AGNC Investment Corp. Q3 FY2025 earnings call

• The Federal Reserve's pivot to less restrictive monetary policy and easing of fiscal concerns drove strong financial market performance and improved investor sentiment. Agency mortgage-backed securities were a top-performing fixed income asset class, outperforming U.S. treasuries for 5 consecutive months.
• Factors supporting agency MBS include improved spread environment, balanced supply and demand, strong financing market, and favorable GSE reform direction.
• Bernie Bell discussed financial results, noting net spread and dollar roll income declined $0.03 to $0.35 per common share, driven by factors like legacy swap maturity and capital deployment timing. Also, $345 million of Fixed-Rate preferred equity and $309 million of common equity were issued.
• Portfolio activity included deploying raised capital, with asset portfolio totaling $91 billion at quarter end, TBA position at $14 billion, and adding $7 billion of receiver swaptions for downgrade protection.

AGNC reported comprehensive income of $0.78 per common share for the third quarter. The economic return on tangible common equity was 10.6%, consisting of $0.36 of dividends declared per common share and a $0.47 increase in tangible net book value per common share. Leverage was 7.6x tangible equity and average leverage was 7.5x, unchanged from the prior quarter. Liquidity remained strong with $7.2 billion in cash and unencumbered Agency MBS at quarter end, representing 66% of tangible equity.

• Expect lower funding costs from Fed rate cuts and full deployment of recently raised capital to provide tailwind to net spread and dollar roll income.
• Anticipate continued favorable outlook for agency MBS due to factors like administration focus on mortgage spreads, balanced supply-demand, and supportive financing market.

• Macroeconomic factors such as unexpected changes in fiscal policy leading to inflation concerns and Fed having to pause rate cuts could pressure fixed income and Agency MBS.
• Potential delays in GSE reform or unforeseen issues with bank regulation impacting bank demand for mortgages.

Q: Spreads have tightened materially. Can you discuss expected ROEs and dividend sustainability?

A: Peter Federico said mortgages are in expected ROE range of 16%-18% aligning with cost of capital. Dividend sustainability is aligned as breakeven dropped to ~17% quarter-over-quarter.

Q: Decreased hedge ratio. What drove it and key risks?

A: Peter Federico explained hedge ratio drop due to adding receiver swaptions, with 23% short-term debt at high cost, expecting benefit as Fed eases. Receiver swaptions provide down rate protection but affect hedge ratio.

Q: Incremental demand for MBS from money managers. Sustained?

A: Terry Ma asked. Peter Federico said bond fund inflows robust, expected to remain so with Fed pivot and potential bank rotation into mortgages as regulation clarifies.

Q: Refi environment and prepay risk. Risks to consider?

A: Richard Shane asked. Peter Federico said only 20% of market has 50bps incentive, but technology and pent-up demand exist. Administration focus on mortgage spreads is key.

Q: Optimal leverage and near-term risk to spreads?

A: Ameeta Lobo Nelson asked. Peter Federico said leverage at 7.5x is good, near-term risk is macroeconomic factors like unexpected inflation changing Fed course.

Q: Hedging and duration gap. Thoughts?

A: Kenneth Lee asked. Peter Federico said duration gap is small now, nearer-term risk is 10-year rate being higher, but may adjust later.

Q: Deploying capital and down rate risk management?

A: Harsh Hemnani asked. Peter Federico said they rotate assets and optimize composition, adding $8 billion of specified pools rotated in Q3 for better characteristics.

Q: $0.05 tailwind time frame and impact of spread tightening?

A: Bose George asked. Peter Federico said $0.05 tailwind depends on Fed rate cut pace. Spread tightening benefits book value but return on portfolio remains aligned for common shareholders.

Q: Prepurchase risk in higher coupons?

A: Jason Weaver asked. Peter Federico said higher coupon pools have some prepayment protection through asset characteristics, and they rotate to favorable pools.