Prepared remarks
Good morning, and welcome to the AGNC Investment Corp. Second Quarter 2025 Shareholder Call. Please note this event is being recorded. I would now like to turn the conference over to Katie Turlington in Investor Relations. Please go ahead.
Thank you all for joining AGNC Investment Corp. Second Quarter 2025 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission.
Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer, and Chief Investment Officer; Bernie Bell, Executive Vice President, and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.
Good morning, and thank you all for joining our second quarter earnings call. Following the administration's tariff announcement in early April, elevated governmental policy risk caused investor sentiment to turn sharply negative and financial markets to reassess the macroeconomic and monetary policy outlook. After a sharp repricing in April, most markets retraced their early period losses and ended the quarter at better valuation levels. The performance of Agency mortgage-backed securities relative to benchmark interest rates, however, was notably weaker quarter-over-quarter. As a result of this underperformance, AGNC's economic return for the second quarter was negative 1%. During the first three weeks of April, when the financial market stress was most pronounced, the yield on the 10-year treasury fluctuated by more than 100 basis points and the S&P 500 Stock Index declined by 12%. This volatility and macroeconomic uncertainty adversely impacted Agency mortgage-backed securities with spreads to treasury and swap rates widening meaningfully.
A primary focus of AGNC's risk management framework is maintaining sufficient liquidity to withstand episodes of significant financial market stress. One important measure of this capacity is the percentage of equity that we hold in unencumbered cash and Agency mortgage-backed securities, which are available to meet margin calls in the normal course of business. This focus enabled us to begin the second quarter with a strong liquidity position and to navigate the financial market volatility without issue and importantly, without selling assets. Moreover, we were able to take advantage of the wider MBS spread environment by raising accretive capital during the quarter and opportunistically deploying a portion of that capital in attractively priced assets. Over the last two months of the quarter, most financial markets retraced the April losses, and in some cases, set new record highs. For example, the S&P 500 Index rallied 25% from the April low and ended the quarter about 10% higher.
Investment-grade and high-yield debt also performed well with spreads tightening 10 and 50 basis points, respectively. The one notable performance exception was Agency mortgage-backed securities as the current coupon spread to a blend of treasury and swap benchmarks ended the quarter 7 and 14 basis points wider, respectively. Although the Fed and treasury have indicated that beneficial regulatory reforms are forthcoming, bank demand for MBS still appears to be constrained. Similarly, foreign investor demand may be hindered by U.S. dollar weakness and geopolitical risk. Looking ahead, we expect banks and foreign demand for Agency MBS to grow. In addition, as we enter the third quarter, the seasonal supply pattern for MBS issuance should improve. We expect the net supply of new MBS will be about $200 billion this year, the low end of most forecasts. Since quarter end, MBS spreads have tightened slightly and are showing signs of stabilization.
As a levered and hedged investor in Agency mortgage-backed securities, AGNC's return profile is most favorable in environments in which mortgage spreads are wide and stable. Our favorable outlook for Agency MBS was further improved in the second quarter by the very positive message from key decision-makers related to the potential recapitalization and release from conservatorship of the GSEs. The White House, the Treasury Department, and FHFA affirmed the government's commitment to maintaining the implicit guarantee for Agency MBS and also indicated that they are taking a do-no-harm approach to GSE reform. Specifically, President Trump made an unprecedented statement in late May regarding the GSEs and the ongoing role of the government in the housing finance system. He said, our great mortgage agencies, Fannie Mae and Freddie Mac, provide a vital service to our nation helping hard-working Americans reach the American dream of homeownership.
I am working on taking these amazing companies public, but I want to be clear the U.S. government will keep its implicit guarantees. Treasury Secretary Bessent also made several important statements regarding the GSEs during the quarter. The one that stood out the most to us was when he said, the one requirement of this privatization is that they are privatized in such a way that mortgage spreads do not widen. And in fact, is there a way that we can make the spread between the risk-free rate and mortgages tighten as Freddie Mac and Fannie Mae are privatized. Finally, Director Pulte weighed in with similar positive statements saying our number one thing is to do no harm and keep the implicit guarantees intact. We cannot have any disruption to the mortgage market. There cannot be any upward pressure on the mortgage rate, and I am very confident that the mortgage market will be safer and sounder as a result of any option that the President takes.
These statements individually and collectively clarify the administration's approach and more importantly, should provide investors greater confidence that the credit quality of the $8 trillion of outstanding Agency mortgage-backed securities as it is understood to be today will not be impaired by actions associated with privatization. In fact, given the explicit statement of credit support made by the President of the United States that the implicit guarantee of Agency MBS will be preserved, investors could reasonably conclude that the credit quality of the outstanding stock of Agency mortgage-backed securities has never been stronger. These statements also make it clear that maintaining stability in the mortgage market and lowering mortgage costs are two important guiding principles of GSE reform. This is a very positive development that should lead to tighter mortgage spreads over time. With that, I'll now turn the call over to our Chief Financial Officer, Bernice Bell, to discuss our financial results in greater detail.
Thank you, Peter. For the second quarter, AGNC reported a comprehensive loss of $0.13 per common share. Our economic return on tangible common equity was negative 1%, consisting of $0.36 of dividends declared per common share and a $0.44 decline in tangible net book value per share as mortgage spreads ended the quarter moderately wider. As of late last week, our tangible net book value per common share was up about 1% for July after deducting our monthly dividend accrual. Quarter-end leverage increased slightly to 7.6x tangible equity compared to 7.5x at the end of Q1. Average leverage for the quarter rose to 7.5x from 7.3x in the prior quarter. As of quarter end, our liquidity position totaled $6.4 billion in cash and unencumbered Agency MBS, representing 65% of tangible equity, up from 63% as of the prior quarter. As Peter noted, we were able to navigate the substantial financial market volatility in April with our portfolio intact as a result of our risk management positioning and ample liquidity entering that period.
Additionally, during the quarter, we opportunistically raised just under $800 million of common equity through our at-the-market offering program at a significant premium to tangible net book value. As of quarter end, we had deployed slightly less than half of the proceeds, and we have continued to deploy the remaining capital post-quarter end. In utilizing the ATM, we attempt to maximize both the accretion benefit associated with the stock issuance premium and the investment returns on acquired assets. However, the optimal timing for stock issuances and capital deployment may not fully align. As a result, our investment of the new capital may lag the issuance as it did this quarter as we evaluate market conditions and wait for favorable entry points. Net spread and dollar roll income declined $0.06 to $0.38 per common share for the quarter, primarily due to the timing of deployment of the new capital raised over the quarter with moderately higher swap costs also contributing to the decline.
Our net interest rate spread decreased 11 basis points to 201 basis points for the quarter, largely due to higher swap costs. Our treasury-based hedges contributed additional net spread income of approximately $0.01 per share for the quarter, which is not reflected in our reported net spread and dollar roll income. Lastly, the average projected life CPR of our portfolio declined to 7.8% at quarter end from 8.3% as of Q1, consistent with higher mortgage rates. Actual CPRs averaged 8.7% for the quarter, up from 7% in the prior quarter. And with that, I'll now turn the call back over to Peter for his concluding remarks.
Thank you, Bernie. I'll provide a brief review of our portfolio before taking your questions. Trade, fiscal, and monetary policy uncertainty caused Agency MBS spreads to widen across the coupon stack with higher coupon MBS performing slightly better than lower coupon MBS. MBS performance also varied considerably by hedge type and maturity as the yield curve steepened significantly during the quarter and swap spreads tightened 5 to 10 basis points. As a result, MBS hedged with longer-dated treasury-based hedges performed materially better than MBS hedged with short- and intermediate-term swap-based hedges. Our asset portfolio totaled $82 billion at quarter end, up about $3.5 billion from the prior quarter. The mortgages that we added were largely higher coupon specified pools with favorable prepayment characteristics. As a result, the percentage of our assets with some form of positive prepayment attribute increased to 81%.
Our aggregate TBA position remained relatively stable at about $8 billion, consistent with our preference for specified pools in the current environment. With both our pool and TBA activity concentrated in higher coupons, the weighted average coupon of our asset portfolio increased to 5.13% during the quarter. The notional balance of our hedge portfolio increased to $65.5 billion at quarter end. In duration dollar terms, our hedge portfolio consisted of 46% treasury-based hedges and 54% swap-based hedges. In summary, despite the second quarter volatility and elevated geopolitical and government policy risk that still remains, we continue to have a very positive outlook for Agency mortgage-backed securities. In fact, we believe the outlook actually improved in the second quarter due to four factors. First, MBS supply appears to be manageable as seasonality factors turn more favorable and the mortgage rate remains high.
Second, the demand for MBS appears poised to grow as a result of anticipated regulatory changes and relative value attractiveness. Third, agency spreads appear to be stabilizing at historically cheap levels. And lastly, key policymakers appear to be taking a cautious do-no-harm approach to GSE reform while reaffirming the government's ongoing role in the housing finance system. Collectively, we believe these positive developments create a very favorable investment outlook for Agency mortgage-backed securities as a fixed income asset class. With that, we'll now open the call up to your questions.
Questions and answers
The first question comes from Doug Harter with UBS.
Just kind of digging into the last comments you made about the attractive environment. As you look at that environment and you look to continue to take advantage of that, do you think that, that comes in the form of looking to raise additional capital? Or is increasing leverage from kind of this area where you've been for the past couple of quarters a consideration as well?
I appreciate your question. Our outlook is positive as we enter the second half of the year, especially following the developments in the second quarter, particularly concerning the GSEs. This creates a strong environment for Agency mortgage-backed securities. Currently, we are seeing some stabilization, and I anticipate spreads will gradually narrow, but I don’t foresee a major catalyst for them to drop sharply in the near term. This is significant because, as Bernie noted, we have taken a patient and measured approach to deploying the capital we raised in the second quarter, having deployed just under half of it. We still have the ability to invest those funds at attractive levels today, with current Agency mortgage-backed securities' coupons about 200 basis points over blended swap rates, close to the upper end of the range seen in the last four years. If we have the capacity to raise accretive capital and invest those proceeds, we will certainly consider it to create additional value for our shareholders.
We believe we are well-positioned to deploy capital at a measured pace. I think these opportunities will last a while, but we also have the capacity to operate with slightly higher leverage. Bernie mentioned that at the end of the quarter, our unencumbered cash position was $6.4 billion or 65%, which is actually 2% higher than at the end of the first quarter. So despite the volatility and a portfolio increase of $3.5 billion, we still have a higher ratio of unencumbered cash to equity at the end of the second quarter. We are in a solid position to proceed with the strategies you mentioned and will let market conditions dictate the timing and decisions based on the development of mortgage spreads. Additionally, we hope some ongoing political uncertainties will be resolved in the coming weeks regarding government policy and tariffs. While there is still some uncertainty with monetary policy, that should also clarify in the next month or two. We have plenty of capacity and flexibility to be opportunistic in this environment.
The next question comes from Crispin Love with Piper Sandler.
Peter, can you speak to your views on the core earnings trajectory and what that means for the dividend level? Core returns are high, spreads are pretty wide, swaps continue to roll off. But curious what you view to be the run rate for earnings and core returns over the near to intermediate term?
Yes, we've discussed our net spread and dollar roll income in several quarters, focusing on how it aligns with the economic realities of our portfolio. There are many factors to consider regarding net spread and dollar roll income, particularly how accounting affects asset yields and hedge costs. This measure doesn't necessarily reflect the long-term economic earning potential of our portfolio; it's a snapshot of current period earnings. With that in mind, our figures have aligned more closely with current portfolio economics. For instance, the $0.38 return on equity translates to approximately a 19.5% return. Current mortgage valuations show a return spread of around 180 basis points in today's environment. Given our leverage, this again suggests about a 19% return on equity for new investments. In this environment, I would estimate returns in the high teens, between 18% and 20%, which aligns with our current net spread and dollar roll income.
There will be fluctuations from quarter to quarter, as Bernie noted, with a decline last quarter due to slow capital deployment. As we invest those proceeds, it will help mitigate that drag. However, we will also experience ongoing pressure from swap hedges rolling off; we had around $5 billion roll off last quarter and replaced $2.3 billion. Over time, we anticipate that our swap costs will increase, while our repo costs should decrease, especially as the Fed potentially eases. I also expect gradual increases in our asset yields, which are still below market levels. Overall, I believe our net spread and dollar roll income will remain in the range we are currently experiencing, probably around high-to-mid $0.30s to low-to-mid-$0.40s. I hope this addresses your question.
Absolutely. No, that was very helpful, Peter. And then just following up on Doug's issuance question and comments you've made about deployment. You raised accretive capital and deployed about 50% of that in the second quarter. I believe that was a comment or it might be 50% to date. But can you just share where you stand today? How much more have you deployed since quarter end? And then just where are the best opportunities, coupons, investments, et cetera? And then just given the outsized issuance in the second quarter, would you expect issuance in the third to come down versus historical levels?
Yes, I will address that first and then come back to your other points. You provided a lot of information. We're approaching this opportunistically, and I believe we can afford to be patient regarding our capital raising. We were pleased with the opportunities in the second quarter, especially given the high volatility, which allowed us to raise capital in a beneficial way. This has given us added liquidity to manage any potential disruptions and also to utilize those funds effectively. However, I wouldn't suggest that the second quarter will reflect what we see in the future. We'll have to evaluate each quarter on its own merits. Could you please repeat the first part of your question?
Yes. So you talked about deploying 50% of the capital. Just the timing of that, was that in the second quarter or to date? And I'm just curious where you are right now...
Yes. According to Bernie, it was in the second quarter, but she mentioned that we have continued to deploy. We purchased about $1 billion worth of mortgages earlier this month. We still like the market and are deploying capital at a disciplined pace. As for our preferences, we continue to favor upper coupons, particularly in specified pools with higher coupons in the 5% to 6% range, along with some favorable prepayment characteristics. We appreciate the yield profile there and the prepayment protection available with certain characteristics.
The next question comes from Trevor Cranston with Citizens JMP.
Another question on the capital raising. Peter, obviously, for the last several quarters, you guys have been able to do a decent amount at pretty accretive levels. And obviously, there's a lot of benefits to being able to issue so accretively. I guess, big picture, can you kind of give us an update on your thoughts as to how you think about the optimal size of the company and particularly if you continue to be able to issue accretively for the foreseeable future?
Yes, that's a great question, and it's one we've discussed periodically. I want to emphasize that we're not growing just for the sake of growth. We aim to raise capital beneficially for our existing shareholders and to utilize those funds in support of our dividend. If we can maintain this strategy, we will definitely seek to take advantage of that opportunity. Additionally, we experience significant advantages due to our scale. For instance, our operating costs last quarter were only 111 basis points, making us one of the lowest in the industry, which is quite compelling. Moreover, there's strong liquidity in our stock, which is very valuable for shareholders. Our portfolio is now concentrated in agency or agency-like securities, allowing investors who want that exposure to buy our stock easily. Our common equity exceeds $8 billion, providing substantial liquidity for those seeking fixed income exposure through our shares.
From a positive perspective on size, as we increase our market cap, we become more accessible for inclusion in various indexes. This growth in size and liquidity has its benefits. However, we are aware of market capacity constraints. The liquidity in the fixed income market today is not as robust as it was 10 or 15 years ago, before the great financial crisis. We remain mindful of the size of our asset portfolio and the ability to conduct transactions in both the hedge and asset markets. We're striving to find the perfect balance among these various factors. While there are numerous advantages to our growth in size, scale, and liquidity, we also recognize that there are limits to how large we can become.
The next question comes from Bose George with KBW.
First, just given the level of swap spreads, how do you see the appropriate balance between swap hedges and treasury futures? And then when you gave the ROE number at 19% plus is that kind of reflect the mix that you guys currently have in the portfolio?
When I calculated the return on equity, I arrived at 180 basis points using a 50-50 mix, which we believe is the right long-term approach. This blend offers us diversification benefits, combining treasuries and swaps. However, we are currently slightly more focused on swaps overall. In the second quarter, about two-thirds of our hedges were based on swaps, indicating that we are more weighted in that direction. Moving forward, we may lean towards a slightly higher percentage of swaps compared to the long-term 50-50 ratio, as I anticipate stability in swap spreads developing over time. I expect upward pressure on swap spreads, which will be advantageous for us as the supplemental leverage ratio reform is likely to happen by the fourth quarter or possibly the third quarter. The changes we observed in the swap market during the second quarter were significant, particularly the narrowing of longer-term swap spreads by nearly 10 basis points. This reflects the existing balance sheet constraints in the market between swaps and treasuries. We expect these constraints to ease as bank regulations are implemented and the supplemental leverage ratio is adjusted. Therefore, having a higher exposure to swaps at this time should benefit us, while the 50-50 mix remains the ideal long-term strategy.
Okay. Great. And then in terms of your CPR, so it looks like the lifetime CPR declined. Does that just reflect the market expectation on rates?
Exactly right. Looking at the second quarter, the yield curve steepened but the 10-year rate was almost unchanged, only increasing by about 2 or 3 basis points. We did see a significant rally in the 2-year rate, which went up by 17 basis points. However, the real story was in the longer end of the yield curve, which had a negative impact on the mortgage portfolio. I mentioned this in my prepared remarks because the 20- and 30-year rates increased, with the 30-year rising by 21 basis points. Mortgages are sensitive to these long-term rates, so the increase in the 30-year rate pushed forward mortgage rates higher during the second quarter. This also contributed to the lifetime CPR change. It's important to monitor this since most portfolios, including ours, typically do not hedge very long cash flows in mortgages. We primarily focus on the intermediate part of the curve, up to about 15 years. The longer end is quite unique and challenging to hedge from a mortgage standpoint, so our hedging tends to be concentrated around the 10-year part of the curve to manage that long duration. If the 10s and 30s curve changes significantly, it could impact mortgage performance.
The next question comes from Jason Weaver with Jones Trading.
Peter, considering the value implications we've discussed, we've been examining MBS spreads for quite some time due to their widening. Would you agree that the spreads have entered a broader long-term trend over time, especially since volatility levels have decreased, yet we still see them at 200 over swaps?
Yes, we have established a new trading range. If we look back at mortgage spreads over the last four years, excluding the COVID event, we are currently at the high end of that range. We recently broke out slightly, closing at 220 basis points compared to swaps. However, the range is still intact, likely between 160 to 200 basis points for mortgages versus swaps and around 160 to 120 basis points for treasuries. This appears to be the new norm, and given the geopolitical and fiscal policy uncertainties, I expect us to remain in the upper half of that range. I don't see significant catalysts for breaking out of it, which I believe is an important development from the second quarter. We navigated through significant tariff-related market stress, which was crucial. Another potential factor that could have redefined the trading range was GSE reform, due to the uncertainty surrounding it. Key policymakers effectively communicated their thought process and priorities in preserving the market's unique attributes, which alleviated some upward spread pressure. We are indeed in a new range, but I believe we are at the top of it and do not anticipate further increases; instead, I expect to see a stabilization within this range, possibly moving lower.
Got it. That's helpful. And then just another one on the capital deployment progress in Q2 and even currently. How are you looking at relative value within the specified pool product just among the different sort of warehouses there?
I noted in my prepared remarks that approximately 81% of our portfolio features some form of positive prepayment characteristic. In our presentation, we highlighted that about 41% of these are categorized as high-quality specified pools. Our belief is that there are numerous attributes beyond typical high-quality indicators, such as low loan balance, that can lead to strong mortgage performance and more stable cash flows. These include factors like FICO scores, loan-to-value ratios, and specific geographic elements where taxes are recorded, along with characteristics related to housing prices and loan types, whether they pertain to primary residences, second homes, or investment properties. This is why we value adding specified pools, especially those with higher coupons, as they provide a significant yield advantage, though we recognize this also involves additional convexity risk. In the current environment, where house prices are stabilizing or potentially decreasing in certain areas, we see considerable value in incorporating specified pools with these features.
Moreover, during the second quarter, we noticed that there are specific advantages associated with TBA positions, particularly regarding implied financing levels for certain high-coupon Ginnie Mae securities that constitute most of our long positions. However, conventional TBA positions do not offer much of a funding advantage right now. Therefore, we prefer higher coupon specified pools over TBA positions in the current landscape.
The next question comes from Jason Stewart with Janney.
It seems to us that the curve steepener trade is quite crowded. We've discussed hedges, but could you elaborate more on the asset side? I believe you started addressing this in response to Jason's question. In a post steepener trade, how do you position the asset side of the balance sheet regarding coupons and other factors to maximize returns moving forward?
There's definitely a lot of flexibility. We've made significant shifts in our coupon position from quarter to quarter. We have plenty of liquidity and the capacity to transition between TBAs and specified pools. The characteristics we've discussed alter our profile, providing various options on the asset side. Particularly with a TBA position, we can shift from TBAs to pools and different coupons. As the yield curve changes, we can adjust the asset side of our equation. This is mainly driven by our hedge location, which is critical, and we have ample capacity for that. Most of our hedges are focused in the 7- to 12-year range, with about 83% of our hedge duration exceeding 7 years. This indicates that our asset key rate duration profile, when combined with our hedge profile, suggests we have positioned our portfolio to benefit from a steepening yield curve between 2 years and 10 years. Therefore, we will continue to see benefits.
If 2-year rates decrease while 10-year rates remain stable or increase, our aggregate portfolio will benefit due to our asset and hedge composition. We anticipate that the curve steepening will persist, especially given the current pressures on the Fed. Today, the 2-year to 10-year section of the curve is approximately 52 basis points, which is about 50 to 60 basis points flatter than the 25-year average. I expect this segment of the curve to steepen over time, and I believe our portfolio will benefit from that.
We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.
Again, we appreciate everybody's time and participation on our call today, and we look forward to speaking to you all again at the end of the third quarter.
Thank you for joining the call. You may now disconnect.