The Zhitong Finance App learned that UBS published a research report to raise the ratings of mortgage-type REIT company Annaly Capital Management (NLY.US) and American Capital Agency (AGNC.US) from “neutral” to “buy” because these companies will benefit from the end of the Fed's austerity cycle and its exit from the mortgage-backed securities (MBS) market.
UBS analyst Vilas Abraham wrote in the report: “We believe the industry will usher in a period of strong and sustainable total returns. We anticipate a total return of around 30% next year, supported by increased book value and low double-digit returns.”
Abraham further explained that assuming the Fed has almost completed its austerity policy, the nominal MBS interest spread of over 160 basis points is still “biased towards tightening in the medium to long term” due to reduced interest rate volatility and gradual improvement in supply and demand dynamics. “This dynamic could reasonably increase the book value of mortgage-type REITs by about 10% over the next 12 months,” he said.
The analyst also pointed out that when the Fed buys and holds MBS, its performance worsens during periods of boom and recession. “Going forward, we expect [such companies] to have more stable performance — there is an opportunity for small increases in book value, but more importantly, sustainable/predictable returns will support dividends,” Abraham wrote.
Finally, he added, the downside risk is that the Fed will further sharply tighten its policies, which may continue to widen interest spreads and impact such stocks by lowering book value.