Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- AGNC Investment Corp (AGNC, Financial) reported a comprehensive loss of only $0.13 per share despite moderate spread widening.
- Liquidity remained strong with unencumbered cash and Agency MBS of $5.3 billion, representing 65% of tangible equity.
- Net spread and dollar roll income for the quarter was well above the dividend at $0.53 per share.
- AGNC Investment Corp (AGNC) issued $434 million of common equity through its at-the-market offering program, creating incremental value for stockholders.
- The long-term fundamentals for Agency MBS remain very favorable, with historically slow prepayment speeds and persistent affordability challenges.
Negative Points
- AGNC Investment Corp (AGNC) experienced a negative economic return of 0.9% for the quarter.
- Leverage increased modestly to 7.4 times tangible equity from 7.1 times in the previous quarter.
- The average projected life CPR for the portfolio decreased to 9.2%, indicating slower prepayment speeds.
- Net interest rate spread decreased by approximately 30 basis points to just under 270 basis points for the quarter.
- The Federal Reserve's cautious stance and increased intra-quarter volatility negatively impacted fixed income markets.
Q & A Highlights
Q: With the election cycle ramping up, how might the election impact AGNC from both pre and post-election standpoints? What have you experienced in past elections, and how might it impact investment positioning and volatility?
A: Peter Federico, President, Chief Executive Officer, Director: Previous elections, like 2016, saw significant rate moves post-election. This election is harder to read due to the evolving political landscape. Generally, we approach such periods with a lower risk profile, taking less interest rate risk. From a GSE perspective, it's too early to tell which party might be better or worse for US treasuries. Disrupting the current highly liquid housing finance system seems unlikely to make homeownership more affordable. Both parties are focused on reducing homeownership costs, and the current system is functioning well.
Q: Can you discuss the demand for Agency MBS, particularly with bank demand moderating? Who are the incremental buyers today?
A: Peter Federico, President, Chief Executive Officer, Director: The second quarter saw significant positive fundamental developments for fixed income, though spreads moved wider. The fundamental outlook for fixed income improved dramatically. The demand for Agency MBS should improve as monetary policy outlook improves, bank regulation becomes less onerous, and the yield curve steepens. These factors will likely lead to increased demand from banks and other investors.
Q: How do you think about setting the dividend, and what are the most important factors?
A: Peter Federico, President, Chief Executive Officer, Director: We consider the total cost of capital, which includes the cost of common and preferred dividends and operating costs. We compare this to the expected return on equity from our business. Currently, our total cost of capital is around 16.5%, and the expected return on equity is between 16% to 19%. This alignment supports dividend sustainability.
Q: Can you explain the difference between nominal spreads and OAS balance?
A: Christopher Kuehl, Executive Vice President, Chief Investment Officer: The difference is largely due to the increase in implied volatility earlier in the quarter. When volatility goes up, OAS will go down, leading to some confusion.
Q: How do you approach issuing shares through the ATM program? Is it a dynamic process?
A: Peter Federico, President, Chief Executive Officer, Director: We do not start with a set expectation. The ATM program allows flexibility to issue stock on days with high volume or unique demand. It also allows us to issue stock in increments, making it efficient to deploy without disrupting asset prices. This approach helps align liquidity in our stock with the richness or cheapness of mortgages.
Q: If mortgage spreads remain range-bound, does that provide more flexibility to increase leverage?
A: Peter Federico, President, Chief Executive Officer, Director: Yes, the capacity to take leverage higher is informed by our outlook for mortgage spread volatility. The narrower the spread range, the more capacity we have to take greater risk. However, we are cautious due to upcoming macro issues and potential volatility.
Q: What drives your coupon selection over the next few quarters?
A: Christopher Kuehl, Executive Vice President, Chief Investment Officer: Production coupons offer the most attractive spreads, and that's where we've been investing marginal capital. Higher coupons have different technicals and more prepayment risk, but they offer higher spreads that can be used to manage that risk. We also focus on specified pools and higher quality specs to manage convexity risk.
Q: How do you view the funding landscape for non-agency securities?
A: Aaron Pas, Senior Vice President: The funding landscape for non-agency securities remains stable and relatively attractive by historical standards. We were able to opportunistically redeploy capital freed up from GSE tender offers and CMBS paydowns.
Q: Can you discuss the impact of the Fed's balance sheet runoff on the repo market?
A: Peter Federico, President, Chief Executive Officer, Director: The Fed's balance sheet runoff is draining reserves from the system, moving from abundant to ample reserves. This has led to some pressure at quarter-end, which is normal. The Fed has tools to maintain liquidity in the repo market, and I expect the balance sheet runoff to stop in the next five to six months.
Q: What is your outlook for mortgage spreads and their impact on total return?
A: Peter Federico, President, Chief Executive Officer, Director: I expect mortgage spreads to stay range-bound in the near term. Longer term, there are more reasons for spreads to tighten than to widen. The catalysts for spreads to move to the high end of the range are harder to see, while there are more reasons to believe they could tighten over time.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
