Executive Summary / Key Takeaways

• AGNC Investment Corp. is a leading Agency MBS REIT focused on generating total return through leveraged investment in government-guaranteed mortgage securities, supported by a dynamic risk management strategy and a strong liquidity position.
• Despite recent market volatility driven by macroeconomic uncertainty and policy announcements, AGNC delivered a 2.4% economic return on tangible common equity in Q1 2025, benefiting from a higher net interest spread and accretive capital raises.
• Management views current Agency MBS valuations, particularly relative to swaps, as historically wide and offering compelling return potential, aligning well with the company's total cost of capital and supporting the sustainability of its monthly dividend.
• The outlook for Agency MBS is viewed as highly constructive, underpinned by expectations for continued range-bound spreads, potential increases in bank and unlevered investor demand, and muted supply due to elevated mortgage rates.
• Key risks include ongoing interest rate and spread volatility, particularly in swap markets, and uncertainties surrounding government policy and the future of the GSEs, which AGNC manages through diversified portfolio positioning, robust hedging, and maintaining significant unencumbered liquidity.

The Premier Agency Residential Mortgage REIT in a Shifting Landscape

AGNC Investment Corp. stands as a prominent figure in the U.S. housing finance system, primarily operating as a real estate investment trust (REIT) focused on Agency residential mortgage-backed securities (Agency RMBS). Since commencing operations in 2008, the company's core objective has been to deliver favorable long-term stockholder returns, characterized by a substantial yield component. This is achieved by investing in Agency RMBS—securities backed by residential mortgages where the principal and interest payments are guaranteed by U.S. government-sponsored enterprises like Fannie Mae and Freddie Mac, or a government agency like Ginnie Mae. AGNC employs a leveraged investment approach, funding its portfolio predominantly through collateralized borrowings structured as repurchase agreements.

The company operates with an internally managed structure, enabling a dynamic and responsive active management strategy. This approach allows AGNC to tailor its portfolio composition and investment, funding, and hedging strategies to prevailing market conditions and relative value opportunities. Income is generated from the spread between the yield earned on its investments and the cost of its borrowings and hedging activities, supplemented by net realized gains and losses.

AGNC's strategic positioning is fundamentally shaped by its focus on Agency MBS, a market segment known for its high liquidity and implicit government backing, which significantly mitigates credit risk compared to other mortgage-related investments. This focus differentiates AGNC from more diversified mortgage REITs like Annaly Capital Management (NLY) or Starwood Property Trust (STWD), which incorporate broader credit assets or commercial real estate exposures. While competitors like NLY may offer greater scale and diversification, potentially capturing higher yields in certain market segments, AGNC's specialized Agency focus contributes to operational efficiency and a potentially lower-risk profile, appealing to investors prioritizing stability. AGNC's operating costs per unit of MBS managed are generally lower than some peers, contributing to competitive net margins and return on equity (ROE). However, this concentration also exposes AGNC more directly to the specific dynamics and volatilities of the Agency MBS market and the effectiveness of its hedging strategies.

The company's operational edge is further supported by its sophisticated risk management framework. This involves the use of various derivative instruments, including interest rate swaps, swaptions, U.S. Treasury securities and futures, and TBA contracts, to hedge exposures to interest rate, prepayment, extension, and liquidity risks. AGNC utilizes third-party pricing sources and internal models for asset and hedge valuation and risk assessment. While details on proprietary software are not available, the emphasis on active management, tailored strategies, and detailed risk analysis points to a robust operational and analytical capability built on expertise and integrated systems. This capability is crucial for managing a leveraged portfolio and navigating complex market dynamics, contributing to the company's ability to generate returns and manage volatility. The strategic use of TBA contracts, accounted for as derivatives, also serves as a form of off-balance sheet financing, enhancing funding diversification and liquidity.

The broader market environment has been characterized by significant shifts. Following a challenging period of monetary policy restraint from 2022-2023, marked by high volatility and an inverted yield curve, the Federal Reserve began a recalibration towards a more accommodative stance in Q3 2024. This transition, including initial rate cuts, was seen as a positive for fixed income. However, macroeconomic uncertainty, particularly concerning inflation and the potential impact of government policy actions like tariffs, continued to fuel volatility into Q1 2025 and early April. This led to periods of constrained liquidity and disrupted market correlations, putting pressure on the Agency MBS market, with spreads widening significantly, especially relative to swaps.

Performance Amidst Volatility: Spreads, Income, and Strategic Positioning

AGNC's recent financial performance reflects its navigation of this complex environment. For the first quarter of 2025, the company reported total comprehensive income of $0.12 per common share. The economic return on tangible common equity for the quarter was 2.4%, comprising $0.36 in dividends declared and a $0.16 decline in tangible net book value per share, primarily attributed to modest spread widening.

Net spread and dollar roll income, a key non-GAAP measure reflecting current period earnings power, saw an increase of $0.07 to $0.44 per common share in Q1 2025. This improvement was driven by a 21 basis point expansion in the net interest rate spread to 2.12%, alongside growth in the asset base. The wider spread reflected a combination of higher asset yields, a greater proportion of swap-based hedges, and lower funding costs as repurchase agreements fully reset to prevailing short-term rates. Treasury-based hedges also contributed an estimated $0.02 per share in additional net spread income, not included in the reported non-GAAP figure. This performance contrasts with Q4 2024, where net spread income declined due to a narrowing spread, influenced by higher swap pay rates and a shift towards treasury hedges.

The investment portfolio continued to grow, increasing by approximately $5 billion in Q1 2025 to reach $78.9 billion at quarter-end. Asset additions focused on specified pools with favorable prepayment characteristics, while the TBA position remained relatively stable, with a shift in composition towards Ginnie Mae and conventional UMBS based on financing levels and delivery profiles. The weighted average coupon of the portfolio remained just over 5%. The average projected life CPR for the portfolio increased to 8.3% at the end of Q1 2025, up from 7.7% in Q4 2024, consistent with lower prevailing rates during the quarter, although actual CPRs averaged a lower 7%.

Funding and leverage levels remained within management's target range. Tangible net book value at risk leverage stood at 7.5x at March 31, 2025, up slightly from 7.2x at the end of 2024, reflecting the decline in book value and asset growth. The average leverage for Q1 2025 was 7.3x. AGNC maintained a robust liquidity position, ending Q1 2025 with $6 billion in cash and unencumbered Agency MBS, representing a significant 63% of tangible equity. This strong liquidity, a result of disciplined balance sheet management, is a critical buffer against market volatility and margin calls, allowing the company to withstand adverse movements without being forced to delever or alter its core portfolio strategy.

The hedge portfolio also expanded, with a notional balance increasing to $64.1 billion, covering 91% of mortgage borrowings. The duration gap was 0.40 years at quarter-end. The composition of the hedge portfolio in Q1 2025 was approximately 40% treasury-based and 60% swap-based hedges on a duration dollar basis. Management noted the potential benefit of a more balanced 50-50 mix in the future for diversification, particularly given the recent volatility observed in swap spreads.

AGNC has actively utilized its at-the-market (ATM) offering program to raise capital opportunistically. In Q1 2025, the company issued 49.7 million shares for net proceeds of $509 million at a material premium to tangible net book value. This accretive issuance enhanced liquidity and supported portfolio growth. A new ATM program was established in April 2025, authorizing the sale of up to $1.50 billion in common stock through December 2026, providing continued flexibility.

Outlook and Risk Considerations

Management maintains a highly constructive outlook for Agency MBS, despite the likelihood of continued macroeconomic uncertainty. They believe current valuations offer compelling return opportunities, both on a levered and unlevered basis. Historical data suggests that mortgage spreads to benchmark rates, particularly the wide spreads observed relative to swaps in early April 2025 (reaching levels near COVID-19 crisis highs), have not typically persisted for extended periods.

The supply and demand dynamics for Agency MBS are expected to remain reasonably balanced. With mortgage rates in the mid-to-upper 6% range, new issuance is anticipated to be relatively muted. On the demand side, management expects potential increases from regulatory relief leading to greater bank demand and from unlevered investors as short-term rates decline in an accommodative monetary policy environment. Discussions around the future of the GSEs are acknowledged, but management believes there is a growing consensus on preserving the core functionality of the housing finance system, which relies heavily on the Agency MBS market and government involvement. Clarifying and potentially making permanent the government's role is seen as beneficial for housing affordability and Agency MBS demand.

AGNC's dividend policy is rooted in the expected long-run economic returns of its portfolio relative to its total cost of capital. Management views these as well-aligned, supporting the sustainability of the current monthly dividend. At the end of Q1 2025, the total cost of capital was estimated around 16.7%, while expected go-forward returns at current valuation levels were estimated between 19% and 22%, indicating a favorable spread.

However, the investment thesis is not without risks. Ongoing interest rate volatility remains a primary concern, as changes in rates can impact asset values, borrowing costs, prepayment speeds, and the effectiveness of hedges. Spread risk, particularly the unpredictable nature of swap spreads, can also negatively impact book value if spreads widen. Liquidity risk, while mitigated by AGNC's strong cash position, is inherent in financing long-term assets with short-term borrowings, exposing the company to margin calls if collateral values decline. Credit risk exists in the smaller non-Agency portfolio. Broader macroeconomic factors, government policy shifts (including tariffs and potential changes to bank regulation or GSE structure), and geopolitical events can all introduce market disruption. AGNC addresses these risks through its active management, portfolio diversification, robust hedging program, and by maintaining significant unencumbered liquidity.

Conclusion

AGNC Investment Corp. is strategically positioned to capitalize on the current environment of historically wide Agency MBS spreads and a shifting monetary policy landscape. The company's core business model, centered on leveraged investment in government-guaranteed securities, provides a foundation of credit stability. Despite navigating periods of significant market volatility and macroeconomic uncertainty, AGNC's disciplined approach to balance sheet management, robust liquidity, and dynamic hedging strategies have enabled it to maintain a strong position and deliver solid economic returns, as demonstrated in Q1 2025.

Management's positive outlook is supported by the compelling return potential offered by current Agency MBS valuations, expectations for a balanced supply-demand picture, and the anticipated benefits of a more accommodative Federal Reserve and potential regulatory clarity. While risks from interest rate and spread volatility persist, AGNC's experienced management team, operational capabilities, and strategic flexibility, including the opportunistic use of its ATM program, provide tools to manage these challenges. For investors seeking substantial yield and exposure to the Agency MBS market, AGNC's current positioning and outlook present a compelling investment thesis, underpinned by the alignment of expected portfolio returns with the company's cost of capital.