Prepared remarks
Thank you all for joining AGNC Investment Corp.'s First Quarter 2026 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contain 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 first quarter earnings conference call. Agency MBS performance in the first quarter was driven by 2 very divergent investment themes. In January and February, the administration's focus on reducing interest rate volatility, maintaining mortgage spread stability and improving housing affordability drove strong performance across the fixed income markets. Agency MBS performance was particularly strong during this period as President Trump's January 8 directive instructing the GSEs to purchase $200 billion of agency mortgage-backed securities pushed spreads through the lower end of the recent 3-year trading range. In March, however, uncertainty associated with the war in Iran and the potential for a more widespread conflict in the Middle East caused interest rate volatility to increase, investor sentiment to turn negative, and Agency MBS spreads to widen significantly. As a result, AGNC's economic return in the first quarter was negative 1.6%. Despite the spread widening to swaps quarter-over-quarter, Agency MBS outperformed U.S. treasuries and investment-grade corporate bonds in the first quarter, again demonstrating the diversification benefits of this unique, high credit quality fixed income asset class. At the beginning of the year, I discussed a number of factors that we believe would benefit Agency MBS performance in 2026. Among these were low interest rate volatility and an accommodative monetary policy stance. In the first quarter, however, the Middle East conflict caused interest rate volatility to increase and Fed rate cuts to become more uncertain. While the duration and economic implications of the conflict are still unknown, recent developments are encouraging, and these factors could once again be positive catalysts for Agency MBS performance. More importantly, many of the other factors that I discussed actually improved in the first quarter and now further strengthen the outlook for Agency MBS. Most notably, at current spread levels, the return profile on Agency MBS is more attractive. At the time of our fourth quarter earnings conference call, the spread differential between current coupon MBS and a blend of swaps was 135 basis points. Over the last 2 months, that spread has ranged between 150 and 175 basis points as a result of heightened geopolitical and macroeconomic risks. We believe Agency MBS in this spread range represents compelling value on both an absolute and relative basis. The supply outlook for Agency MBS also improved in the first quarter. At the start of the year, the net new supply of Agency MBS was expected to be approximately $250 billion assuming a mortgage rate of just below 6%. With mortgage rates now about 50 basis points higher, MBS supply could be $50 billion to $70 billion lower this year. The demand outlook for Agency MBS improved in the first quarter as well. Money manager demand for MBS increased materially in the first quarter as bond fund inflows came in about double the pace of the previous 2 years. U.S. bank regulators also released their proposed bank regulatory capital framework for common. As expected, the proposal includes lower capital requirements for high-quality mortgage credit. These favorable capital requirements could lead banks to retain a greater share of mortgage credit in whole loan form or to utilize the private label securitization path to a greater extent, thereby reducing the GSE footprint over time. Finally, with mortgage spreads wider and the mortgage rate now in the low to mid-6% range, the administration may take further actions to improve housing affordability. Such actions could include more aggressive GSE purchases or increases in GSE portfolio size limits. Either or both of these actions would benefit mortgage performance. In addition, while the funding markets for Agency MBS are deep and liquid, further actions by the Fed to improve the functionality and accessibility of the standing repo program could also be catalysts for tighter mortgage spreads and lower mortgage rates. In summary, although the sharp increase in geopolitical and macroeconomic risk creates a more challenging investment environment over the near term, the return profile and technical backdrop for Agency mortgage-backed securities improved in the first quarter. In addition, actions by the administration to improve housing affordability are more likely. As we are continually reminded, market conditions change quickly. A prompt resolution to the Middle East conflict while at times difficult to predict could lead to a substantial reduction in volatility and inflationary pressures. Collectively, these conditions support our favorable outlook for agency mortgage-backed securities. Moreover, AGNC remains well positioned to capitalize on these favorable conditions and build upon our lengthy track record of generating strong risk-adjusted returns for our stockholders over a wide range of market cycles. With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail.
Thank you, Peter. For the first quarter, AGNC reported a comprehensive loss of $0.18 per common share. Our economic return on tangible common equity was negative 1.6% for the quarter, consisting of $0.36 of dividends declared per common share and a $0.50 decrease in tangible net book value per share, driven by wider mortgage spreads to benchmark rates. As of late last week, our tangible net book value per common share was up approximately 6% for April or 5% net of our monthly dividend accrual. With the recovery in April through the end of last week, our tangible net book value has now largely reversed the first quarter decline. We ended the first quarter with leverage of 7.4x tangible equity, up slightly from 7.2x as of Q4, while average leverage for the quarter was unchanged at 7.4x. We also ended the quarter with a significant liquidity position of $7 billion of unencumbered cash and Agency MBS, representing 60% of tangible equity. Net spread and dollar roll income was $0.42 per common share for the quarter, up $0.07 from the fourth quarter. The increase was largely due to a 25 basis point increase in our net interest spread, which was driven by a combination of a greater allocation of interest rate swaps in our hedge portfolio, lower repo funding costs, more favorable TBA implied financing levels and a modest increase in the yield on our asset portfolio. Our quarter-over-quarter results also benefited from reduced compensation expense as our fourth quarter results included year-end incentive compensation accrual adjustments. The average projected life CPR of our portfolio increased 70 basis points to 10.3% at quarter end from 9.6% as of Q4. The increase was largely due to prepayment model updates implemented in the first quarter and portfolio composition changes, partly offset by higher mortgage rates. Actual CPRs averaged 13.2% for the quarter compared to 9.7% in the prior quarter. Lastly, during the first quarter, we issued $401 million of common equity through our at-the-market offering program at a significant premium to tangible net book value per share, continuing our active capital management strategy and generating meaningful accretion for our common stockholders. And with that, I will now turn the call back over to Peter to discuss our portfolio.
Thank you, Bernie. Agency MBS performance varied meaningfully by coupon and hedge type in the first quarter. Low coupon MBS meaningfully outperformed high-coupon MBS due to heavy index buying from money managers in response to outsized bond fund inflows. This variation in performance by coupon was significant, with lower coupon MBS tightening about 10 basis points to treasuries during the quarter, while higher coupon MBS widened about 5 basis points on average. MBS performance also varied materially by hedge type as swap spreads tightened during the quarter. 10-year swap spreads, for example, tightened by almost 10 basis points. As a result, MBS positions hedged with a 10-year pay-fixed swap versus a 10-year treasury experienced spread widening of about 10 basis points, all else equal. This tightening in swap spreads was directly related to Middle East uncertainty. The market value of our portfolio totaled $95 billion at quarter end; during the quarter, we purchased $1.7 billion of predominantly low coupon specified pools. In addition, we rotated a portion of our portfolio down in coupon. Consistent with these changes, the weighted average coupon on our portfolio declined to 4.95% from 5.12% the prior quarter, and the percentage of our assets with favorable prepayment characteristics increased slightly to 77%. The notional balance of our hedge portfolio increased to $64 billion due to the addition of shorter-term pay-fixed swaps prior to the sharp sell-off in interest rates in March. We also reduced our exposure to treasury-based hedges during the quarter. As a result, in duration dollar terms, our swap hedge allocation increased to 78% from 70% the prior quarter. Lastly, in the current environment, we continue to favor operating with a positive duration gap which we view as additional prepayment protection in a down rate scenario. With that, we'll now open the call up to your questions.
Questions and answers
The first question comes from Bose George with KBW.
Peter, you mentioned for spreads that you compared to spread level at the earnings call last time where it is now. But if you compare it from the end of the fourth quarter to where it is now, are the returns pretty comparable? And what is the ROE currently imply?
Yes, thank you for your question, Bose. That’s a good way to frame it. Bernie mentioned that our year-to-date book value is almost the same as it was at the end of the fourth quarter. If we consider where mortgage spreads were, I often refer to them relative to the current coupon blended with the swap curve, which was around 150 basis points. Following the announcement regarding purchases from the GSEs, spreads tightened by about 15 to 16 basis points, bringing them down to the 135 level. Now, we are back to where we were this morning, at approximately 151 basis points. At this level, the current coupon to treasuries is about 120 basis points to the curve, not to a specific point on the treasury curve. So, the average spread is between 140 and 150 depending on the amount of swaps we use. At this level, I would indicate that returns are generally in the 15% to 17% range, centered around 16%, which aligns closely with our total cost of capital.
Okay. Great. And then actually, it looks like specialness improved a little bit. Can you just talk about that and how much of a contribution that is now?
Yes. No, that's a very significant change from what we've really observed over the last couple of years. The TBA position, we've talked about it, our TBA position has not been very significant because the implied financing levels on TBA have really been unattractive. And in fact, for a lot of the last 2 years, TBA implied financing levels were well through, in some cases, the repo levels. And that really dates back to the regional banking crisis in 2023, where it was the combination of the regional banking crisis, it was QT, it was regulation, and it was just a lot of things putting a lot of pressure on balance sheets. And that really had an implication for TBA funding. What we've seen is a lot of that pressure easing, and we really got the benefit of it in the fourth quarter. Obviously, the Fed has stopped Q2. Importantly, at the end of last year, they started reserve management purchases and growing their balance sheet with really eased funding pressures. They rebranded the standing repo facility to the standing repo program. And then, of course, we now, as we expected, got reform to the original Basel Endgame. All those things have been really positive for funding, reducing balance sheet constraints. And as a result, the TBA implied financing levels are generally back to through or equal to repo levels. And in fact, for several coupons, they've actually been meaningfully better than TBA finance. So we were able to take advantage of that in the first quarter with our TBA position. We actually had both longs and shorts in our TBA position, which contributed to the uptick in our dollar roll income. So we expect these implied financing levels to sort of remain in this level in this area. So it's a new opportunity for us that we haven't had over the last couple of years.
The next question comes from Crispin Love with Piper Sandler.
Just on quarter earnings. Net spread dollar roll income, very strong in the first quarter. I think since a year ago, can you just some of the dynamics there, the sustainability yields higher cost of, and you just had mentioned some of those financing dynamics. But can I think that's even if you just going a little bit down in coupon. So just as you look forward, would you expect core earnings to compress a little bit closer to the dividend? Just any thoughts there?
Yes, that's a great question. You're correct in thinking about our net spread and dollar roll income along with our margin, which increased by 25 basis points to 2.06. On a return on equity basis, that's nearly 20%, which I would say is above the long-run economics of the current environment. If you're looking for a range, we previously indicated that when our net spread and dollar roll income was around $0.35 to $0.36, we anticipated movement upward. I would suggest that a reasonable expectation for the near term, over several quarters, would be in the high 30s to low 40s. We have seen certain benefits emerge, particularly in the TBA implied financing levels, which now provide a tailwind. More significantly, the easing of repo pressures, thanks to the Fed's actions, has been beneficial. Previously, we experienced substantial pricing pressure in the repo market at month-end and quarter-end, but that has eased, and repo is now trading where the Fed wants it, at the midpoint of the Fed funds target. The timing of capital raises and the deployment of that capital can cause some variations from period to period. Overall, I believe the range I mentioned is likely accurate, somewhere in the high 30s to low 40s in terms of net spread and dollar roll income.
Okay. That makes sense. And then just on hedging. Hedge ratio, it ticked up a little bit, but still fairly low when you look at historical levels. So just in today's environment, the war rate fall the administration being supportive of the housing sector. Just how comfortable are you with the current levels in that 65% to 75% range versus if you, going back a little bit, you were at 90% plus in the past?
It goes back to what we discussed in the fourth quarter regarding our positioning, which remains the same. Our hedge ratio has increased, and I'm focusing on the net of our receiver swaptions, which is approximately 8%. This indicates that we are still set to benefit from lower short-term rates. If short-term rates decrease, we could close that hedge ratio, and we made some adjustments during the first quarter when the 2-year rate and 2-year swap spreads dropped to around 3.18, which was close to the Fed's estimated neutral target. While that target is not confirmed, it's likely around 3%. As short-term rates approach that neutral target, it makes sense for us to close our hedge ratio and secure funding. There is considerable uncertainty regarding the direction of short-term rates at the moment. During the first quarter, we transitioned from expectations of two rate cuts to a point where there was anticipation of Fed tightening. While there is more uncertainty, we believe the situation will stabilize, and the Fed will likely adopt a more accommodative monetary policy later in the quarter, which should benefit us. I would characterize our current hedge position as neutral, although we made some adjustments when the opportunity arose.
The next question comes from Ameeta Lobo Nelson with UBS.
So how do you think about optimal leverage in a policy-supportive environment, but where near-term volatility keeps remaining a recurring feature?
Yes. Certainly, an important question in today's environment. I guess I would start by saying, from our perspective, when we think about our leverage, we obviously are thinking about our leverage and setting our leverage according to the spread range that we expect to be operating and we saw that really play out really well for us in terms of being well positioned for the volatility and the spread volatility that we incurred in the first quarter. Obviously, you saw us grow our portfolio. And the key as a levered investor is you want to make sure that you have sufficient excess liquidity to withstand all of the uncertainty and stressful environments that we ultimately encounter on a regular basis and not have to change the asset composition, not have to delever your portfolio. And we've been able to successfully do that because we sized our position accordingly. And during the quarter, for example, our leverage sort of stayed right in this range, maybe got as low as 7% and maybe got as high as 7.5%. And so we have to wait and see how the environment unfolds. Obviously, there's a lot that can change and a lot that will change over the next quarter or 2, both with respect to the economic outlook, the monetary policy outlook, the geopolitical uncertainty that we face. And then the administration and what actions that they may take that will ultimately impact housing affordability. All those will go to inform us as to what the right leverage level is. But importantly, we are able to operate now in today's environment where spreads are, and particularly since spreads have widened, with a very reasonable leverage position and still generate excellent returns for shareholders. That gives us a lot of ability. What we're trying to do is we're trying to generate the best return we can while putting ourselves in a position to preserve book value across a wide range of market conditions. So we're always trying to optimize that. We will be informed over time as to whether or not we have to take our leverage up or take our leverage down based on the market conditions and the stability of spreads. If we get the war resolved, if the inflation pressures come down, the Fed's more accommodative. And importantly, the administration goes back to focusing as they were on interest rate volatility, in reducing interest rate value and importantly, reducing agency spread volatility, then ultimately, it would be a favorable environment we could operate with potentially a different leverage profile. But we certainly like the leverage profile that we're operating right now.
And then moving to GSE activity. It's been framed as more opportunistic than programmatic. How does that shape your trading strategy and your coupon selection relative value trade?
Yes, that's a great question because it goes back to your previous point about leverage. One of the things that we did expect, and it's very difficult to tell what we kind of realized with the GSEs is while they put out their portfolio numbers to their monthly volume summary is about a month after the fact. I don't believe that those numbers capture their TBA position. So it's not quite clear exactly what the growth is of the GSEs quarter-over-quarter. But what I would say, and I would fully expect and I believe that they do this is that they would approach this from a really economic perspective. And when mortgage spreads widen, particularly like they did, in March, I would expect the GSEs to take advantage of that. They're not only putting on a more profitable book of business, but importantly, they're serving a very important role in the market, which is to reduce interest rate volatility. And excuse me, not interest rate but mortgage spread volatility. And that ultimately is beneficial to the mortgage rate. So I do think that they would approach it that way from an opportunistic perspective and ultimately, the more that they do that, the more other capital gets attracted to the system. And one of the things that really will benefit mortgage rates and mortgage spreads is having a more diverse investor base. And we're starting to see that now. We're seeing that on the bank side, with the changes in bank capital. I do believe that banks will be a bigger buyer. We're seeing that with money managers. We're seeing foreign investors start to come back into the market. And obviously, to the extent that mortgage spread volatility comes down, in part due to the actions of the GSEs that allows more levered money to come into the system. That's a virtuous cycle that will ultimately lead to lower mortgage rates. So I think that's a critical role that the GSEs do play and can continue to play.
The next question comes from Trevor Cranston with Citizens JMP.
Peter. A follow-up on the question you were just talking about with leverage. It looks like you guys didn't really add much to the portfolio during the widening in March, at least based on the quarter end numbers. Can you talk about kind of what you would need to see in the future belts of volatility in order to significantly add to the portfolio? And if the GSE is sort of being there is a potential buyer and widening scenarios sort of gives you any added confidence and potentially adding if spreads are to widen again in the future?
Yes, you're correct. Our portfolio growth in the first quarter was $1.7 billion, which was accurate at the end of the quarter. We've noticed more stability in the market since then, especially considering the changes in tone and developments in the conflict. As I mentioned earlier, if we continue to see positive changes that affect the macroeconomic outlook and inflation, it would positively impact growth. I believe that mortgages trading in the 150 to 160 range are attractive in the long term, and I expect mortgage spreads to tighten over time as we gain more clarity on monetary policy. Over time, this is likely to happen. Additionally, if the GSE is stepping in to buy mortgages when they are underpriced, this would be a positive development.
Okay. That makes sense. You mentioned that in the first quarter, your purchases were in lower coupons. Could you provide more details about where you are finding opportunities in the coupon deck and identifying the best value right now?
Yes. We did both is our purchases, even though it was less than $2 billion, our purchases were concentrated in lower coupon specified pools. And importantly, we also did rotate a portion of our portfolio into lower coupons. And the reason why we did that is because we track on almost a daily basis, bond fund inflows, and we did see that bond fund inflows were coming in materially faster in the first quarter than the previous couple of years. So we knew that, that would ultimately translate to the outperformance of lower coupons. And now that has abated somewhat. So we are always looking for opportunities to move up in coupon, move down in coupon, be opportunistic. We're able to do that in the first quarter to some extent and we'll continue to look for opportunities. We have seen bond fund inflows starting to actually slow down quite a bit. In fact, I think quarter-to-date, they're probably running slower than the pace of the previous 2 years in the second quarter of the year. So we'll watch that closely, but there was an opportunity in low coupons. So we took advantage of that, and we'll continue to be opportunistic. Any follow-up on that, Trevor?
No. That's very helpful.
And our last question comes from the line of Harsh Hemnani with Green Street.
Peter, maybe can you talk a little bit about the timing of the equity raises last quarter? On the prior earnings call, it sounded like it would be more opportunistic and given everything that happened with spreads this quarter. Could you share some color on the timing of those equity raises? And then can we expect the rest of the year to be similarly opportunistic?
Thank you, Harsh. You accurately captured my expectations from the last call. If I reflect on the fourth quarter earnings call, my forecast for capital issuance was a bit slower than what we ultimately achieved. As Bernie noted, we raised about $400 million in the first quarter. The faster pace of this capital issuance compared to my expectation was largely due to the volatility we experienced. Having more capital has clearly been advantageous from that standpoint. Importantly, the economic benefit to our existing shareholders from that capital was substantial in the first quarter. The capital we raised positively impacted our book value, especially since we are trading at a premium to book. Additionally, it significantly enhanced our earnings because we have been able to deploy these funds, although not all of them yet. Most of the capital has been deployed at returns around 16 percent, which is quite favorable compared to our stock's dividend yield of approximately 13.5%. Therefore, it's beneficial from both an earnings and book value perspective, and having increased capital during volatile times is certainly advantageous, allowing us to seize opportunities. It’s important to note that the timing of capital issuance does not always align perfectly with deployment. This is part of our risk management strategy and our aim to be opportunistic, waiting for the right moments to invest the proceeds in assets that offer attractive returns. That was our approach in the first quarter, and we feel well-positioned as we move into the second quarter.
Got it. That's helpful. And then maybe you talked early in the call about specialists improving and that should lead to more DDA in the portfolio. I guess how are you comparing those percentages versus maybe capitalizing on the better specialists versus still seeking some prepayment protection with specified pools?
Yes. There are a couple of points to consider. Firstly, having role specialists does not necessarily mean a significantly larger net TBA position. For instance, our average TBA position in the first quarter was 10.3%, compared to 9.6% in the previous quarter, yet our income was significantly higher. This is because we can have offsetting positions that allow us to leverage TBA specialness effectively. Additionally, while conventional TBA implied specialist levels have improved, we still have significant specialists in the Ginnie Mae market. This will continue, but you may not see an increase in the overall size of our TBA position. Regarding specified pools, we are very focused on managing prepayment exposure in the current environment. We believe that as uncertainty decreases over time, prepayment risk will become our primary concern. Currently, a considerable portion of our portfolio, around 75% to 77%, consists of prepayment characteristics that we consider valuable, and we will maintain that strategy. Importantly, with current TBA implied financing levels, we can deploy capital swiftly into TBA without losing carry due to funding levels. This provides us with time to gradually transition from TBAs to specified pools when opportunities arise, which was not possible in recent years. Holding a TBA position while waiting to move to specified pools previously cost us carry, but that's not the case now. This gives us significant flexibility to deploy capital and eventually transition into specified pools, while we will continue to maintain a high percentage of specified pools. As I mentioned earlier, we will likely keep operating with a positive duration gap, which was a bit higher in the first quarter compared to previous quarters, as we want to position our portfolio to benefit from a lower rate environment.
We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico, for concluding remarks.
Well, again, I appreciate everybody joining the call this morning. We look forward to talking to you again after our second quarter.
Thank you for joining the call. You may now disconnect.