program, form only 4% of the Agency MBS. Average coupon rate on the company’s securities decreased 49 basis points to 3.036% from a year ago. The conditional prepayment rate for Anworth’s holdings is 26% at the end of the third quarter of 2012, up 2% from the linked quarter. The company offers a dividend yield of 9.74%.
In comparison, Annaly Capital Management (NYSE:NLY) has a weighted average of coupon rate of 4.1% with a CPR of 20%. Despite higher CPR compared to Annaly Capital, Anworth is preferred over it. The reason being, Annaly Capital has concentrated the high coupon, 30-year MBS in its asset portfolio, which the Fed is interested in buying. This is why Annaly Capital’s net interest spread would experience more downward pressure due to QE3 than Anworth’s.