Market Outlook & Fed Policy - The market's focus should be on clarity regarding fiscal policy uncertainty rather than solely on Fed rate cuts [3] - The bond market signals concerns about deficits and debt levels, potentially limiting policy room for market advancement [5] - Despite markets near all-time highs, investors are seeking opportunities to deploy capital [7] Investment Strategy & Sector Performance - The firm is using the correction and rally to reposition portfolios, not to de-risk or build cash positions, anticipating better-than-expected Q2 earnings [10] - The firm favors quality-oriented technicals over deep value stories, expecting strong results from financials, industrials, and perennial tech [11] - An alternative perspective suggests taking profits on industrials and fading the rally on small caps [9] Economic Indicators - The dollar experienced its worst first half of the year in approximately 50 years [4] - While a steepening yield curve historically indicates positive growth, current dynamics suggest a more bearish outlook related to deficits and debt [6][7] - The 30-year bond is near a 15-year high [4]

Inflation Outlook - The Fed acknowledges upside risks to inflation, with base effects likely to worsen inflation numbers in upcoming meetings and potentially by year-end [3][4][5] - Crude oil price increases of $10, representing a 20% rise, could add approximately 04 percentage points to the headline CPI if sustained [5][6] - Tariffs are viewed as inflationary by Powell, potentially leading to margin compression and lowered earnings estimates [6][7] - The bond market anticipates the Fed will cut rates even if inflation remains above 3% between now and year-end [9] Monetary Policy & Employment - The Fed's dual mandate faces increasing tensions, potentially requiring a choice between fighting rising unemployment and fighting rising inflation [7] - The market believes the Fed is more likely to prioritize addressing rising unemployment over fighting inflation, even if inflation is moderately above 3% [8][14] - No discussion of rate hikes suggests a consensus within the Fed that the next move in rates will be lower [14] Recession Indicators - A one-year moving average of the twos 10's yield curve turning positive has historically preceded recessions and is currently above its 12-month moving average [9] - The U3 unemployment rate crossing above its three-year moving average has historically signaled the front end of a recession, which has already occurred but is not yet accelerating [10] - Rising continuing claims foreshadow a potential increase in the U3 unemployment rate [11][12] Market Dynamics - The bond market is signaling expectations of rate cuts through a steepening yield curve, with long rates rising more substantially than short-term rates [8][9] - The yield curve steepening is a trend that is expected to continue, with the Fed likely to keep pressure lower on short-term interest rates [13]

Core Viewpoint - AGNC Investment has a high dividend yield of approximately 16%, but its stock price has been declining, raising questions about the sustainability of its payout and whether it is a good investment opportunity [1]. Group 1: Company Overview - AGNC is a mortgage real estate investment trust (mREIT) that primarily invests in agency mortgage-backed securities (MBS) guaranteed by Fannie Mae and Freddie Mac, which carry virtually no credit risk [1]. - The company has faced significant challenges due to rising mortgage interest rates and widening spreads between MBS yields and Treasury yields [2][3]. Group 2: Financial Performance - AGNC's tangible book value (TBV) has decreased by 45% from $15.75 at the end of 2021 to $8.70 per share by the end of 2023, and further declined to $8.25 at the end of Q1 2025 [4]. - The company has maintained its dividend payout despite a challenging environment, although this has impacted its TBV [10]. Group 3: Market Conditions - The Federal Reserve's aggressive interest rate hikes have contributed to higher mortgage rates, which have negatively affected AGNC's performance [2]. - The yield curve has been inverted, which is unfavorable for AGNC's income generation model, but it has recently flipped to a positive slope, potentially benefiting the company [7][8]. Group 4: Future Outlook - Fed Chairman Jerome Powell has indicated potential rate cuts, which could lower AGNC's short-term funding costs and improve MBS valuations, positively impacting TBV [5][6]. - If MBS-to-Treasury yield spreads narrow as banks re-enter the MBS market, AGNC could see a recovery in both its book value and share price, leading to potential total returns of 20% to 25% annually in the coming years [13][14]. Group 5: Investment Considerations - AGNC is characterized as a high-risk, high-reward income investment, with the current market conditions possibly turning in its favor after enduring the impact of higher interest rates [15]. - For income-focused investors, AGNC presents a high yield with strong potential upside, although it requires active management and understanding of associated risks [16].