Bearish Wakeup Call For Mortgage REITs Like AGNC?

AGNC Unusual Option Activity Report

It’s been remarkable how well corporate bonds and mortgage REITs like AGNC Investment Corp (Nasdaq: AGNC) have held up amidst the route in Treasury bonds. As the 10-year U.S. Treasury yield approaches 1.5%, the perception of risk potential may be finally changing. This change is bearish for riskier assets like corporate and mortgage bonds, but also for risk assets generally. Today’s bearish option activity in AGNC is an indication that traders are noticing, and the reversal may be on the horizon.

AGNC Risks

If you’re not familiar with the potential risk in mortgage REITs like AGNC, let’s take a moment to get you up to speed.

Interest Rate Risk

This risk is inherent with a rise in interest rates. If current mortgage bonds being originated at higher yields than the company is holding, the value of the current portfolio of bonds at lower yields fall. The rise in Treasury yields is going to cause new mortgage rates to be higher, causing a company like AGNC to experience paper losses.

Reinvestment Risk

This may not be a huge issue right now, but it has impacted much of the current portfolio of mortgage bonds. The major trend in refinancing has caused mortgages at higher yields to be paid back prematurely. That means that mortgage REITs have to reinvest the money in lower-yielding bonds. This has the effect of lower the yield of the assets and increasing the risk.

Default Risk

The fact that we’re in a recession currently is something that the bond market has failed to fully acknowledge. Certainly, the massive injection of liquidity by the Federal Reserve has papered over the risks, but these risks will materialize at some point.

Borrowing Costs

Mortgage REITs are susceptible to rising borrowing costs. The fact that AGNC pays an 8.8% dividend yield is interesting since mortgage bond yields are at near historic lows. With so many mortgages below 3% and the return on these bonds less than that, how does a company like AGNC pay such a high dividend?

1 2 3
View single page >> |

Disclaimer: Neither TheoTrade or any of its officers, directors, employees, other personnel, representatives, agents or independent contractors is, in such capacities, a licensed financial adviser, ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.