AGNC Preferreds: A Compelling Opportunity for High-Income Investors

Mid Caps 7 replies 0 votes 2240 views Tags:  AGNCAGNCLAGNCNAGNCPfixed-income securitiesincome investingInterest Ratesmarket misconceptionspreferred stocksrelative value analysisyield

AGNC's preferreds continue to be highly attractive high-income securities within the current market landscape. I have thoroughly examined the suite of preferreds and assessed their value proposition across multiple dimensions. AGNC's suite comprises five preferreds, each with distinct characteristics, providing investors with a diverse range of opportunities for relative value.

There are several key reasons why AGNC's preferreds stand out among income-oriented investments. Firstly, AGNC strategically allocates a significant portion of its portfolio to Agency Mortgage-Backed Securities (MBS). These assets offer exceptional liquidity and are further supported by the backing of the Federal Reserve, as demonstrated during the challenging market conditions of the COVID-19 pandemic. This emphasis on Agency MBS provides a robust foundation for stability and resilience within AGNC's preferred securities.

Secondly, the yields on offer for AGNC's preferreds are highly attractive, both in terms of stripped yields and future reset yields. Ranging from 7% to 10%, these yields present compelling income-generating opportunities for investors seeking high returns in the current market environment.

Furthermore, AGNC has demonstrated commendable proficiency in managing its book value, even in the face of a challenging market landscape. By effectively navigating market fluctuations, AGNC has maintained a solid performance track record, as evidenced by the accompanying chart.

In addition, AGNC's issuance of additional common shares is a positive development. This strategic move not only bolsters the equity/preferred coverage ratio but also enhances the overall financial position of the company. Over the past two years, the growth of AGNC's outstanding shares by 8.4% demonstrates a proactive approach to strengthening the support structure behind each dollar of preferred securities.

While short-term gains can be made by trading the common shares, preferreds have historically provided stronger returns with reduced volatility over the long term. As an expert, I emphasize the importance of focusing on AGNC's preferred securities for investors seeking consistent income generation.

To delve into the specifics of AGNC's preferred suite, let us examine the five preferreds in detail. The table provided in the accompanying data showcases AGNC's suite of preferreds, comprising four Libor-based Fix/Float preferreds and one 5-year Constant Maturity Treasury (CMT) preferred, denoted as AGNCL. AGNCL stands apart from the others as it is tied to the 5-year Treasury Yield, offering a unique investment opportunity with a longer duration and fixed-rate period until its first call date in 2027.

It is crucial for investors to avoid common pitfalls when analyzing preferreds to accurately gauge their relative value. One prevalent misconception is the belief that the market remains oblivious to preferred reset dates, resulting in a sudden increase in yields on these dates. However, evidence contradicts this notion. For instance, AGNCN experienced a substantial 22% gain between October and December, indicating that the market was indeed aware of the impending reset to a floating-rate coupon.

Another misconception to avoid is the fixation on fixed interest rates when calculating reset yields for comparison. This approach fails to consider the market's expectation of variable interest rates when AGNCO resets to a floating-rate in October 2024. Market-based pricing suggests that AGNCO's yield is anticipated to be 9.92%, contrasting with the 11.79% based solely on the current Libor rate. It is crucial to base analyses on market-driven pricing to accurately assess risk/reward ratios.

Lastly, rather than focusing solely on individual securities at a particular point in time, it is imperative for investors to adopt a broader perspective. An understanding of how security yields are expected to evolve across the entire preferred suite, as well as over time, is critical. By analyzing forward yields based on forward rates, investors can gain insights into the preferreds' performance. While forward rates may not precisely materialize, they serve as a neutral baseline consistent with broader market pricing, facilitating relative value analysis.

In light of my analysis, I recommend three preferred stocks within AGNC's suite that merit consideration. Firstly, AGNCN stands out with the highest yield presently, making it an appealing choice. However, for investors keen on double-digit yields, I advise considering NLY.PF, which offers a comparable yield with slightly stronger risk metrics.

Secondly, AGNCP proves most attractive for patient investors who prioritize an extended period of potentially higher yields over immediate returns. Notably, in the event of AGNC redeeming the preferreds (a plausible scenario given the current inverted yield curve), AGNCP would offer the highest yield-to-call.

Lastly, AGNCL deserves attention due to its second-highest yield and the security of a fixed yield until at least October 2027. This safeguard shields the portfolio from the risk of declining short-term rates, which aligns with both market and Federal Reserve expectations. Additionally, AGNCL's link to Treasury yield-based coupons rather than the more common Libor/SOFR anchor positions it for potential outperformance when the yield curve eventually normalizes.

In conclusion, I assert that AGNC's preferreds present an enticing opportunity for income-focused investors seeking high-quality securities. The suite's attractive yields, strategic allocation to Agency MBS, and effective management of book value all contribute to their appeal. By avoiding common misconceptions and adopting a comprehensive approach to analysis, investors can make informed decisions.

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