AgNC outlines stable leverage strategy and sees 10.6% economic return as Fed signals rate cuts

Earnings Call Insights: AGNC Investment Corp. (AGNC) Q3 2025

MANAGEMENT VIEW

* CEO Peter Federico highlighted the favorable investment environment driven by the Federal Reserve's shift to a less restrictive monetary policy and easing fiscal concerns, stating that "AGNC generated a very strong economic return of 10.6%, comprised of our attractive monthly dividend and book value appreciation." He noted agency mortgage-backed securities (MBS) outperformed U.S. treasuries for five consecutive months, a trend not seen since 2013.
* Federico emphasized the administration's focus on maintaining or narrowing mortgage spreads to improve housing affordability, referencing a late September interview with the Treasury Secretary stating, "the really important thing is that we either maintain mortgage spreads or narrow them further to help the American people. This focus on spreads by the administration is good for Agency MBS and good for our business."
* AGNC's asset portfolio grew to $91 billion as new capital was fully deployed, and the TBA position increased to $14 billion. Federico reported, "the percentage of our assets with favorable prepayment attributes declined to 76% in the third quarter. The weighted average coupon of our portfolio increased slightly to 5.14%."
* CFO Bernice Bell reported, "For the third quarter, AGNC reported comprehensive income of $0.78 per common share. Our 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."
* Bell added, "We ended the third quarter with leverage of 7.6x tangible equity and average leverage of 7.5x, both unchanged from the prior quarter. Our liquidity position remained very strong with $7.2 billion in cash and unencumbered Agency MBS at the end of the quarter, representing 66% of tangible equity."

OUTLOOK

* Management indicated that a constructive outlook for agency MBS is supported by a defined spread range, well-balanced supply-demand dynamics, a strong financing market, and positive momentum in GSE reform. Federico stated, "Collectively, the 4 factors that I mentioned are currently pointing in a favorable direction for Agency MBS."
* Bell commented, "Looking ahead, we expect that lower funding costs from the September rate cut and widely anticipated future rate cuts, along with the full deployment of recently raised capital and a shift in our hedge mix toward a greater share of swap-based hedges will collectively provide a moderate tailwind to net spread and dollar roll income."

FINANCIAL RESULTS

* AGNC reported comprehensive income of $0.78 per common share in Q3, with an economic return on tangible common equity of 10.6% driven by both dividends and book value appreciation.
* Leverage remained stable at 7.6x tangible equity. Cash and unencumbered Agency MBS stood at $7.2 billion, representing 66% of tangible equity.
* Net spread and dollar roll income declined $0.03 to $0.35 per common share, attributed to lower swap income and timing mismatches between capital issuance and deployment.
* AGNC issued $345 million of fixed-rate preferred equity and $309 million of common equity, with the preferred issuance expected to further enhance future earnings available to common shareholders.

Q&A

* Crispin Love, Piper Sandler: Asked about sustainability of current ROEs and dividend. Federico explained, "I would still say mortgages are in the, call it, the expected ROE range of -- for current coupon somewhere between 16% and 18%, which aligns really well with our total cost of capital."
* Love, Piper Sandler: Queried the lower hedge ratio. Federico detailed, "Our hedge ratio when you think about our swap-based hedges and treasury-based hedges...was 77%...we have 23% funding in our mix, 23% of short-term debt...That cost will come down over time as the Fed eases."
* Terry Ma, Barclays: Asked about sustainability of increased MBS demand from money managers. Federico responded, "I expect bond fund inflows to remain robust, particularly given the Fed move...the market expects them to ease at the next 2 meetings."
* Richard Shane, JPMorgan: Explored risks of prepayment speeds due to technology and policy changes. Federico said, "There does appear to be some anecdotal evidence that they are getting mortgage borrowers to refinance with something less than a 50 basis points incentive."
* Trevor Cranston, Citizens JMP: Asked about volatility and spread outlook. Federico pointed to "less reasons to be concerned about mortgages going wider and certainly going through the upper end of the range, and there's more reasons to believe that mortgages could go through the lower end of the range."

SENTIMENT ANALYSIS

* Analysts pressed on sustainability of returns, hedge strategy, prepayment risks, and demand drivers, showing a slightly positive to neutral tone with ongoing interest in risk factors and return sustainability.
* Management tone was confident in prepared remarks, emphasizing favorable market dynamics, robust demand, and strong liquidity. In Q&A, Federico was detailed and transparent, explaining both strengths and temporary earnings drags, and expressed confidence: "I expect that benefit to show up over the next couple of quarters."
* Compared to the previous quarter, management's tone shifted from cautious optimism amidst volatility to greater confidence in market dynamics and AGNC's positioning. Analyst tone remained consistent, focusing on sustainability and risk.

QUARTER-OVER-QUARTER COMPARISON

* The previous quarter was marked by negative economic return and volatility, while the current quarter saw a return to strong profitability and book value gains.
* Management's tone shifted from navigating macroeconomic stress and emphasizing liquidity to highlighting robust market outperformance and capital deployment.
* Key metrics improved: comprehensive income per share swung from a loss to a gain, economic return turned positive, and leverage and liquidity remained stable.
* Strategic priorities evolved, with greater focus on optimizing hedge composition for anticipated rate cuts and emphasizing the benefits of recently raised capital.
* Analysts continued to question sustainability and risk, but the focus shifted from capital deployment pacing and market stress to returns, policy impact, and prepayment dynamics.

RISKS AND CONCERNS

* Federico identified macroeconomic risks, particularly changes in fiscal policy leading to inflation or volatility, as the main threats to the constructive outlook on spreads.
* Management noted the risk of increased prepayments from technology and policy changes but stated active asset rotation and added swaptions as mitigation strategies.
* Potential timing mismatches in capital deployment and swap maturities temporarily impacted earnings, but management expects these to reverse as rate cuts materialize.

FINAL TAKEAWAY

AGNC’s third quarter results showcased a strong economic return and book value appreciation, supported by favorable market conditions and strategic capital deployment. Management remains confident that the company’s portfolio positioning, robust liquidity, and hedging strategy will benefit from an accommodative monetary policy and ongoing regulatory reforms, pointing to continued stability and attractive risk-adjusted returns for shareholders in the quarters ahead.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/agnc/earnings/transcripts]

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