In a report released Tuesday, Wunderlich analyst Merrill Ross upgraded shares of America Capital Agency AGNC from Hold to Buy and raised the price target from $23.50 to $26.50.
Ross "fully expects" the Fed to remain a $12 billion to $16 billion per week buyer of MBS, which aggregates to "considerably" more demand than supply.
In estimating forward earnings, Ross is expecting supply/demand imbalances to continue to drive strong drop net spread income until lift off. With the assumption that the Fed will tighten in the first half of 2015, Ross is looking for the flattening of the curve to come from the front end, which he said will put pressure on interest margins.
Furthermore, he believes $0.65 per share dividends will be sustainable under those prospective market conditions.
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