AGNC Investment (AGNC) Q2 Earnings call transcript Jul 23, 2024

In the second quarter earnings call for AGNC Investment Corp., Peter Federico, the Director, President, and CEO, provided insights into the company's performance and discussed the current state of the mortgage-backed securities (MBS) market. The call highlighted a cautious environment as the Federal Reserve balances economic and monetary policy outlooks, leading to increased interest rate volatility and spread widening.

Market Conditions and Performance

The call began with a discussion on the mixed economic signals, with consumer spending and confidence weakening, labor market balancing, and inflation trending towards the Fed's long-term target. Peter Federico noted that the Fed's unwillingness to adopt a more accommodative monetary policy stance has led to a cautious fixed income market, with intra-quarter volatility increasing. This caution was reflected in AGNC's negative economic return of just under 1% for the quarter.

Interest rates edged higher, and agency MBS spreads widened, leading to a push and pull between evolving supply and demand dynamics. Bank and foreign demand moderated, while demand from bond funds remained steady. The modest weakening of MBS demand and associated widening of mortgage spreads was expected, as spreads ended the first quarter at the tighter end of the recent trading range. However, the overall trading range for agency MBS remained relatively narrow, indicating a positive development for the market.

Future Outlook and Strategies

Despite the current challenges, AGNC remains optimistic about the long-term outlook for agency MBS. The company anticipates that the Fed's shift towards a more accommodative monetary policy stance, as indicated by the recent summary of economic projections, will likely occur over the next several months. This shift is expected to reduce the risk of meaningfully higher rates, decrease interest rate volatility, and steepen the yield curve, all of which are positive developments for the agency MBS market.

AGNC also highlighted its strong liquidity position, with unencumbered cash and agency MBS of $5.3 billion or 65% of its tangible equity as of the end of Q2. The company's leverage increased modestly to 7.4 times tangible equity, while its tangible net book value per share was up about 2% for July.

Market Trends and Competitive Landscape

The call also touched on the impact of the election cycle on the market, with Peter Federico expressing caution in anticipating significant changes in agency MBS regulation, as the housing finance system is currently viewed as functioning well. The company is focusing on adjusting its investment positioning to accommodate the evolving market conditions, including changes in bank regulation and the potential impact on treasury issuance.

In terms of competition, AGNC continues to position itself in a favorable manner, with its strong liquidity and strategic hedging strategies. The company's focus on high-quality specified pools and its ability to manage prepayment risk effectively have helped it maintain a competitive edge.

Conclusion

AGNC Investment Corp.'s second quarter earnings call provided a comprehensive overview of the company's performance and its outlook for the MBS market. The company's cautious approach, coupled with its strategic investments and focus on managing risk, position it well to navigate the current market conditions. The outlook for the second half of 2024 remains uncertain, but AGNC is optimistic about the long-term prospects for the agency MBS market, driven by the anticipated shift in monetary policy and the favorable fundamentals of the housing finance system.