AGNC(AGNC)2024-07-23 15:05Financial Data and Key Metrics Changes - AGNC reported a comprehensive loss of $0.13 per share for Q2 2024, with an economic return on tangible common equity of negative 0.9% [14] - The tangible net book value per share declined by $0.44, but was up about 2% for July [14] - Leverage increased to 7.4 times tangible equity from 7.1 times in Q1 [15] - Liquidity remained strong with unencumbered cash and agency MBS of $5.3 billion, representing 65% of tangible equity [15] Business Line Data and Key Metrics Changes - The average projected life CPR for the portfolio decreased by 120 basis points to 9.2%, while actual CPRs increased to an average of 7.1% from 5.7% in the prior quarter [15] - Net spread and dollar roll income for the quarter was $0.53 per share, with a decline in net interest rate spread of approximately 30 basis points to just under 270 basis points [15] Market Data and Key Metrics Changes - The second quarter saw $52 billion in mortgage supply, double the pace of the first quarter, leading to a widening of agency MBS spreads [10] - Agency MBS spreads to treasuries widened by 5 to 10 basis points across the coupon stack [10] - The 10-year treasury yield ended the quarter just 20 basis points higher, with significant volatility throughout the quarter [9] Company Strategy and Development Direction - The company remains optimistic about the long-term fundamentals for agency MBS, citing persistent affordability challenges and historically slow prepayment speeds [13] - The company plans to approach the upcoming election with a lower risk profile, avoiding significant interest rate risk until the political landscape becomes clearer [26][30] - The company anticipates that bank regulation will become less onerous, potentially increasing demand for mortgage-backed securities [34] Management's Comments on Operating Environment and Future Outlook - Management noted that the economic data is supportive of the Fed moving toward a more accommodative monetary policy stance, which is expected to begin over the next several months [12] - The company highlighted that the earnings environment for agency MBS remains favorable, with historically wide spreads and low levels of prepayment risk [20] - Management expressed caution regarding the upcoming election's impact on investment positioning and volatility, indicating a need to monitor developments closely [26] Other Important Information - The company issued $434 million of common equity through its aftermarket offering program, investing proceeds in attractively priced assets [16] - The hedge portfolio increased to $58.8 billion, with a shift towards a heavier allocation of swap-based hedges [19] Q&A Session Summary Question: Impact of the presidential election on investment positioning - Management indicated that the political landscape is evolving and will be monitored closely, with a cautious approach to interest rate risk in a high volatility environment [26][30] Question: Demand for agency MBS - Management noted that while bank demand moderated, demand from bond funds remained steady, and they expect demand for mortgage-backed securities to improve as monetary policy outlook becomes clearer [31][34] Question: Setting the dividend - Management explained that the dividend is set based on total cost of capital and the economics of the business, with current expectations aligning with a return on equity of 16% to 19% [37][40] Question: Spreads and funding markets - Management discussed the widening of spreads and the impact of elevated SOFR rates, indicating that the Fed's balance sheet runoff is being monitored closely [42][48] Question: Net interest margin outlook - Management acknowledged that the decline in net interest margin was influenced by the addition of longer-term swaps and indicated that future NIM changes will depend on portfolio growth and attractive investment returns [51][54] Question: Share issuance dynamics - Management clarified that share issuance is based on market conditions and portfolio needs, allowing for flexibility in capital raising [56][58] Question: Leverage considerations - Management stated that the current cash position allows for increased leverage if desired, but volatility and market conditions will inform their decisions [63][65] Question: Prepayment speed forecast - Management indicated that the forecast assumes realization of forward rates, with manageable convexity risk in the current environment [68]