It's hard to get worked up about the taper upsetting the supply/demand picture in MBS this year, says American Capital Agency (AGNC -0.9%) CIO Gary Kain on the earnings call. Thanks to the slow pace of mortgage originations this year, 2014 will likely have the smallest pace of net MBS supply (gross supply minus Fed purchases) of any year this century (excepting the 2009 blowup). See presentation slides, page 12.
Given these dynamics, says Kain, it's hard to make the argument that mortgages are overpriced at the moment.
Next, Kain looks (page 13) at the changing investor base for MBS as the Fed has become the gorilla. Who's been selling? Everyone, but it's mostly money managers who have cut back while the Fed fattened up its holdings. As for mortgage REITs, they've not only cut back their holdings (account for less than 5% of the market), but they've reduced leverage too.