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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.
分析師問答
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?
Sure, I appreciate your question. Our outlook is positive as we move into the second half of the year, especially given the developments in the second quarter related to the GSEs. This creates a solid backdrop for Agency mortgage-backed securities. Currently, we are experiencing some stabilization and I anticipate spreads will gradually tighten, although I don't see any significant catalysts for a sharp decrease in the near term. It’s important to note, as Bernie pointed out, we've taken a careful approach to deploying the capital we raised in the second quarter, having utilized just under half of it. This allows us room to invest those proceeds at still favorable levels today. The current coupon for Agency mortgage-backed securities stands at approximately 200 basis points over a blend of swap rates, which is near the top of the range we've seen over the past four years. Additionally, if we have the opportunity to raise more accretive capital during the quarter, we will pursue that to create incremental value for our shareholders.
We are positioned well to deploy capital gradually. These opportunities should remain available for some time, and we also have the capacity to consider slightly higher leverage. Bernie noted that our unencumbered cash position at the end of the quarter was $6.4 billion, or 65%, which is actually a 2% increase from the end of the first quarter. Despite all the market volatility and the growth of our portfolio by $3.5 billion, we have more unencumbered cash as a percentage of our equity compared to the end of the second quarter. Thus, we are well-positioned to execute on the strategies you mentioned. The market will guide the pace of our actions as we observe the development of mortgage spreads and the resolution of ongoing political uncertainties related to government policy and tariffs, which we hope will clarify within the next couple of weeks. There is also some ongoing uncertainty with monetary policy, but that should also be addressed in the coming month or two. Overall, we have considerable 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 talked about our net spread and dollar roll income for a lot of quarters now in terms of it coming down to be more aligned with the economics of our portfolio as we see it. And obviously, there are a lot of considerations when you're looking at net spread and dollar roll income in terms of the way accounting works for asset yields and for hedge costs. And it doesn't reflect necessarily the long-term ongoing economic earnings power of your portfolio. It's a current period earnings measure. So you have to look at it in that context. But that said, it has come down more in line with the economics of our portfolio today, and I'll share with you a couple of points. One, if you look at that $0.38, that $0.38 in terms of a return on equity is, I think, in the 19.5% type range. I don't know exactly what that number, but something in the 19%, 19.5% range. I point that out because if you look at where mortgage valuations are today, that rough number I just talked about with current coupon to a blend of treasury rates and a current coupon to a blend of swap rates, current coupon to treasury rates right now at about 160 basis points, a blend of rates across the curve from 3 years to 10 years and 200 basis points to swaps.
So you're looking at about an 180 basis point return spread in the current environment. Leverage the way we leverage our portfolio translates again to about a 19% or so ROE for marginal investments. So I would say that the environment that we're in right now, given where spreads are, I would call it in the high teens, somewhere between 18% to 20% returns. That aligns with our net spread and dollar roll income. But there's going to be period-to-period volatility in that number. Bernie mentioned it came down this last quarter because of the slow pace of deployment primarily of the proceeds of the capital that we raised. And obviously, as we deploy that, that will sort of eliminate that drag that we were seeing in the second quarter. But also, there will be a continued drag from our swap hedges rolling off. We had about $5 billion roll off in the second quarter. We replaced $2.3 billion of those.
So over time, our swap cost will go up. I expect our repo cost to come down over time, particularly as the Fed eventually gets back into easing. And I expect our asset yields to gradually rise. They're still below market. So there's a bunch of different factors, but I would say our net spread and dollar roll income should stay generally in the kind of range that we're seeing, maybe mid- to high-$0.30s to low to mid-$0.40s range. I gave you a lot there. I hope that answers 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, 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'll address that first and then revisit the other points you made. You provided a lot of information. We're taking an opportunistic approach, and I believe we can afford to be patient regarding capital raising. We were particularly pleased with the opportunities in the second quarter due to the volatility, which allowed us to raise capital in a beneficial way. This provided us with additional liquidity to handle any further disruptions and also enabled us to utilize those funds effectively. However, I wouldn't necessarily consider the second quarter as a predictor for future quarters; we'll evaluate each quarter as it arrives. 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 did mention that we have continued to deploy. We purchased about $1 billion worth of mortgages earlier this month. So we still like the market. We are still deploying capital at a disciplined pace. In terms of our preference, we continue to favor the upper coupons, particularly in specified pools with higher coupons, in the 5% to 6% range, where there are favorable prepayment characteristics. We appreciate the yield profile there, as well as 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 kind of 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 are not growing just for growth's sake. Our growth is focused on raising capital in a way that benefits our existing shareholders and supports our dividend. If we can keep doing this, we will certainly look to seize that opportunity. Additionally, operating at our scale brings significant benefits. For example, our operating costs last quarter were 111 basis points, making us the lowest in the industry, which is quite compelling. Furthermore, our stock has tremendous liquidity, which is valuable for shareholders. We have concentrated our portfolio in agency or agency-like securities, providing a way for investors to gain this exposure through our highly liquid stock. With a common equity market cap over $8 billion, it’s easy for investors seeking fixed income exposure to purchase our stock.
Another positive aspect of our size is that as our market cap grows, we become more accessible for inclusion in various indices, enhancing our liquidity and visibility. However, there are also market capacity constraints we're aware of related to size. The liquidity in the fixed income market is not as strong today as it was 10 or 15 years ago, prior to the financial crisis. We are mindful of the size of our asset portfolio and our ability to transact both in the hedge and asset markets. Balancing these factors is essential, and while there are many benefits related to size, scale, and liquidity, we also recognize that there is a limit to how large we can grow.
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, does that kind of reflect the mix that you guys currently have in the portfolio?
It does. When I did that calculation on the ROE, I came to 180 basis points because I used a 50-50 blend. And that's probably the right blend for us we think long term, meaning that there are a lot of diversification benefits that we like about having sort of an equal mix of treasuries and swaps. But that said, we are a little overweighted on swaps still on aggregate. And if you look at the way we hedged our purchases in the second quarter, about 2/3 of the hedges were in swap-based hedges. So we're a little more overweight. As we go forward in the current environment, I would say at the margin, we would probably favor a little bit higher percent of swaps than the long-term 50-50 average because I do expect stability in swap spreads to sort of develop over time, and I do expect some upward pressure, meaning swap spreads should widen, which will be beneficial to us as the supplemental leverage ratio reform actually takes place, likely by the fourth quarter, but maybe even in the third quarter.
And when you really look at what happened in the swap market in the second quarter, that was really one of the sort of the most important points about mortgage performance. I mean the move we saw in swap spreads with longer-term swap spreads moving almost 10 basis points narrower was really dramatic, and it's indicative of sort of the balance sheet constraints that still exist in the market today, swaps versus treasuries. We do expect that balance sheet pressure to ease as bank regulation is implemented and particularly as the supplemental leverage ratio has changed. So over time, I think we'll benefit from having this overweight right now on swaps. But 50-50 is probably the right long-term mix going forward.
Okay, great. And then in terms of your CPR, it looks like the lifetime CPR declined. Does that just reflect the market expectation on rates?
Exactly. In the second quarter, we saw the yield curve steepening. The 10-year yield remained mostly unchanged, increasing by only 2 or 3 basis points, while the 2-year yield experienced a notable rise of 17 basis points. However, the significant movement at the longer end of the yield curve negatively impacted our mortgage portfolio. I emphasized this in my prepared remarks because both the 20- and 30-year yields increased, with the 30-year jumping by 21 basis points. This shift affects the key rate duration of mortgages, causing forward mortgage rates to rise in the second quarter. This increase contributed to the change in our lifetime CPR. It's important to note that most portfolios, including ours, usually don’t hedge very long cash flows related to mortgages, focusing instead on the intermediate part of the curve, typically up to about 15 years. The dynamics at the longer end are quite specific and hard to hedge from a mortgage perspective, so our hedging mainly concentrates on the 10-year area of the curve to manage that long duration. Therefore, if there are significant changes in the 10s and 30s curve, it could impact mortgage performance.
The next question comes from Jason Weaver with Jones Trading.
Peter, even considering the relative value implications we've discussed, I realize we've been focusing on the level of MBS spreads for some time due to their significant wideness. Would you agree that spreads appear to have entered a larger secular trend over time? The level of volatility has decreased, yet we still find ourselves at 200 over on swaps.
Yes, I believe we have established a new trading range. When looking back at mortgage spreads over the past four years, excluding the COVID event, we are currently at the high end of that range. We just barely broke out in the latest episode, reaching 220 basis points as a closing mark versus swaps. However, that range is still intact. I would estimate the range for mortgages versus swaps to be around 160 to 200 basis points, and versus treasuries, it might be between 160 and 120 basis points. This appears to be the new norm, and given the current environment, we may remain in the upper half of that range due to uncertainties in geopolitical, fiscal, and monetary policies. I don't foresee significant catalysts that would push us out of this range, which is an important development from the second quarter. There was notable tariff-related market stress that we managed to navigate, and GSE reform was another potential factor that could have redefined the trading range due to the uncertainty surrounding it. Key policymakers effectively communicated their thought processes and priorities, which helped maintain the market's unique characteristics today. Therefore, while we are now in a new range, I expect to stay at the top of it and not see continued upward movement; rather, we may see a decline within this range.
Got it. That's helpful. And then just another one on the capital deployment progress in 2Q and even currently. How are you looking at relative value within the specified pool product just among the different sort of warehouses there?
Yes, in my prepared remarks, I mentioned that approximately 81% of our portfolio possesses some positive prepayment feature. At the start of our asset portfolio presentation, we noted that about 41% are classified as high-quality specified pools. The key takeaway is that we believe there are many attributes beyond the usual high-quality indicators, such as low loan balances, that can lead to strong mortgage performance and more stable cash flows. These attributes include factors like FICO scores, loan-to-value ratios, geographical tax implications, and house price trends, as well as loan types, whether for primary residences, second homes, or investment properties. We see significant value in these additional characteristics, which is why we favor acquiring specified pools, especially those with higher coupons that offer noticeable yield advantages, even though they come with greater convexity risk.
In the current market, where house prices are stabilizing and possibly declining in certain areas, we find substantial value in adding specified pools with these traits. Furthermore, in the current environment, as we observed in the second quarter, TBA positions offer some unique benefits regarding implied financing levels, particularly for specific coupons in Ginnie Mae securities, which constitute a significant portion of our long position. However, conventional TBA positions do not provide a real funding advantage at this time. Therefore, we prefer higher coupon specified pools over TBA positions in today's market.
The next question comes from Jason Stewart with Janney.
It seems that the curve steepener trade is quite crowded. We've discussed hedges, but could you elaborate more on the asset side? I believe you began to address 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, among other factors, to optimize returns moving forward?
There is definitely a lot of flexibility. You can see us adjusting our coupon position significantly from quarter to quarter. We have ample liquidity and the capacity to shift between TBAs and specified pools. The characteristics we've discussed alter our profile, allowing us to make various adjustments on the asset side, especially with a TBA position. We can transition from TBAs to pools and different coupons. As the yield curve changes, we can certainly adapt the asset side of our strategy. This will largely depend on the positioning of our hedges, which is crucial, and we have substantial capability in this area. Most of our hedges are focused in the 7- to 12-year range, with about 83% of our hedge duration being longer than 7 years. This indicates that when you assess our asset key rate duration profile alongside our hedge profile, the concentration suggests we've set our overall portfolio to gain when the yield curve steepens between the 2-year and 10-year segments.
Thus, we stand to benefit and will continue to do so. If 2-year rates decline while 10-year rates remain steady or increase, our overall portfolio will benefit, based on our asset mix and hedge structure in that scenario. We anticipate that the curve steepening will persist, especially given the ongoing pressures from the Fed. Currently, the 2-year to 10-year spread is approximately 52 basis points, which is about 50 to 60 basis points flatter than the 25-year average. I foresee this part of the curve steepening over time, and I expect our portfolio to gain from this movement.
Got it. Okay. So perhaps too early to think about post-steepener trades. And then I apologize if I missed this in the comments or the questions. Did you give an updated estimate for book value quarter-to-date in 3Q?
Yes. Bernie mentioned at the end of last week, it was up about 1%.
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.