Core Insights - Agency mortgage REITs have experienced significant gains in 2025, with Dynex Capital (DX) and AGNC Investment (AGNC) reporting substantial comprehensive income and book value growth, indicating a favorable macroeconomic environment [1][2] - Despite these gains, there is caution regarding the sustainability of such performance, as the sharp increases are viewed as one-time events, and both companies may be slightly overvalued [2][18] - The outlook for 2026 remains strong, driven by anticipated continued tightening of spreads and favorable macro developments [11][13] Macro Factors - The spread between residential mortgage-backed securities (RMBS) and treasuries was notably wide in 2024 at 225 basis points, but narrowed to 150 basis points in 2025, positively impacting book values of mREITs [4][7] - The narrowing spread in 2025 led to widespread book value gains across the sector, with DX and AGNC showing strong rebounds [7][9] - Anticipated factors for 2026 include GSE purchases of MBS, the end of quantitative tightening (QT), and continued bond fund inflows, which are expected to support further tightening of spreads [11][12] Financial Performance - In Q4 2025, DX reported a book value increase of $0.78 per share, while AGNC achieved a 22.7% economic return, resulting in a book value rise of $0.47 per share [9][25] - AGNC's comprehensive income for 2025 was $1.22 per share, with significant unrealized gains contributing to this figure [8][19] - DX's net income included $370 million from unrealized gains, highlighting the reliance on such gains for sustaining dividends [20][29] Dividend Sustainability - Both AGNC and DX's dividends are primarily supported by unrealized gains rather than recurring earnings, raising concerns about their sustainability [26][27] - AGNC paid $1.44 in dividends per share in 2025, which was not fully covered by its net interest income of $675 million, indicating potential future dividend cuts [26][30] - The payout ratios for both companies suggest that without unrealized gains, their book values could be adversely affected [29][30] Investment Alternatives - Preferred shares of mREITs are viewed as having higher total return prospects compared to common shares, as they sit above common equity in the capital structure [31][46] - Preferreds from AGNC and Dynex are currently trading at or near par, offering attractive yields without significant risk of redemption [34][36] - Other mREITs, such as Armour Residential, have preferreds trading at discounts to par, presenting potential capital gains opportunities [38][40]