American Capital Agency's Mid-Q1 2014 Composition And Valuation Analysis - Part 1

| About: AGNC Investment (AGNC)

Author's Note: This three-part article is a very detailed look at AGNC's MBS and derivative portfolios. I perform this detailed analysis for readers who anticipate/want such an analysis performed each quarter. For readers who just want the summarized conclusions/results, I would suggest to scroll down to the "Conclusions Drawn" section at the bottom of the each part of the article.

Focus of Article:

The focus of this article is to provide a mid-first quarter of 2014 update on American Capital Agency Corp. (NASDAQ:AGNC) regarding the company's mortgage-backed security ("MBS") and derivative portfolios. Each portfolio will be separately analyzed according to its composition and valuation. I feel this mid-quarter update will provide readers a general direction on how the first half of the first quarter of 2014 has panned out regarding AGNC's MBS and derivative strategies. This article will mainly compare and contrast what has occurred so far in the first quarter of 2014 versus the fourth quarter of 2013 regarding AGNC's MBS and derivative portfolios. This will also help readers understand how the second half of the current quarter could pan out as interest rates fluctuate.

I would like to first analyze AGNC's MBS portfolio as of 12/31/2013 and identify the changes the company made in the prior quarter which will impact the current quarter. In conjunction with this portfolio, specific quarterly MBS prices will be analyzed and discussed. This information will assist in projecting AGNC's MBS portfolio valuation through the week ending 2/14/2014. After AGNC's MBS portfolio is analyzed and discussed, I will then analyze the company's derivative portfolio as of 12/31/2013 and identify the changes management made in the prior quarter which will impact the current quarter. In conjunction with this portfolio, specific quarterly MBS prices, swap rates, and U.S. Treasury yields will be analyzed and discussed. This information will assist in projecting a valuation for AGNC's derivative portfolio through the week ending 2/14/2014.

Due to the length of the material covered in this article, I feel it is necessary to break this particular article into three parts. This article will be broken down by the following two account portfolios:

PART 1:

- AGNC's MBS Portfolio (Composition and Valuation Analysis)

PART 2:

- AGNC's Derivative Portfolio (Composition Analysis)

PART 3:

- AGNC's Derivative Portfolio (Valuation Analysis)

- Book Value ("BV") Projection as of 2/14/2014, 2/21/2014, and 2/28/2014

A) AGNC's MBS Portfolio - Composition and Valuation Analysis:

Let us first understand the composition of AGNC's MBS portfolio as of 12/31/2013. This will include a net change analysis when comparing AGNC's 12/31/2013 balance versus the company's 9/30/2013 balance. This will be followed by a valuation analysis on AGNC's MBS portfolio for the first half of the first quarter of 2014.

Side Note: AGNC has continued to have an overwhelming portion of the company's MBS portfolio in fixed-rate agency holdings (approximately 96% as of 12/31/2013). As such, all references to AGNC's MBS portfolio below will automatically be implied as being both "fixed-rate" and "agency" securities (unless otherwise noted).

1) AGNC's MBS Portfolio - Composition Analysis (As of 12/31/2013; Including Quarterly Net Change Analysis):

Table 1 below shows AGNC's MBS portfolio as of 12/31/2013. All MBS are sorted by maturity (15, 20, or 30-year) and coupon rate (2.5% - 6%). Table 1 displays the following columns (in order from left to right): 1) MBS coupon rate; 2) par value; 3) amortized cost value (basis); 4) market value ("FMV"); 5) percentage of Lower Loan Balance ("LLB") or Home Affordable Refinance Program ("HARP") MBS; 6) amortized cost basis as a percentage to par; 7) FMV as a percentage to par; 8) weighted average coupon ("WAC") rate; 9) average age of MBS; 10) monthly conditional prepayment rate (CPR); and finally 11) weighted average duration of MBS.

Table 1 - AGNC MBS Portfolio (As of 12/31/2013)

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(Source: Table created entirely by myself, partially using data obtained from AGNC's quarterly investor presentation slides)

Having Table 1 above as a reference, let us first discuss how the composition of AGNC's MBS portfolio as of 12/31/2013 compared to the company's MBS portfolio as of 9/30/2013. This will enable us to better understand what changes were made during the fourth quarter of 2013. To better understand how AGNC's MBS portfolio compared as of 12/31/2013 versus 9/30/2013, Table 2 is shown below. Table 2 provides key information on some recent quarterly net changes to AGNC's MBS portfolio regarding the following: 1) par value; 2) FMV versus amortized cost value (basis); 3) amortized cost value (basis) percentage; 4) FMV price percentage; 5) WAC percentage; and 6) CPR percentage. Table 2 further breaks out these quarterly net changes into the respective coupon rates. Due to the immateriality of AGNC's 20-year MBS, only the company's 15 and 30-year fixed-rate agency holdings will be discussed below.

Table 2 - AGNC MBS Portfolio Quarterly Net Changes (12/31/2013 versus 9/30/2013)

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(Source: Table created entirely by myself, including all calculated figures and percentages)

Using Table 2 above as a reference, AGNC continued to sell a rather large portion of the company's remaining 30-year, 3.0% coupon MBS during the fourth quarter of 2013. The quarterly net change within AGNC's 30-year, 3.0% coupon MBS was a continued reduction of ($2.4) billion. Taking a look back at this specific maturity and coupon, AGNC had a par value of $12.9 billion within the company's 30-year, 3.0% coupon MBS as of 6/30/2013. As shown in Table 1 earlier, this balance has now been reduced to only $0.3 billion as of 12/31/2013.

This material reduction was due to two particular strategies that were implemented during the latter half of 2013. First, AGNC performed an aggressive portfolio realignment, where management rotated out of the more price-sensitive 30-year MBS and into the less price-sensitive 15-year MBS. Second, AGNC "re-rolled" the company's MBS portfolio into higher coupons within the same maturities. Rather than sustain additional valuation losses within this specific coupon in a rising interest rate environment, AGNC decided to sell an extremely large portion of the company's 30-year, 3.0% coupon MBS. In the current environment, the lowest coupon MBS have been (and will continue to be) the most susceptible to price fluctuations as interest rates move in either direction. Reducing this specific coupon's balance helps AGNC offset future additional valuation losses if MBS prices were further suppressed in the coming quarters due to rising interest rates. With the exception of the 4.5% coupon, AGNC decreased all 30-year coupon MBS as part of the company's deleveraging strategy during the fourth quarter of 2013. Other than a modest ($1.3) billion decrease in the company's 4.0% coupon, the remaining 30-year coupon MBS had minor quarterly net decreases in par value and will not be discussed within this article due to immateriality.

AGNC also continued to sell a rather large portion of the company's remaining 15-year, 2.5% coupon MBS during the fourth quarter of 2013. The quarterly net change within AGNC's 15-year, 2.5% coupon MBS was a continued reduction of ($2.7) billion. Taking a look back at this specific maturity and coupon, AGNC had a par value of $16.5 billion within the company's 15-year, 2.5% coupon MBS as of 6/30/2013. As shown in Table 1 earlier, this balance has been reduced to only $10.0 billion as of 12/31/2013. While not as large of a reduction in par value when compared to the 30-year, 3.0% coupon, this decrease was the largest when compared to other coupons having a 15-year maturity. Again, AGNC is trying to mitigate future valuation losses if MBS prices were further suppressed in the coming quarters due to rising interest rates. AGNC decreased all 15-year coupon MBS as part of the company's deleveraging strategy during the fourth quarter of 2013. Other than a modest ($1.7) billion decrease in the company's 3.5% coupon, the remaining 15-year coupon MBS had minor quarterly net decreases in par value and will not be discussed within this article due to immateriality.

Generally, as the coupon of a particular existing MBS drifts below and further away from the current coupon offered on a similar type of MBS, the existing lower-coupon MBS escalates its valuation losses. Instead of the growing likelihood of mounting cumulative unrealized valuation losses in future quarters, AGNC continued to quickly sell the company's 15-year, 2.5% and 30-year, 3.0% coupon MBS for a material net realized loss in the third and fourth quarters of 2013.

Therefore, in selling these types of lower-coupon MBS, AGNC has mitigated escalating future valuation losses and also has new capital to deploy into higher coupons. AGNC could also wait regarding deploying this newly obtained capital if management feels rates will continue to rise rather quickly. Management may temporarily pursue this strategy because waiting until a higher-coupon MBS becomes available, including at a more attractive price, would provide higher interest income while having less valuation losses. In the meantime, AGNC can have a net long U.S. Treasury securities position instead of keeping unused capital in extremely low-interest bearing cash accounts. Or, as was recently disclosed by management, AGNC can continue to repurchase the company's outstanding shares of common stock or acquire sector peers at a material discount to BV.

Acquiring outstanding shares of common stock in sector peers is basically an extension of AGNC's own balance sheet (just without the use of leverage). Basically, AGNC is making an investment in companies who were (and still are) highly discounted to BV. Also, these sector peers hold assets that, some could argue, continue to be undervalued. When SEC filings disclosed AGNC recently acquired 7.3 million (or 7.5%) of the outstanding shares of common stock of Hatteras Financial Corp. (NYSE:HTS), I felt this was a smart move on the part of management. I state this because HTS mainly has variable-rate agency MBS. As such, AGNC has diversified the company's own balance sheet by acquiring stock in a sector peer who mainly invests in variable-rate agency MBS. Since AGNC currently has made at least a 10% gain on this investment, I feel this was positive "out-of-the-box" thinking by management to put some unused capital to work while mitigating MBS valuation losses. Furthermore, AGNC is continuing to collect the quarterly dividends from HTS and all other sector peers where an investment was made.

Regarding purchases, Table 2 reveals that AGNC made some modest acquisitions within the 30-year, 4.5% coupon MBS. The determination of which MBS coupons are most readily available in a given quarter is in direct correlation to where recent fixed mortgage rates were within each respective maturity. For the fourth quarter of 2013, this was generally the 3.5% coupon for MBS with 15-year maturities and the 4.5% coupon for MBS with 30-year maturities. The quarterly net change within AGNC's 30-year, 4.5% coupon MBS was an increase of $0.6 billion.

Still using Table 2 above as a reference, when comparing quarterly net changes, AGNC had a net decrease of ($5.1) billion regarding the company's 15-year MBS holdings. AGNC also had a net decrease of ($3.7) billion regarding the company's 30-year MBS holdings. Management has continued to take a "defensive posture" regarding the company's current MBS portfolio. This was a direct result of rising mortgage interest rates/U.S. Treasury yields during the latter half of the second and fourth quarters of 2013, which led to MBS price declines. Since AGNC continued to reduce the company's lower-coupon MBS, a recent increase in the WAC occurred. As of 9/30/2013, AGNC's MBS portfolio had a WAC of 3.53%. As of 12/31/2013, AGNC's MBS portfolio had an increase in the WAC of 6 basis points ("bps") to 3.59%. Going into the first quarter of 2014, I am projecting a continued minor increase in AGNC's WAC.

Now that we understand the recent past and current composition of AGNC's MBS portfolio, let us slightly shift topics. This article will now perform a valuation analysis on AGNC's MBS portfolio through the first half of the first quarter of 2014.

2) AGNC's MBS Portfolio - Valuation Analysis (Through the First Half of the First Quarter of 2014):

Prior to performing a valuation analysis on AGNC's current MBS portfolio, let us first analyze the fixed-rate agency MBS price movements during the first half of the first quarter of 2014. Using Table 3 below as a reference, let us first analyze the 15-year fixed-rate agency MBS price movements for the first half of the first quarter of 2014. This will then be followed by a similar analysis (via Table 4) of the 30-year fixed-rate agency MBS price movements for the first half of the first quarter of 2014. By analyzing the 15 and 30-year fixed-rate agency MBS price movements, it will help us better understand how I come up with my projected valuations discussed later in the article.

Table 3 - 15-Year Fixed-Rate Agency MBS Price Movements (Through the First Half of the First Quarter of 2014)

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[Source: Table created entirely by myself, using privately-assessed MBS pricing data from my company's intranet resources (courtesy of Thomson Reuters)]

Table 3 above shows the 15-year fixed-rate agency MBS price movements during the first half of the first quarter of 2014. It breaks out the 15-year fixed-rate agency MBS holdings by government-sponsored entity ("GSE"). This includes both Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) MBS. As of 12/31/2013, AGNC's Ginnie Mae holdings accounted for less than 0.5% of the company's MBS portfolio. As such, Ginnie Mae fixed-rate agency MBS price movements are immaterial for projection purposes, and thus excluded from this table and article. Table 3 further breaks out the 15-year fixed-rate agency MBS price movements into the various coupons on AGNC's books, ranging from 2.5%-4.5%. AGNC holds an immaterial balance of 15-year fixed-rate agency MBS over the 4.5% coupon, and thus these specific coupons are excluded from Table 3 above.

From the information portrayed in Table 3 above, a valuation gain (loss) can be calculated, which is broken down by the various coupons. This valuation gain (loss) is performed in Table 5 later in the article. An exact valuation figure cannot be obtained because AGNC continually changes the company's portfolio holdings in a given quarter. As such, I must determine specific purchase and sale assumptions towards the end of my valuation analysis.

Using Table 3 as a reference, let us look at the 15-year fixed-rate agency MBS price movements for the current quarter regarding a few of the coupon rates where AGNC held a material MBS balance as of 12/31/2013. The cumulative quarterly net MBS price movements for each coupon rate are shown within Table 3 under the "Cumulative Quarterly Change" column. To illustrate, through the week ending 2/14/2014, the Fannie 15-year fixed-rate agency MBS with a 2.5% coupon had a cumulative quarterly price increase of 1.06 to settle its price at 99.98 (100 being par). The Fannie 15-year fixed-rate agency MBS with a 3.0% coupon had a cumulative quarterly MBS price increase of 1.00 to settle its price at 102.97 (100 being par). The Fannie 15-year fixed-rate agency MBS with a 3.5% coupon (AGNC's largest 15-year fixed-rate agency MBS position as of 12/31/2013) had a cumulative quarterly MBS price increase of 0.75 to settle its price at 105.25 (100 being par).

Still using Table 3 above as a reference, when evaluating all coupons, it looks like AGNC's Fannie 15-year fixed-rate agency MBS had material cumulative quarterly MBS price increases through the week ending 2/14/2014. Material 15-year fixed-rate agency MBS price increases occurred on the 2.5%-4.5% coupons, with the materiality level decreasing as the coupon increased.

For the Freddie 15-year fixed-rate agency MBS, the same conclusions hold true. When compared to the Fannie 15-year fixed-rate agency MBS, the Freddie 15-year fixed-rate agency MBS usually have slight differences in weekly (hence, cumulative quarterly) price valuations across the same coupons. However, as evidenced in Table 3, the same general themes typically hold true. Now that we have an understanding of the 15-year fixed-rate MBS price movements through the first half of the first quarter of 2014, let us take a look at the 30-year fixed-rate agency MBS price movements.

Table 4 - 30-Year Fixed-Rate Agency MBS Price Movements (Through the First Half of the First Quarter of 2014)

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(Source: Table created entirely by myself, using privately-assessed MBS pricing data from my company's intranet resources [courtesy of Thomson Reuters)]

Table 4 above shows the 30-year fixed-rate agency MBS price movements during the first half of the first quarter of 2014. It breaks out the 30-year fixed-rate agency MBS holdings by GSE. As was the case with the 15-year fixed-rate agency MBS, this includes both Fannie Mae and Freddie Mac holdings. As stated earlier, AGNC's Ginnie Mae fixed-rate agency MBS holdings are immaterial for projection purposes. As such, Ginnie Mae fixed-rate agency MBS price movements are excluded from this table. Table 4 further breaks out the 30-year fixed-rate agency MBS price movements into the various coupons on AGNC's books, ranging from 3.0%-5.0%. AGNC holds an immaterial balance of 30-year fixed-rate agency MBS over the 5.0% coupon, and thus these specific coupons are excluded from Table 4 above.

From the information portrayed in Table 4 above, a valuation gain (loss) can be calculated, which is broken down by the various coupons. This valuation gain (loss) is performed in Table 5 later in the article. An exact valuation figure cannot be obtained because AGNC continually changes the company's portfolio holdings in a given quarter. As such, I must determine specific purchase and sale assumptions towards the end of my valuation analysis.

Using Table 4 as a reference, let us look at the 30-year fixed-rate agency MBS price movements for the current quarter regarding a few of the coupon rates where AGNC held a material MBS balance as of 12/31/2013. The cumulative quarterly net MBS price movements for each coupon rate are shown within Table 4 above under the "Cumulative Quarterly Change" column. To illustrate, through the week ending 2/14/2014, the Fannie 30-year fixed-rate agency MBS with a 3.0% coupon had a cumulative quarterly price increase of 1.48 to settle its price at 96.42 (100 being par). The Fannie 30-year fixed-rate agency MBS with a 3.5% coupon (AGNC's largest 30-year fixed-rate agency MBS position held as of 12/31/2013) had a cumulative quarterly MBS price increase of 1.34 to settle its price at 100.69 (100 being par). The Fannie 30-year fixed-rate agency MBS with a 4.0% coupon had a cumulative quarterly MBS price increase of 1.25 to settle its price at 104.19 (100 being par). The Fannie 30-year fixed-rate agency MBS with a 4.5% coupon had a cumulative quarterly MBS price increase of 0.88 to settle its price at 106.84 (100 being par).

Still using Table 4 as a reference, when evaluating all coupons, it looks like AGNC's Fannie 30-year fixed-rate agency MBS had modest to material cumulative quarterly MBS price increases through the week ending 2/14/2014. Material 30-year fixed-rate agency MBS price increases occurred on the 3.0%-4.5% coupons, with the materiality level decreasing as the coupon increased. A modest 30-year fixed-rate agency MBS price increase occurred on the 5.0% coupon.

For the Freddie 30-year fixed-rate agency MBS, the same conclusions hold true. When compared to the Fannie 30-year fixed-rate agency MBS, the Freddie 30-year fixed-rate agency MBS usually have slight differences in weekly (hence, cumulative quarterly) price valuations across the same coupons. However, as evidenced in Table 4 above, the same general themes typically hold true. Now that we have an understanding of the 15 and 30-year fixed-rate agency MBS price movements through the first half of the first quarter of 2014, let us take a look at how these price movements affected AGNC's MBS portfolio regarding the company's weekly and cumulative quarterly valuations through the week ending 2/14/2014 (quantified in dollar amounts).

Table 5 - AGNC Summarized Weekly and Cumulative Quarterly Fixed-Rate MBS Portfolio Valuation Gain (Loss) (Through the Week Ending 2/14/2014)

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(Source: Table created entirely by myself, including all calculated figures and projected valuations)

Table 5 above shows AGNC's weekly and cumulative quarterly projected valuation gain (loss) on the company's 15 and 30-year Fannie and Freddie fixed-rate agency MBS holdings across all coupons (including immaterial coupons omitted from Table 3 and Table 4 above). For this specific analysis, Table 5 quantifies the projected cumulative quarterly net valuation gain (loss) through the week ending 2/14/2014 in dollar amounts.

From the beginning of January 2014 through early February 2014, AGNC continued to have a growing projected cumulative quarterly valuation gain on the company's MBS portfolio. Due to the mini "crisis" regarding emerging markets and the relatively weak U.S. economic data, mortgage interest rates/U.S. Treasury yields modestly decreased from levels seen at the end of 2013. During the week ending 2/7/2014, U.S. Treasury yields were between 25-35 bps lower when compared to yields as of 12/31/2013. Traditional 15 and 30-year fixed-rate mortgage interest rates were approximately 20-25 bps lower when compared to rates as of 12/31/2013. As such, AGNC had a projected cumulative quarterly net valuation gain (loss) of $916 million on the company's MBS portfolio through the week ending 2/7/2014. Through the week ending 2/14/2014, I am projecting AGNC had a cumulative quarterly net valuation gain (loss) of $589 million. As evidenced in Table 5, a material decrease in AGNC's net valuation gain occurred as MBS prices reversed course for a week.

Since one can accurately track existing fixed-rate agency MBS price movements throughout the various coupons, a general sense of AGNC's cumulative quarterly net valuation gain (loss) on the company's MBS portfolio can be achieved. Therefore, when all net valuation gains (losses) are combined, I am projecting a net valuation gain (loss) on AGNC's MBS portfolio of $645 million for the first half of the first quarter of 2014. In addition to AGNC's 15 and 30-year fixed-rate agency MBS, this projected figure includes a net valuation gain (loss) on the following investments: 1) specified pools; 2) 20-year fixed-rate agency MBS; 3) collateralized mortgage obligations ("CMO"); and 4) adjustable-rate agency MBS ("ARM'). Finally, it should be noted this figure is PRIOR to all sold MBS being reversed out in the current quarter.

Brief Discussion of MTGE's MBS Portfolio (In Comparison to AGNC):

AGNC's sister company, American Capital Mortgage Investment Corp. (NASDAQ:MTGE), is also classified as a mortgage real estate investment trust (mREIT) who currently earns a majority of the company's income from investing (through leverage) in agency MBS. Approximately 83% of MTGE's MBS portfolio as of 12/31/2013 was in agency holdings (mostly fixed-rate MBS). MTGE further diversifies the company's investments in non-agency holdings, including prime and subprime mortgage loans, option ARM, and Alt-A loans (at management's discretion). Non-agency holdings include residential mortgage-backed securities ("RMBS") backed by residential mortgages which are not guaranteed by a GSE or U.S. government agency.

MTGE's non-agency MBS portfolio slightly increased during the fourth quarter of 2013. MTGE had a total non-agency MBS portfolio of $928 million as of 9/30/2013. As of 12/31/2013, this balance increased by $83 million to $1.0 billion. When compared to MTGE's agency MBS portfolio of $4.9 billion as of 12/31/2013, management slightly increased the proportional share of the company's non-agency MBS portfolio by 5% during the fourth quarter of 2013. As such, MTGE's proportional share on the company's non-agency MBS portfolio increased from 12% as of 9/30/2013 to 17% as of 12/31/2013.

As of 12/31/2013, 89% of MTGE's agency MBS portfolio consisted of 15 and 30-year fixed-rate holdings that had similar characteristics when compared to AGNC's fixed-rate agency MBS portfolio. This includes a somewhat similar proportion of LLB and HARP loans and similar MBS coupon rates (some slight percentage differences). The remaining 11% of MTGE's agency MBS portfolio consisted of ARM and CMO holdings.

One other slight difference between AGNC's and MTGE's fixed-rate agency MBS portfolio that should be noted is the proportional breakout of 15 and 30-year fixed-rate agency holdings as of 12/31/2013 (as a percentage of each company's total fixed-rate agency MBS portfolio).

Table 6 - AGNC versus MTGE Fixed-Rate Agency MBS Portfolio (As of 12/31/2013)

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(Source: Table created entirely by myself, partially using data obtained from AGNC's quarterly investor presentation slides and MTGE's quarterly investor presentation slides)

Using Table 6 above as an indirect reference, AGNC maintained the company's 15-year fixed-rate agency MBS holdings at 53% as of 9/30/2013 and 12/31/2013 [when including AGNC's net long (short) TBA MBS position]. AGNC maintained the company's 30-year fixed-rate agency MBS holdings at 45% as of 9/30/2013 and 12/31/2013 (when including AGNC's net long (short) TBA MBS position). The remaining 2% remained in 20-year fixed-rate agency MBS holdings.

In contrast, MTGE increased the company's 15-year fixed-rate agency MBS holdings from 40% as of 9/30/2013 to 43% as of 12/31/2013 [when including MTGE's net long (short) TBA MBS position]. MTGE decreased the company's 30-year fixed-rate agency MBS holdings from 57% as of 9/30/2013 to 53% as of 12/31/2013 [when including MTGE's net long (short) TBA MBS position]. All remaining percentages were in 20-year fixed-rate agency MBS holdings. As such, a slight difference in MBS valuations will occur between AGNC's and MTGE's fixed-rate agency MBS portfolios.

MTGE's fixed-rate agency MBS portfolio has a slightly higher risk regarding BV losses if mortgage interest rates/U.S. Treasury yields were to quickly rise. This assumption is based on the fact that AGNC's MBS portfolio has more of an allocation in the less price-sensitive 15-year fixed-rate agency holdings when compared to MTGE. On the other hand, MTGE's fixed-rate agency MBS portfolio has a slightly higher reward potential regarding BV gains if mortgage interest rates/U.S. Treasury yields were to quickly drop. This assumption is based on the fact that MTGE's MBS portfolio has more of an allocation in the more price-sensitive 30-year fixed-rate agency holdings when compared to AGNC. This is strictly from a fixed-rate agency MBS portfolio perspective, and does not consider each company's offsetting hedges yet (which will be discussed in PART 2 and PART 3 of this article). Also, it should be noted AGNC's WAC, among the 15, 20, and 30-year fixed-rate agency MBS holdings, was slightly higher when compared to the same maturities on MTGE's portfolio. As of 12/31/2013, AGNC's fixed-rate agency MBS WAC was 3.59%, while MTGE's WAC was slightly less at 3.47%.

With these slight differences noted, the net valuation gain projected for AGNC earlier in the analysis can generally be assumed for MTGE as well. As such, I am projecting there have only been minor valuation differences between AGNC's and MTGE's MBS portfolio through the first half of the first quarter of 2014 (proportionally speaking). Again, there will not be a 100% "pairing" between the two companies but more of a similar net valuation trend.

Conclusions Drawn (PART 1):

By examining AGNC's MBS portfolio as of 12/31/2013, I have shown how and analyzed why management has continued to change the composition of the company's MBS portfolio. Table 2 showed the quarterly net compositional changes that AGNC incorporated regarding the company's 15 and 30-year fixed-rate agency MBS holdings. During the fourth quarter of 2013, AGNC maintained the company's proportion of 15 and 30-year fixed-rate agency MBS holdings. AGNC also continued to re-roll the company's MBS portfolio into higher coupons within the same maturities. As such, AGNC's MBS portfolio should continue to see a slight increase in the WAC.

This article then provided a valuation analysis on AGNC's MBS portfolio. For the first half of the first quarter of 2014, AGNC's cumulative quarterly 15 and 30-year fixed-rate agency MBS price movements ranged from modestly to materially positive across the entire MBS coupon spectrum.

Therefore, I am projecting a net valuation gain (loss) on AGNC's MBS portfolio of $645 million for the first half of the first quarter of 2014 (through the week ending 2/14/2014).

Final Note: I would caution readers that MBS prices change daily. As a direct result, AGNC's MBS portfolio has daily valuation fluctuations as well. One quick, sharp move in mortgage interest rates/U.S. Treasury yields can materially change MBS prices (or vice versa), thus changing AGNC's MBS portfolio valuation by hundreds of millions of dollars. This is why I feel it is imperative readers understand how AGNC values the company's MBS portfolio and how modest changes in rates/yields have a direct impact on MBS prices (hence, asset valuations). Therefore, I feel it is extremely beneficial to provide readers a mid-quarter update regarding the valuation of AGNC's updated MBS portfolio as of 12/31/2013 (including projected current quarter activities). PART 2 of this analysis will analyze and discuss the composition of AGNC's derivative portfolio as of 12/31/2013. PART 3 will discuss the valuation of AGNC's derivative portfolio through the week ending 2/14/2014. PART 3 will also include a projected BV per share amount as of 2/14/2014, 2/21/2014, and 2/28/2014 (possibly 3/7/2014 as well).

Disclosure: I am long AGNC, MTGE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I have no position in FMCC, FNMA, or HTS.