AGNC - AGNC: Inflation Is Back (Rating Downgrade)

2024-04-11 16:29:02 ET

Summary

• AGNC Investment and other mortgage REITs may face headwinds due to an inflation acceleration in March.
• The risk profile for leveraged mortgage REITs has deteriorated as the Federal Reserve is likely to delay federal fund rate cuts.
• The inflation report indicates that AGNC's interest expenses will remain high, putting pressure on its net interest income and book value.

AGNC Investment Corp. ( AGNC ) and other mortgage REITs with considerable investments in rate-sensitive mortgage-backed securities were expected to be the beneficiaries of the Federal Reserve's rate pivot in FY 2024. With inflation for the month of March coming in hotter than expected on Wednesday, the market is adjusting its expectations for cuts to the federal fund rate, which I suspect will be a considerable headwind for AGNC's valuation. Prospects for book value growth as well as higher for longer funding costs may hurt AGNC in the short term as well. Because of the inflation update, I believe the risk profile for highly leveraged mortgage REITs has deteriorated, and I am downgrading AGNC's shares to hold....

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