A Mortgage REIT Pairs Trade - Long American Capital Agency (AGNC)/Short Annaly Capital (NLY)

In agency mortgage REITs, Nomura analyst Bill Carcache recommends a pairs trade - go long American Capital Agency Corp. (NASDAQ: AGNC) and short Annaly Capital Management, Inc. (NYSE: NLY).

"Added buying pressure from the Fed's recent QE3 announcement will lead to higher MBS valuations and tighter spreads for the agency mortgage REITs," Carcache notes. "We expect dividend capacity to come into focus as we head into Q3 earnings. We have already seen some mortgage REITs (CYS and CMO) cut their dividends by 10%, and we expect others (ex-AGNC) to follow. We recommend going long AGNC and short NLY shares into NLY's dividend announcement (expected sometime over the next several days). Consensus is looking for a $0.04 cut this quarter to $0.51 (from $0.55). Although our estimate is only $0.01 below consensus at $0.50, we believe there is room for further downside."

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