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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 Katie 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. 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 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 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%. 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. For example, 10-year swap spreads 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 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.
分析師問答
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. Thanks for that question, Bose. Yes, that's a good way of putting it. In fact, Bernie 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 maybe 16 basis points tighter, got us down to the 135 level. And now we're right back to where we were this morning, there are about 151 basis points. And at that level, that's 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. 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 two 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 a combination of the regional banking crisis, QT, and regulation put a lot of pressure on balance sheets. 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 QT. At the end of last year, they started reserve management purchases and growing their balance sheet, which eased funding pressures. They rebranded the standing repo facility to be the standing repo program. And 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. As a result, the TBA implied financing levels are generally back to or equal to repo levels. 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 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. Dollar roll income, very strong in the first quarter. I think since a year ago, can you just talk about some of the dynamics there, the sustainability yields higher cost of funding, and you just had mentioned some of those financing dynamics. But as you look forward, would you expect core earnings to compress a little bit closer to the dividend? Just 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 Bernie mentioned, did increase 25 basis points to 2.06. If you think about that on a return on equity basis, that's really close to 20%. I would describe that as above the long-run economics of the current environment. But if you're looking for sort of a range, I would say that probably a good range of expectation over the relatively near term would be in the high 30s and low 40s. Some of the things we talked about definitely showed up, particularly the same benefits 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 that we thank to the Fed made a big difference. If you recall, we were seeing 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 some 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 and 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 compared to historical levels. So just in today's environment, with the war, the rate fall, and the administration being supportive of the housing sector, how comfortable are you with the current levels in that 65% to 75% range versus if you, go back a little bit, you were at 90% plus in the past?
Well, it goes back to what we talked about in the fourth quarter. You're right, our hedge ratio increase, and the hedge ratio that I'd like to look at is the 1 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 close that hedge ratio. We did some of that in the first quarter because there was a period of time in the first quarter where the 2-year rate and 2-year swap spreads really got down into the low 3% range. Not that far off of the Fed's neutral target. Obviously, that's not known right now, but it's probably somewhere around 3% as to Fed's 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 to lock in that funding. 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, in effect, at one point during the quarter when the market was expecting Fed tightening. So we have more uncertainty there now, but still long-run, we think that this will ultimately resolve and that the underlying fundamentals will come back and that the Fed will adopt a more accommodative monetary policy stance later in the quarter, and we should stand to benefit from that. I would describe us as neutral right now in terms of changes to our hedge position. We did close it a little bit when we had the opportunity.
The next question comes from Marissa Lobo 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 are obviously considering our leverage and setting it according to the spread range that we expect to be operating in, and we saw that play out well for us in terms of managing overall spread volatility. Obviously, you saw us grow our portfolio. The key as a levered investor is you want to ensure you have sufficient liquidity to withstand all the uncertainty and stressful environments we encounter regularly and not have to change the asset composition or deleverage 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% and maybe got as high as 7.5%. We have to wait and see how the environment unfolds. Obviously, there's a lot that can change over the next quarter or two, including the economic outlook, monetary policy outlook, the geopolitical uncertainty 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 can operate now in today's environment where spreads are, and particularly since spreads have widened, with a reasonable leverage position and still generate excellent returns for shareholders. That gives us a lot of ability. What we're trying to do is generate the best return we can while preserving book value across a broad range of market conditions. So we're always trying to optimize that. We will be informed over time whether we need to raise or lower our leverage based on market conditions and the stability of spreads. If we resolve the war, keep inflation pressures down, the Fed becomes more accommodative, and the administration focuses back on reducing interest rate volatility and importantly, reducing agency spread volatility, then it would be a favorable environment for a different leverage profile. But we certainly like the leverage profile we're operating with 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 ties back to your previous point about leverage. One of the things that we did expect, and while it’s very difficult to assess, I do believe the GSEs would approach this from an economic perspective. When mortgage spreads widened, particularly 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 also serving a critical role in the market, which is reducing mortgage spread volatility. That’s beneficial to mortgage rates. The more they do that, the more other capital gets attracted to the system. We’re starting to see that now; on the bank side, with the changes in capital. I do believe banks will be bigger buyers, and we're seeing that increase with money managers and foreign investors returning to the market. The actions of the GSEs to buy when spreads widen can drive down mortgage rates. That’s a virtuous cycle, ultimately leading to lower rates.
The next question comes from Trevor Cranston with Citizens JMP.
Peter. A follow-up on the leverage question. It seems like you guys didn't add much to the portfolio during the widening in March, at least based on the quarter-end numbers. Can you talk about what you would need to see in future bouts of volatility in order to significantly add to the portfolio? And if having the GSE there as a potential buyer during widening scenarios gives you any added confidence in potentially adding if spreads widen again in the future?
Yes, you're right. We didn't see our portfolio growth in the first quarter, which was $1.7 billion. This was true at the end of the quarter. We have seen more stability in the market since then, importantly given the geopolitical change in tone. So to the extent that we continue to see positive developments that can tailwind the macroeconomic outlook and inflationary implications, it would help growth perspectives. I do believe homes in this 150 to 160 spread range are attractive long run, and I expect mortgage spreads to tighten over time once we have more resolution and once the monetary policy outlook starts to become clearer. Over time, that can all unfold positively. I do think the GSEs stepping in and buying mortgages when they are cheap is ultimately positive.
Okay. That makes sense. And I think you said the purposes you made during the first quarter were in lower coupons. Can you just maybe add some detail around where you guys are buying in the coupon deck and finding the best value right now?
Yes. Our purchases, even though they were less than $2 billion, were concentrated in lower coupon specified pools. We also rotated a portion of our portfolio into lower coupons. The reasoning behind that is we track on almost a daily basis bond fund inflows, and we did see those inflows coming in materially faster this quarter than in the previous couple of years. We knew this would translate to the outperformance of lower coupons. That has slowed somewhat, but we continuously seek opportunities. There was an opportunity in low coupons during the first quarter, and we took advantage of that. We will continue to look for opportunities as bond fund inflows have started to slow down in the second quarter compared to previous years.
And our last question comes from the line of Harsh Hemnani with Green Street.
Peter, can you talk 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, could you share some color on the timing of those equity raises? Can we expect the rest of the year to be similarly opportunistic?
Yes, thank you for that, Harsh. Yes, I think you characterized my expectation from the last call. If I go back to the fourth quarter earnings call, my expectation for the capital issuance would have been a little slower than what we ultimately saw. As Bernie mentioned, it was about $400 million in the first quarter. The reason that it ended up being a little faster than anticipated was the volatility we saw. So having more capital in that time is beneficial. Importantly, from an economic benefit perspective to our shareholders, it's significant. The capital raised was accretive from a book value perspective given that we traded at a premium to book. Also, it was significantly accretive from an earnings perspective due to the ability to deploy those proceeds. We're in a good position as we start the second quarter.
That's helpful. You talked early in the call about specialist improving and that should lead to more dollar roll income in the portfolio. How are you comparing those percentages versus capitalizing on better specialists while still seeking some prepayment protection with specified pools?
Yes. A couple of points there. One, it doesn't necessarily imply that the TBA position will significantly increase. Our average TBA position in the first quarter was 10.3% versus 9.6% the previous quarter, yet our income was materially higher. We can have offsetting positions allowing us to take advantage of the TBA specialness, and there have been significant specialists in the Ginnie Mae market still. We will continue to manage prepayment exposure diligently because we do believe that in the future, prepayment risk will be our predominant risk once this uncertainty abates. We are operating now with a significant portion of our portfolio having favorable prepayment characteristics. We will also continue to manage our capital fluidly depending on the advantages of TBA financing levels, allowing us to deploy capital and rotate into specified pools when opportunities present themselves. With this improved environment, we have the chance to rotate capital while seeking favorable yields. We have openly operated with a positive duration gap, and our duration gap in the first quarter increased slightly due to our ability to benefit from our positioning in a lower rate scenario.
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.