While AGNC Investment Corp. CEO Gary Kain attributed a rapid spike in U.S. Treasury yields and increased post-election market volatility for restraining the company's economic return in the fourth quarter of 2016, he believes a widening in agency mortgage-backed securities spreads could provide substantial investment opportunities over the long term.
For a two-week period following President Donald Trump's victory in the U.S. presidential election, yields on 10-year Treasurys rose by approximately 50 basis points. Although the sharp rise in interest rates and the widening of MBS spreads contributed to a negative 5.2% economic return for AGNC Investment during the period, Kain noted that the company's MBS portfolio performed "significantly better" than it did in May 2013 when yields soared amid the Federal Reserve's plans to reduce its quantitative easing program.
AGNC Investment entered the so-called "taper tantrum" with MBS spreads at "very tight" levels, Kain told analysts during the company's 2016 fourth-quarter earnings call. At the time, markets also had to contend with high origination volumes and a changing environment for bank capital, Kain added, which provided added complexities for the company.
"You had a lot of moving parts back then, many of those things are non-existent today or much smaller," Kain said. "With that being said, I think the performance was somewhat logical given the big move in rates."
AGNC Investment expects that agency MBS investments could provide a return on equity in the range of 11% to 16%, according to a company presentation, assuming a net interest rate spread of 100 to 150 basis points in a rising interest rate environment. Although Kain said the baseline path for the U.S. economy is stronger under Trump due to the potential for increased infrastructure and defense spending, he emphasized that potential protectionist policies put in place by the administration could negatively impact other economies abroad, including China and Mexico.