On Wednesday, Compass Point adjusted its outlook on shares of AGNC Investment Corp (NASDAQ: NASDAQ:AGNC), increasing the price target to $11.00 from the previous $10.25, while retaining a Buy rating on the stock. The adjustment reflects anticipation of the Federal Reserve's potential policy easing, which is expected to influence the bond market favorably.
The firm's analyst predicts that current coupon spreads to the 5/10 Treasury will tighten, although not proportionally, in response to a projected 25 basis point cut by the Federal Reserve. This prediction is based on the bond market already fully pricing in a 25% Fed rate reduction.
The analysis suggests that mortgage-backed securities (MBS) option-adjusted spreads could tighten by approximately 10 basis points, which, according to AGNC's MBS spread sensitivity tables, would result in a 5% increase in book value if all other factors remain constant.
AGNC Investment's strategy of continuing to issue equity is deemed beneficial to shareholders, particularly if the company can acquire agency MBS at spreads of 150 basis points or wider before the easing cycle commences. The firm anticipates an increase in the portfolio's value over the next year as the Federal Reserve potentially relaxes its monetary stance.
The analyst also notes that AGNC shares are currently trading at a premium to book value per share (BVPS). With expectations of a significant tightening in MBS spreads as the Federal Reserve eases, there is a forecast of a 25% increase in BVPS. This outlook supports the rationale behind the raised price target.
Investors are also expected to benefit from AGNC's consistent monthly dividend, which is seen as a stable income while waiting for the Federal Reserve's policy normalization. The revised price target of $11.00 is based on the firm's expectation of an appreciable rise in BVPS, contingent on the Fed initiating an easing cycle.
In other recent news, AGNC Investment Corp reported mixed results for the second quarter of 2024. The company faced a challenging quarter, recording a negative economic return just shy of 1% and a comprehensive loss of $0.13 per share. Despite the cautious fixed income markets and increased volatility, AGNC remains positive about the future of agency mortgage-backed securities (MBS), supported by potential changes in Federal Reserve policy.
AGNC expanded its investment portfolio by approximately $3 billion in agency MBS, though it saw a 10% reduction in its non-agency portfolio. Amid the uncertainty surrounding the upcoming presidential election, the company anticipates a stable housing finance system. Recent developments include AGNC issuing $434 million in common equity and adding $3 billion in agency MBS to its portfolio.
The company projects a return of 16% to 19%, aligning with its dividend and total cost of capital. AGNC also anticipates agency MBS to benefit from economic data supporting a shift in Federal Reserve policy. Still, the company's performance has been negatively affected by volatility in the rates market and wider spreads. Despite this, AGNC maintains an optimistic outlook on the long-term tightening of mortgage spreads.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.