AGNC Investment Corp (NASDAQ:AGNC) generated an economic return of 2.4% in the first quarter, driven by an attractive monthly dividend.
The company's total stock return with dividends reinvested was a positive 7.8% for the quarter.
AGNC maintained a strong liquidity position with $6 billion in cash and unencumbered Agency MBS, representing 63% of tangible equity.
Net spread and dollar roll income increased to $0.44 per common share, driven by a higher net interest rate spread and larger asset base.
AGNC's outlook for Agency MBS remains positive, with expectations of regulatory relief potentially increasing demand from banks.
Negative Points
AGNC's net asset value was negatively impacted by mortgage spread widening, resulting in a $0.16 decline in tangible net book value per share.
Interest rate volatility and macroeconomic uncertainty caused financial market correlations to break down, affecting liquidity and investor sentiment.
The current coupon spread to a blend of swap rates reached an intraday peak of 230 basis points, indicating significant pressure on the Agency MBS market.
Quarter-end leverage increased to 7.5 times tangible equity, up from 7.2 times at year-end, due to the decline in tangible net book value per share.
The average projected life CPR in AGNC's portfolio increased to 8.3% at quarter end, indicating a rise in prepayment risk.
Q & A Highlights
Q: Can you provide an update on your book value since the April 9 pre-release? A: Peter Federico, President, CEO, and CIO, stated that mortgage spreads widened further from the pre-release number, putting the book value down in the range of 7.5% to 8% as of the end of last week.
Q: How comfortable are you with the dividend given the current mark-to-market book value? A: Peter Federico explained that despite the increase in total cost of capital due to mortgage spread widening, the go-forward returns align well with the total cost of capital. Expected returns on the portfolio are between 19% and 22%, which supports the dividend.
Q: How did you manage the extreme rate volatility where 10-year yields fluctuated significantly in early April? A: Peter Federico highlighted the importance of entering the environment with a strong position, including a leverage of 7.5 times and a strong liquidity position. This allowed AGNC to navigate the volatility without changing asset composition or deleveraging.
Q: What is your outlook on leverage and hedge ratio given the current market conditions? A: Peter Federico noted that current spread levels allow for attractive returns without excessive leverage. While leverage could be reduced if spreads remain wide, he does not expect these levels to hold long-term. The company will evaluate leverage and hedge ratios based on market conditions.
Q: How do you view the risk of spread levels gapping out further given the current uncertainty? A: Peter Federico acknowledged the potential for wider spreads but emphasized the importance of being prepared for such scenarios. He noted that the current mortgage performance relative to swaps is driven by technical factors in the swap market rather than concerns about mortgages themselves.
Q: Have there been any changes to your hedge portfolio post-quarter end? A: Peter Federico confirmed that there have been no substantial changes to the hedge portfolio since the quarter ended.
Q: Can you discuss the prepayment environment and the level of convexity risk in the market? A: Peter Federico explained that while there is some increase in convexity risk due to the Rocket and Mr. Cooper merger, overall prepayment risk remains low. The portfolio is managed with significant prepayment protection, particularly in higher coupon holdings.
Q: How do you view the potential for margin calls and forced selling in the current market? A: Peter Federico stated that there has been no indication of forced deleveraging or margin calls affecting the current mortgage market repricing. The REIT community is in a strong position with adequate liquidity and leverage management.
Q: What is your perspective on swap spreads and their impact on your hedging strategy? A: Peter Federico noted that while swap spreads have narrowed, indicating balance sheet constraints and a preference for derivative forms of US dollar assets, he expects regulatory changes to eventually normalize swap spreads. The hedge portfolio remains diversified to manage these conditions.
Q: How are you approaching capital deployment given recent market conditions? A: Peter Federico mentioned that AGNC continues to use its ATM program opportunistically to raise capital accretively. The company remains focused on deploying capital where it sees attractive investment opportunities.
