Prepared remarks
Good morning, and welcome to the AGNC Investment Corp. First Quarter 2026 Shareholder Call. Please note this event is being recorded. I would now like to turn the conference over to Katherine Turlington in Investor Relations. Please go ahead.
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; Bernice 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 two 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 three-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 two 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 represent 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 two 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 Bernice 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. Ten-year swap spreads, for example, tightened by almost 10 basis points. As a result, an MBS position 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 that you compared current spreads to the level at the earnings call last time. 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 implied ROE currently?
Yes. Thanks for that question, Bose. Yes, that's a good way of putting it. In fact, Bernice mentioned that our year-to-date book value is almost unchanged from the end of the fourth quarter. So when you think back about where mortgage spreads were, again, I always kind of refer to them off the current coupon to the blend of the swap curve, but they were right in that neighborhood of around 150 basis points. And then when we got the announcement on the purchases from the GSEs, it really pushed them, as you recall, about 15 to 16 basis points tighter, got us down to the 135 basis points level. And now we're right back to where we were this morning, at about 151 basis points. And at that level to the swap curve, the current coupon to Treasuries is about 120 or so basis points to the curve, not to a specific point on the Treasury curve. But you're looking at an average spread of somewhere between 140 and 150 depending on what amount of swaps we use. And at that level, I would say returns are kind of broadly in the 15% to 17% range, centered right around 16%, which aligns pretty well with our total cost of capital.
Okay. Great. 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. Our 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 two years, TBA implied financing levels were well through, in some cases, the repo levels. That really dates back to the regional banking crisis in 2023, where it was the combination of the regional banking crisis, it was quantitative tightening, it was regulation. 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 Quantitative Tightening. Importantly, at the end of last year they started reserve management purchases and growing their balance sheet which really eased funding pressures. They rebranded the standing repo facility to be 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. In fact, for several coupons, they've actually been meaningfully better than repo 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 area. 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 and dollar roll income was very strong in the first quarter, I think versus a year ago. Can you discuss some of the dynamics there — sustained higher yields, higher cost of hedging, and you just had mentioned some of those financing dynamics? As you look forward, would you expect core earnings to compress a little bit closer to the dividend? Any thoughts there?
Yes. No, great question. You're right. When you think about our net spread and dollar roll income and our margin, our margin, as Bernice mentioned, did increase 25 basis points to 2.06. And if you think about that on a return on equity basis, that's really close to 20%. I would describe that as being above the long-run economics of the current environment. But if you're looking for sort of a range, and we talked about this when our net spread and dollar roll income was down around $0.35 to $0.36, we said generally that we thought it was going to move up. So I would say that probably a good range of expectation over the relatively near term — meaning several quarters — would be high 30s and low 40s cents. And some of the things that we talked about definitely showed up, particularly, as I just mentioned, the same benefits that we saw in the TBA implied financing levels; obviously, that's a tailwind now. But just more broadly and more importantly, the easing of repo pressures thanks to the Fed and their activities really made a big difference. If you recall, we were seeing real significant month-end and quarter-end pricing pressure in the repo market that has abated and repo is now trading right where the Fed wants it in the middle of the Fed funds target. Obviously, the timing of capital raises and how we deploy that capital can have a little bit of period-to-period implications. But generally speaking, I feel like the range that I talked about is probably the right range: 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: the hedge ratio ticked up a little bit, but is still fairly low when you look at historical levels. In today's environment — with the war, potential rate falls, and the administration being supportive of the housing sector — how comfortable are you with current hedge levels in that 65% to 75% range versus historically being 90% plus?
Well, it goes back to really what we talked about in the fourth quarter. We were positioned and we still are positioned — you're right that our hedge ratio increased — and the hedge ratio that I'd like to look at is one net of our receiver swaptions, which is about 8%. That tells you that we are still positioned to benefit from lower short-term rates, meaning that if short-term rates go down, we could ultimately close that hedge ratio. And we did some of that in the first quarter because there was a period of time in the first quarter where the two-year rate and two-year swap spreads really got down into the low threes. I think they dropped down to around 3.18% at their lowest. So not that far off of where the Fed's neutral target might be. Obviously, that's not known right now, but it's probably somewhere around 3% as a neutral target. So as short-term rates approach that long-run neutral target, it would make sense for us to close our hedge ratio and move higher, essentially locking in that funding. Obviously, there's a lot more uncertainty about the direction of short-term rates right now. In fact, during the first quarter, we went from pricing in two eases at least to, at one point during the quarter, the market pricing in Fed tightening. So we have more uncertainty on that, but long run, we think that this ultimately will be resolved and that some of the underlying fundamentals will come back and that the Fed will ultimately adopt a more accommodative monetary policy stance later in the year, and we should stand to benefit from that. So I would describe us as sort of neutral right now in terms of changes to our hedge position. But we did close it a little bit when we had the opportunity.
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 remains a recurring feature? And then moving to GSE activity: you've framed it as more opportunistic than programmatic. How does that shape your trading strategy and your coupon selection relative-value trade?
Yes. Certainly an important question in today's environment. I would start by saying that when we think about our leverage, we obviously are setting our leverage according to the spread range that we expect to be operating in, and we saw that really play out well for us in terms of being well positioned for the volatility and spread volatility that we incurred in the first quarter. Obviously, you saw us grow our portfolio. 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 or delever your portfolio. We've been able to successfully do that because we sized our position accordingly. During the quarter, for example, our leverage sort of stayed right in this range — maybe got as low as 7.0x and maybe got as high as 7.5x. We have to wait and see how the environment unfolds. There's a lot that can change over the next quarter or two, both with respect to the economic outlook, the monetary policy outlook, the geopolitical uncertainty that we face and then the administration and what actions they may take that will ultimately impact housing affordability. All those will inform us as to what the right leverage level is. Importantly, we are able to operate now in today's environment where spreads are — particularly since spreads have widened — with a very reasonable leverage position and still generate excellent returns for shareholders. That gives us a lot of flexibility. What we're trying to do is 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 whether or not we have to take our leverage up or down based on market conditions and the stability of spreads. If we get the war resolved, inflation pressures come down, the Fed becomes more accommodative and the administration goes back to focusing on reducing mortgage spread volatility, then ultimately, it would be a favorable environment in which we could operate with potentially a different leverage profile. But we certainly like the leverage profile that we're operating with right now. Regarding GSE activity: One of the things that we expected — and it's difficult to see exactly in real time — is that the GSEs' monthly portfolio numbers are released with a lag and may not capture their full TBA positions. I would fully expect the GSEs to approach purchases from an economic perspective, taking advantage of wider spreads when it's beneficial. They are serving a critical role in the market, which is to reduce mortgage spread volatility, and that ultimately benefits mortgage rates. I do think they would approach their purchases opportunistically and that the more they do that, the more other capital gets attracted to the system. That will benefit mortgage spreads: we are seeing more activity on the bank side with changes in bank capital, more money manager demand and foreign investors starting to return to the market. To the extent that mortgage spread volatility comes down — in part due to actions by the GSEs — that allows more levered money to come into the system, creating a virtuous cycle that ultimately leads to lower mortgage rates. So I think the GSEs play a critical role and can continue to do so.
The next question comes from Trevor Cranston with Citizens JMP.
Peter, a follow-up on leverage: it looks like you didn't really add much to the portfolio during the widening in March, at least based on the quarter-end numbers. What would you need to see in future bouts of volatility to significantly add to the portfolio? And if the GSEs are a potential buyer in widening scenarios, does that give you added confidence to potentially add if spreads widen again in the future? Also, you mentioned purchases in the first quarter were in lower coupons — can you add detail around where you're buying in the coupon stack and where you find the best value now?
Yes, you're right. Our portfolio growth in the first quarter was, as I mentioned, $1.7 billion, and that was concentrated in lower coupon specified pools. That was true at quarter end. We have seen more stability in the market since quarter end, importantly given changes in the conflict. To the extent we continue to see positive developments that change the macroeconomic outlook and particularly the inflationary implications, it would be positive from a growth perspective. I do believe that mortgages in the 150 to 160 basis point range where we've been trading are attractive long run, and I do expect mortgage spreads to tighten over time once we have more resolution and a clearer monetary policy outlook. So over time, that can happen. I also do think the GSEs step in and buy mortgages when they're priced attractively, and if they do that it would be positive. With regard to coupon selection, even though our purchases were less than $2 billion, they were concentrated in lower coupon specified pools. Importantly, we also rotated a portion of our portfolio into lower coupons. The reason is we track, almost daily, bond fund inflows, and we saw that bond fund inflows were coming in materially faster in the first quarter than the previous couple of years. That translated to outperformance in lower coupons, so we took advantage. That has abated somewhat, and we're always looking for opportunities to move up or down in coupon opportunistically. We have seen bond fund inflows slowing in the second quarter relative to the first quarter, so we'll watch that closely, but there was an opportunity in low coupons and we took advantage of it. We'll continue to be opportunistic.
No, that's very helpful.
And our last question comes from Harsh Hemnani with Green Street.
Peter, can you talk a little bit about the timing of the equity raises last quarter? On the prior earnings call, it sounded like issuance would be more opportunistic, and given the volatility this quarter, could you share color on timing of those equity raises? Can we expect the rest of the year's issuance to be similarly opportunistic? And you mentioned earlier that TBA specialness improved and that should lead to more TBA in the portfolio. How are you comparing those percentages versus capitalizing on the better TBA specialness versus still seeking some prepayment protection with specified pools?
Yes, thank you, Harsh. I would say my expectation coming out of the fourth quarter was that capital issuance would have been a little slower than what we ultimately did in the first quarter. As Bernice mentioned, we issued about $401 million in the first quarter. The reason that ended up being a little faster than the pace I had anticipated was the volatility we saw. Having more capital is beneficial in volatile times. Importantly, the economic benefit to our existing shareholders of that capital was significant in the first quarter. The capital we raised was accretive from a book value perspective given that we were trading at a premium to book. It was also accretive from an earnings perspective because we were able to deploy those proceeds at attractive returns. We haven't deployed all of it yet, but we've deployed most of it. We were able to deploy at returns around 16%, and you can compare that to the dividend yield on the stock around 13.5%, so it's accretive from an earnings perspective and from a book perspective. Having more capital in times of volatility is beneficial and gives us the opportunity to act. Sometimes issuance timing does not align perfectly with deployment timing — that's part risk management, part opportunism. That's the approach we took in the first quarter and we feel like we're in a good position entering the second quarter. Regarding TBA specialness, it doesn't necessarily translate into materially bigger aggregate TBA positions. For example, our average TBA position in the first quarter was 10.3% versus 9.6% the previous quarter, yet our income was materially higher. That's because we had offsetting positions that allowed us to take advantage of TBA specialness. Not only did conventional TBA implied financing levels improve, but we've seen significant specialness in the Ginnie Mae market as well. We'll continue to use TBAs opportunistically. You may not see a massive uptick in the aggregate size of our TBA position. In terms of specified pools, we remain focused on managing prepayment exposure. We do believe that over time, once uncertainty abates, prepayment risk will be the predominant risk. As I mentioned, a significant portion of our portfolio — 75% to 77% — has prepayment characteristics we deem valuable, and we will continue to manage that. What's important in the current environment is that because TBA implied financing levels are where they are, we can deploy capital quickly in TBAs without losing carry due to funding levels. That gives us more time to slowly rotate out of TBAs into specified pools when those opportunities exist. That was not the case for the last couple of years. To have a TBA position while you wait for the opportunity to rotate into specified pools used to cost us carry; that's not the case now. So it gives us flexibility to deploy capital and ultimately rotate into specified pools, but we will continue to operate with a high percentage of specified pools in this environment. We also, as I mentioned in my prepared remarks, are likely to continue to operate with a positive duration gap: our duration gap in the first quarter was a little higher than in prior quarters because we want to position the portfolio to benefit in a lower rate scenario.
Got it. That's helpful.
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.