AGNC Investment Corp. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Market Environment: Fixed income momentum abated in Q2 as the Fed and market awaited signs of economic slowdown and inflation moderation. Interest rates edged higher, agency MBS spreads widened, resulting in a negative economic return of just under 1%. Economic data was supportive of the Fed moving toward a more accommodative policy, which should lead to lower rate risk, reduced volatility, and a steeper yield curve.
• Agency MBS Market: Demand from banks and foreign investors moderated in Q2, while bond funds demand was steady. Supply increased in Q2 due to seasonal factors, but spreads ended the quarter in the middle of the recent range. The net supply of agency MBS remains below expectations due to persistent affordability challenges and slow prepayment speeds.
• Financial Results: Comprehensive loss of $0.13 per share. Economic return on tangible common equity was negative 0.9%. Tangible net book value per share was up ~2% in July. Leverage increased to 7.4 times tangible equity. $434 million of common equity was issued in Q2.
• Non-Agency Market: Credit spread performance was mixed. The non-agency portfolio declined, but capital was redeployed. Funding landscape for non-agency securities remained stable.

Segment Performance

• Agency Mortgage Backed Securities (MBS): The total investment portfolio was $66 billion as of June 30. For the second quarter, AGNC had a comprehensive loss of $0.13 per share. Economic return on tangible common equity was negative 0.9% for the quarter, with $0.36 of dividends declared for common shares and a decline in tangible net book value of $0.44 per share. Leverage increased modestly to 7.4 times tangible equity as of Q2 from 7.1 times in Q1. Liquidity remained strong with unencumbered cash and agency MBS of $5.3 billion, 65% of tangible equity. The average projected life CPR for the portfolio decreased 120 basis points to 9.2% at quarter end, but actual CPRs increased to 7.1% due to seasonal factors. Net spread and dollar roll income for the quarter was $0.53 per share, with a $0.05 per share decline due to a decrease in net interest rate spread.
• Non-Agency Securities: The non-agency portfolio ended the quarter at $940 million, down ~10% from prior quarter due to participation in GSE tender offers and CMBS payoffs. Some freed-up capital was opportunistically redeployed. Funding landscape for non-agency securities remained stable.

Guidance

• The Fed's short-term rate forecast shows 9 rate cuts over the next two years, which should reduce rate risk and volatility, benefiting the agency MBS market.
• Long-term fundamentals for agency MBS are favorable due to persistent affordability challenges and slow prepayment speeds, leading to net supply below expectations.
• Agency MBS are expected to remain range-bound in the near term, but longer term, there are more reasons for spreads to tighten.

Risks

• Political events like the presidential election could impact market volatility and investment positioning.
• The Fed's balance sheet runoff and reserve level changes could affect funding markets and net interest margin.
• Mortgage spread volatility and economic data releases could cause market fluctuations.

Question and Answer

• Q: Impact of the presidential election on AGNC? A: Peter discussed that the election could impact market volatility, but expects minimal change in the agency MBS market over the near term, with no significant disruption to the highly liquid agency MBS market.
• Q: Incremental buyers for agency MBS? A: Peter mentioned bank demand moderating, but bank regulation is likely to be less negative, and the shift in monetary policy should improve demand for agency MBS.
• Q: How is the dividend set? A: Bernie explained the dividend is set based on total cost of capital vs. expected return on mortgage backed securities, with alignment between the dividend and the economics of mortgage backed securities.
• Q: NIM decline and swap roll-off? A: Terry asked about NIM decline due to swap roll-off, and Peter explained the impact of shorter vs. longer term swaps on NIM, with alignment between NIM and economic fundamentals.
• Q: Hedging and capital deployment? A: Rich asked about hedging during capital deployment, and Peter noted the ATM program allows flexible capital deployment with no friction in hedging due to market liquidity.
• Q: Prepayment speeds and mortgage rates? **A: Eric asked about prepayment speeds and mortgage rate trends, and Chris explained the prepayment speed forecast assumes forward rates, with convexity risk manageable and coupon selection based on spread and cash flow.