Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Potential Winners of Quantitative Easing’s Death: American Capital Agency Corp. (AGNC) and More

Page 1 of 2

Where the death of Fed’s quantitative easing might be a negative for the US equities in general, it will bring relief to the US Agency mortgage REITs sector. I believe in the event of a halt of the Fed’s easing, Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC) will appear to be the largest winners. The rest of this investment thesis aims to look at the reasons for conducting the easing at the first place, reasons for its possible halt and how this halt might lead these stocks to outperform.

American Capital Agency Corp. (NASDAQ:AGNC)Why The Economy Needed Easing

The Fed started its $85 billion a month quantitative easing in the wake of a weakening global economy, with the intention of stimulating the US economy, particularly the housing and labor sectors. The easing had more specific objectives, including the continuation until unemployment exceeds 6.5% and so long as inflation isn’t forecast to rise to more than 2.5 percent in one to two years.

Why It Might Halt

However, anxiety over the strategy’s cost and risks is beginning to overshadow it benefits. Recent reports about the lack of durability of the Fed’s program sent S&P sharply lower. The programs’ efficacy, costs, and risk have led a number of participants to say that the FOMC might end its purchases before it could judge a substantial improvement in the outlook for the labor market. The latest release of the minutes of the meeting also reveals a far less unified committee than at any other time in the past few years.

Alternatives To Easing

Among new tools being considered by the Fed’s Open Market Committee’s 19-members is the option of holding on to the bonds for a longer period than originally planned. Currently, the size of Fed’s balance sheet has already crossed $3 billion. This is triple the size of its balance sheet in 2008. The next meeting is scheduled to take place in March this year when a final decision can be expected.

Why A Halt In Easing Will Lead Agency mREITs To Outperform

While the S&P is sent sharply down by the news of a possible halt in the Fed’s easing, one sector in the US will enjoy the death of this easing. This is the US mortgage REITs sector, which suffered the most throughout the easing.

Besides keeping the short term rates at record low, Fed’ QE3 was aimed at bringing down the long-term mortgage rates, in order to make home loans cheap  and stimulate the US housing sector. Mortgage REITs, which invest in mortgagebacked securities, earn a yield on those backed securities that is linked to the prevailing mortgage rate. In contrast, the mortgage REITS pay interest on their short-term borrowings, which are used to finance their MBS holdings.

While the record low short-term rates helped these mortgage REITs in bringing their cost of funds, at the same time the downward pressure created by QE3 brought long-term mortgage rates down. Since the yields on MBS held by mortgage REITs are linked to mortgage rates, MBS yields also fell. As a result, the net interest rate spread for many of the Agency mortgage REITs declined many folds over the past few quarters.

Therefore, the death of Fed’s easing would be a sign of relief for Agency mortgage REITs, like American Capital Agency and Annaly Capital Management.

American Capital Agency Corp. (NASDAQ:AGNC)

American Capital Agency invests exclusively in Agency mortgage-backed securities that are fixed-rate in nature. The company has a large concentration of low coupon, HARP eligible loans. These loans are considered to have low prepayment speeds, which is why the management was able to better manage the company during such challenging times without diversifying into assets other than Agency MBS.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!