Morning Report: Tidbits from the AGNC Investment earnings release

Vital Statistics:

S&P futures3,840-30.50
Oil (WTI)86.21.87
10 year government bond yield 4.06%
30 year fixed rate mortgage 7.07%

Stocks are lower this morning after disappointing numbers out of Google and Mr. Softee. Bonds and MBS are up.

Mortgage applications fell 1.7% last week, as purchases fell 2% and refis actually ticked up. “The ongoing trend of rising mortgage rates continues to depress mortgage application activity, which remained at its slowest pace since 1997,” said Joel Kan, MBA Vice President and Deputy Chief Economist. “Refinance applications were essentially unchanged, but purchase applications declined 2 percent to the slowest pace since 2015 – over 40 percent behind last year’s pace. Despite higher rates and lower overall application activity, there was a slight increase in FHA purchase applications, as FHA rates remained lower than conventional loan rates.” Mortgage rates increased 20 basis points, from 6.94% to 7.16%.

Mortgage REIT AGNC Investment reported earnings yesterday, and discussed the current market. Mortgage originators should think of mortgage REITs as the buyers of their production. Inside the investor presentation, they showed just how wide MBS spreads have become. Take a look at the chart below.

The MBS spread is the difference in yield between a 10 year Treasury and corresponding mortgage backed security. The yield that investors like AGNC demand for these securities are the basic input to determine mortgage rates in general. AGNC investment holds primarily agency securities (in other words, bonds backed by Fannie and Freddie loans).

On the conference call, the CEO described what is going on the MBS market. The first thing he said is that in the early stages of market downturns agency mortgage backed securities are the first ones sold. This is because agency mortgage backed securities are the most liquid fixed income market in the US after Treasuries. So there tends to be a “sell what you can” aspect to this. And certainly bond funds have seen outflows.

The hiccup in the UK bond market was a big catalyst for the widening of MBS spreads. Since agency mortgage backed securities have no credit risk (they are government-guaranteed) the widening is due to liquidity and volatility overall in the bond market.

MBS spreads right now are wider than they were in December 2008, when the financial crisis was peaking. They are wider than they were in early-mid 2020 when the MBS market froze and the mortgage REITs were beset by margin calls. Can they go wider? Sure. But we are seeing a historically unprecedented market and these spikes don’t last very long.

Over the past 10 years, MBS spreads have averaged about 78 basis points, and are at 190 bps now. Here is what that means. If the 10 year yield stays the same, there is a built-in improvement in mortgage rates of 112 basis points. In other words, we could see rates fall to the low 6% range over the next few months, even if the Fed continues raising rates and the 10 year stays where it is.

From the standpoint of MBS investors, a government-guaranteed 6% rate of return is pretty attractive, certainly compared to investment-grade corporate bonds or junk. And if the economy does enter a recession, investors will sell credit risk and hide out in Treasuries and MBS. I expect this to happen at the end of the year, when lots of asset managers revise their risk allocations.

During the call, one of the analysts asked about the dividend. AGNC currently pays a monthly dividend of $0.12, which works out to a 18.6% dividend yield. Mortgage REIT investors have been waiting for the other shoe to drop, which means a dividend cut.

The analyst asked point-blank if the portfolio can cover the dividend yield. ANGC’s CEO said, after the caveats about always re-evaluating the correct dividend yield “But what’s really, I think, critical to understanding, I think is the heart of your question is you have to understand what drove the decline in our book value. And if you look at the performance of mortgages and you look at that graph that we show, I think it’s clear to everybody when you look on Page 7, that mortgage spreads have gone in one direction only for the better part of the last 18 months, 65 basis points wider, if you will, from August to now. So the decline in our book value is driven primarily by wider spreads. So while it hurts your book value currently because the decline in book value came from wider spreads, it also enhances the go-forward return on our portfolio…So, going forward, I still believe that those two things are reasonably well aligned, and obviously, conditions change and markets are volatile and we’re going to continue to be diligent about monitoring that. But to go forward, the return on our portfolio still is consistent with our dividend.”

If AGNC was planning on cutting the dividend, this would have been the time to do it. Mortgage stocks in general are about as popular as mask mandates, but we are probably at peak pessimism about the sector in general.

12 Responses

  1. This is pure dementia at this point:

    “In a forum with NowThis, a left-wing news site, Biden said of his student loan forgiveness plan: “You are probably aware I’ve just signed a law that’s being challenged by my Republican colleagues. … What we’ve provided for is if you went to school, if you qualified for a Pell Grant, you qualify for $20,000 in debt forgiveness. Secondly, if you don’t have one of those loans, you just get $10,000 written off. It’s passed. I got it passed by a vote or two.””


  2. Looks like DeSantis’ & Abbott’s stunts worked:


  3. Yep:


    • “Since the leak of the Dobbs decision in May, the conservative organization CatholicVote has counted 75 attacks on pro-life organizations around the country”

      Holy crap, I would expect the millenials in the newsroom over at the NYT flipped out that that line appeared in THE PAPER OF RECORD. I expect after a good screaming crying jag they had to go home and try to see if they could get an apology from the NYT for letting a rabid right wing MAGA guy like Douthat spew propaganda in their pages.

      But seriously, surprised something acknowledging that the left does, indeed, commit violent acts appeared in the NYT. And that they were referred to as pro-life organizations and not “anti-choice advocates for turning America into the Handmaid’s Tale’s Gilead.

      And as I continue to read, it gets worse! OMG, did Rupert Murdoch buy the NYT?

      “pro-choice arsonists”

      Jeeze, why don’t they just let a Nazi write an opinion piece?

      “And to give up the weapons of state power that your opponents are using so freely feels, inevitably, like unilateral disarmament.”


      Good piece. Surprised the Times ran that, to be honest.


  4. Even when they closing the store, they are still spouting the progressive platitudes:

    “Nyce: What was the police’s role in all of this?

    Smith: Well, we’ve struggled to get the attention of the police, and they just seem to not have a lot of interest in solving the problem. To be fair, they have a hard job. And I don’t know all the complexities as to why this is such a big problem that doesn’t seem to get resolved.

    I do know that a month or so ago they announced that they were going to be doing fewer street patrols and have a smaller presence on Hayes Street, which just was shocking because the amount of crime that was happening was just mind-blowing and all the retailers were kind of up in arms, saying, “Hey, we need help.” And just nothing would change. That said, this week, we’re having some meaningful conversations, but I think what we need is not so much conversations. We just need action.

    Nyce: What kind of action?

    Smith: Yeah. The thing is, I don’t think police solve this problem. We need a holistic approach that comes from an entire community committing to change. And I think it’s businesses coming together, citizens coming together, people that legislate and prosecute, and police—everyone coming together, saying, “Okay, what do we need to do differently?” Because what we’re doing right now isn’t working. And I’m not an expert in this, so I don’t even know what the answer is. I know it’s really complex. It’s more complex than I even realized.”


    • I am about halfway through Scott recommendation “The psychology of totalitarianism” and this makes sense. The left is completely willing to subordinate its own interests in the interest of the collective.

      The epiphany I had was that democrats are totalitarian, not so much because they want to control people – they do, but that isn’t the main driver.

      It is because they want to be controlled. That is their motivation. They want to feel safe. They want the state to ease their anxiety about life. Just tell me that if I follow the rules, I will be fine. If I wear my useless mask, I am doing good. And if businesses get shut down in an unnecessary lockdown, that is okay, because it is best for society. This also helps fix their inherent loneliness as it is all about belonging to a social group. Plus, they get to hector and ostracize people who don’t buy in, and they get to feel virtuous.

      Which is why they don’t give a shit if masking up was useless, that the vaccine was ineffective, and keeping schools shut was wrong. They may even grasp that, but they dismiss it in servitude to the narrative that an omniscient and omnipotent group of experts is going to make everything all right.


    • “We need a holistic approach that comes from an entire community committing to change”

      You are exactly right, jnc4p. The whole problem is around the confusion created by the platitudes. The reality, they are taking what the left would consider “a holistic approach”. This is the result of that “holistic” approach.

      “The thing is, I don’t think police solve this problem.”

      And of course he has to say literally the only thing that will solve this problem won’t solve the problem. Maybe he’s just saying SF police won’t solve the problem, which might be true, but outside of people with guns and handcuffs catching the criminals and putting them in jail for long periods, what in the world would solve the problem?

      Or he could hire private security and SF could give them a license to kill? I mean, I don’t know what the options are. Back in the 60s in the Memphis area some smart criminals became aware that after payday a lot of liquor stores had a lot of money, so they started hitting them. Not just once, but over and over, San Francisco Hayes Valley-style.

      So the solution was pretty much all the liquor stores had partitions built behind the counters, or to the side, sometimes with a panel and an eye slit, sometimes with two-way class and the movable panel, and a few private security folks rotated through the liquor stores, posting a guy behind the panel. After all of two guys got shot by the guy who happened to be behind the panel that night, the rash of liquor store robberies ended. Like that.

      So basically you can put them all in jail, or you can arrange it so enough of them get shot in commission of a crime. Those are the answers.

      Although global, universal shaming of criminals and crime from the culture would help there, too. That would be the holistic approach but when the “holistic” approach can’t even imagine making criminals feel bad for committing crime, you may as well not even bring it up.


  5. This is funny:

    “If I Emailed My Parents Like Democrats Email Me

    by Sarah Gruen and Chandler Dean”


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