AGNC: Rising Mortgage Spread Signals Trouble For Agency REITs

• While agency mortgage REITs carry minimal credit risks, they carry immense exposure to the spread between mortgages and treasuries.
• This spread has been artificially suppressed by the Federal Reserve's immense mortgage-backed-security purchase program.
• The Fed's ability to keep the mortgage spread below its equilibrium level is fading despite continued purchase pressures.
• The coming end to the eviction moratorium or Federal Reserve tapering may create dislocations that catalyze a larger widening of the mortgage spread.
• As the mortgage spread normalizes, AGNC's book value may decline 20-40% - making for a short opportunity for those looking to hedge against downside risks.