Deutsche Bank Initiates American Capital Agency (AGNC) with a Hold

June 24, 2008 8:23 AM EDT

Deutsche Bank initiates coverage on American Capital Agency (NASDAQ: AGNC) with a Hold rating and a $17.50 price target.

The firm said, "We expect American Capital Agency Corp. to invest in agency RMBS with spreads at historically wide levels, enabling the company to operate with conservative leverage and still provide attractive returns. While we expect funding costs to remain at current levels throughout 2008, market expectations for rising short-term rates may limit near-term multiple expansion, resulting in dividends providing the majority of near-term returns."

Deutsche believes that interest rate volatility may limit short-term multiple expansion. However, the firm believes that AGNC will "ramp the portfolio quickly", which will result in an attractive dividend yield. In addition, AGNC has limited credit risk because it exclusively invests in agency RMBS, which are guaranteed against credit losses by Fannie Mae, Freddie Mac, or Ginnie Mae.

American Capital Agency Corp. is a Delaware corporation formed to invest exclusively in single-family residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government agency or a U.S. Government-sponsored entity.

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