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QE Firmly In Gear - Macroeconomic Tailwinds For Agency MBS mREITs

Mar. 01, 2021 1:20 PM ETAGNC, NLY, TWO8 Comments
Thomas Boyd profile picture
Thomas Boyd


  • mREITS with large holdings of Agency guaranteed RMBS and CMBS securities occupy a unique position within the wider mREIT sector.
  • While the Federal Reserve is an active participant in the Agency-eligible securitized mortgage market, Agency mREITs can outperform more diversified mREIT baskets.
  • By most measures, the primary mortgage market outperformed in 2020. Demographic shifts and the "home office" premium should support the primary home purchase market into 2021.
  • NLY, AGNC and TWO are all positioned to enjoy outsized benefits from Federal Reserve support of the money and securitized mortgage markets.

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Federal Reserve support of U.S. money and securitized mortgage markets coupled with the dramatic strengthening of the primary mortgage markets warrant a separation of mortgage Real Estate Investment Trusts (mREITs) with concentrated exposure to Agency guaranteed mortgage-backed securities (Agency mREITs) from the broader mREIT space. Relative value analysis of mREIT common and preferred shares is warranted in isolation of mREITs with diversified mortgages held on balance.

mREITs in general purchase and originate a wide swath of mortgage and commercial real estate securities and debt instruments: Agency single family MBS, non-Agency residential MBS, Agency CMBS, private label CMBS securitized by first and second liens, as well as direct commercial lending. Drawing on my experience and observations as a sell-side participant in the Agency eligible single- and multifamily- securitized mortgage markets over the past year, I will examine three macroeconomic factors that should lead to outperformance of Agency mREITs in 2021: Federal Reserve money market support, Federal Reserve quantitative easing and price support in the secondary mortgage market and the outperformance of the primary mortgage market.

The basis will be constructed for a generally bullish backdrop to be applied to a basket of names, upon which more detailed comparative single name analysis can be built. To reiterate, while not always stated explicitly, the investment thesis outlined in this article will be limited to those mREITs with significant holdings of Agency guaranteed RMBS and CMBS securities.

Three names fall under the criteria set forth above:

Agency MBS & CMBS


% Total Assets


This article was written by

Thomas Boyd profile picture
Sell-side Securitized Mortgage Trader and former balance sheet generalist. Managed instruments include securitized mortgages, wholesale mortgages, interest rate derivatives securitized mortgage forwards. My quantitative fluency is still in it's infancy but I work diligently in and out of the office to deepen my statistical and mathematical financial foundation.+ Fannie Mae and Freddie Mac+ Mortgage REITs+ Retail long/short+ Programming and quantitative portfolio management

Analyst’s Disclosure: I am/we are long AGNC, NLY. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (8)

Well written, and avoided simplistically “talking up” sectors or stocks.
Thomas Boyd profile picture
@ThisIsOnlyaTest Appreciate the kind words. Thanks for reading!
Mr Boyd - Thank you for your write-up. With rates having bottomed out and now possibly increasing, many point to NRZ in this sector as having the best prospects, given that it is heavily into MSRs. For example, I see on BBerg that 14/14 rate it a buy. You might consider writing about NRZ in a subsequent post. Thank you again.
Thomas Boyd profile picture
@NJ Income Investor Thanks for pointing me in that direction! One headwind MSR heavy balance sheets will have to face as rates rise is the re-introduction of negative convexity in their MSR assets but that rate risk can be managed with a well managed derivative portfolio so I think you're spot on. On balance, MSR holders should be in a good spot to outperform benchmarks as yields increase.
"At present, AGNC, NLY and AGNC all tout weighty dividend yields". I think you meant to put TWO in there somewhere...
Thomas Boyd profile picture
@dusteater Indeed I did. Thanks for the catch. Edit submitted.
Income4ever aka Cyclenut profile picture
Nicely done
Do you see a div increase in the near future, I'm kinda surprised they did not raise already for 2021
Thomas Boyd profile picture
@Income4ever aka Cyclenut Thanks! Dividend safety I feel very confident throwing my weight behind, dividend increases not so much. I want to take a closer fundamental look at AGNC, NLY and TWO but until I do, can't opine on dividend increase or decrease probability.
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