Kain not yet ready to take up leverage

|By:, SA News Editor

While the near-term outlook for MBS is very Fed-dependent, longer-term the picture is far clearer, says American Capital Agency (AGNC -8.5%) CIO Gary Kain on the earnings call. Looking 2-5 years out, the Fed will no longer be the gorilla in the MBS market, and banks (due to capital requirements) will also be less present. The result will be far better ROE on new investments. "We want to be sure that we have substantial capital to put to work in that environment."

CC webcast and presentation slides here.

Short-term, Kain sees taxable income likely to remain under pressure in Q4 as portfolio repositioning will require security sales and the booking of losses. He reiterates the company's intention to continue to buy back shares as long as they remain substantially under book value. The current price is about a 13% discount (growing as call goes on) to September 30 reported book value of $25.27.

No one's asked about the dividend, but management's apparent commitment to continue to hunker down suggests a cut is coming. Why are you playing defense, asks one call participant who disagrees with the company's near-certainty that the taper is coming. Management gets paid to create alpha, he says, not clip coupons. Kain's response: What happens if you're holding 30-year paper and the December employment report comes in strong?

Q3 results from last night.