Executive Summary / Key Takeaways

• AGNC Investment Corp. operates as a leading Agency residential mortgage-backed securities (RMBS) REIT, focused on generating attractive long-term stockholder returns primarily through a substantial yield component derived from leveraged investments in government-guaranteed mortgage assets.
• The company employs a sophisticated, active management strategy, leveraging advanced analytical models and operational processes to optimize its portfolio composition, funding, and hedging in response to dynamic market conditions, which serves as a key competitive differentiator.
• Despite recent market volatility and spread widening, particularly in early 2025, management views current Agency MBS valuations as historically attractive, offering compelling return potential that aligns well with the company's total cost of capital and supports its dividend policy.
• AGNC maintains a strong liquidity position and manages leverage conservatively, providing resilience against market shocks and capacity to capitalize on investment opportunities, complemented by opportunistic capital raising through its At-the-Market (ATM) program.
• The outlook for Agency MBS is viewed favorably, underpinned by expectations for a more accommodative Federal Reserve stance, lower long-term volatility, potential yield curve steepening, and a balanced supply/demand dynamic, suggesting a bias for spreads to remain within or even modestly tighten from their current range.

The Foundation: Agency MBS, Yield, and Active Management

AGNC Investment Corp. was established in 2008 with a clear mandate: to serve as a leading provider of private capital to the U.S. housing market, thereby enhancing liquidity and facilitating home ownership. At its core, AGNC operates as a real estate investment trust (REIT), primarily investing in Agency residential mortgage-backed securities (Agency RMBS). These securities, backed by the full faith and credit of U.S. government-sponsored enterprises (GSEs) or agencies, represent a fundamental component of the U.S. housing finance system. The company's principal objective is to generate favorable long-term stockholder returns, with a significant emphasis on providing a substantial yield component, funded primarily through collateralized borrowings structured as repurchase agreements. Operating as a REIT necessitates distributing at least 90% of its taxable income annually, a requirement AGNC intends to exceed by distributing 100%.

The U.S. mortgage REIT sector is characterized by several key players, including large, diversified firms like Annaly Capital Management (NLY) and Starwood Property Trust (STWD), as well as more specialized entities like Blackstone Mortgage Trust (BXMT) and Two Harbors Investment Corp. (TWO). While competitors like NLY and STWD often pursue broader strategies encompassing non-Agency MBS, commercial real estate debt, or other credit assets, AGNC maintains a focused approach predominantly on Agency RMBS. This specialization distinguishes AGNC, positioning it as a pure-play vehicle for investors seeking exposure to the government-guaranteed segment of the mortgage market.

Comparatively, AGNC's focused strategy contributes to superior profitability margins (net margins typically 60-70%) and return on equity (ROE 15-20%) relative to some diversified peers like NLY (net margins 50-60%, ROE 10-15%) and STWD (net margins 40-50%, ROE ~12%). This efficiency stems partly from lower operating costs per unit, estimated to be 5-10% lower than some diversified competitors, and a more streamlined approach to asset management. However, this focus also presents a vulnerability: AGNC's growth trajectory (4-6% annual revenue growth) has historically lagged the broader market (5-7%) and more diversified competitors like NLY (6-8%) and STWD (8-10%), which can capture market share through expansion into various asset classes. AGNC's competitive edge lies in its deep expertise within the Agency MBS market, its robust dividend track record, and its tax-efficient REIT structure, which collectively enable strong cash flow generation and capital efficiency.

Central to AGNC's ability to execute its strategy and maintain its competitive standing is its sophisticated active management approach, underpinned by advanced analytical capabilities and operational processes. While not involving physical technology like manufacturing equipment, the company's "technology" in this context refers to its complex risk management systems, quantitative models, and experienced team. These tools enable the company to:

• Estimate and manage interest rate sensitivity (duration and convexity) of its portfolio using third-party systems and internal adjustments.
• Project mortgage prepayment speeds based on models incorporating market data, interest rates, loan characteristics, and volatility, allowing for effective yield calculations and amortization adjustments.
• Determine fair values of financial instruments using multi-source pricing services and models, validating reasonableness based on market conditions and expertise.
• Manage collateral requirements under funding and derivative agreements, including monitoring haircut levels and margin calls.
• Utilize the TBA market and dollar roll transactions as a form of off-balance sheet financing, enhancing funding diversification and liquidity with potentially lower implied costs and haircuts compared to traditional repo.
• Leverage its wholly-owned captive broker-dealer subsidiary, Bethesda Securities, LLC, to access funding markets like FICC's GCF Repo service, enhancing operational efficiency and funding diversification.

These sophisticated analytical and operational processes provide tangible benefits. For instance, the ability to accurately estimate and hedge duration helps mitigate the impact of interest rate fluctuations on book value, as demonstrated by sensitivity analyses showing estimated changes in tangible net book value per common share under various interest rate shock scenarios (e.g., a 50 bps rate increase estimated to cause a -4.0% change as of March 31, 2025). Precise prepayment modeling allows for better yield forecasting and management of premium amortization. The strategic use of the TBA market offers a form of financing with potentially lower implied haircuts, contributing to liquidity management.

The "so what" for investors is that this analytical and operational sophistication is AGNC's primary moat. It allows the company to navigate complex and volatile fixed-income markets, optimize its portfolio for yield and risk, manage its funding efficiently, and respond dynamically to changing conditions. This capability is crucial for generating consistent returns and maintaining stability in book value, which are key to supporting its dividend and long-term investment thesis, particularly when compared to less specialized or less analytically driven market participants.

Performance and Portfolio Evolution in a Dynamic Market

The period leading up to and including the first quarter of 2025 has been marked by significant shifts in the macroeconomic and monetary policy landscape, presenting both opportunities and challenges for AGNC. Following a year (2024) that saw AGNC generate a positive economic return of 13.2%, driven by its monthly dividend, the first quarter of 2025 experienced increased volatility. Government policy actions and rising uncertainty regarding economic growth and inflation led to cautious investor sentiment. While fixed income markets initially saw a flight to quality, broader volatility escalated in early April 2025 following unexpected tariff announcements, disrupting correlations and pressuring the Agency MBS market.

Despite these headwinds, AGNC reported a total comprehensive income of $0.12 per common share for the three months ended March 31, 2025, resulting in an economic return on tangible common equity of 2.4%. This included $0.36 in dividends declared per common share, partially offset by a $0.16 decline in tangible net book value per share due to modest spread widening. For comparison, the prior year period (three months ended March 31, 2024) saw a much higher net income of $443 million and comprehensive income of $366 million, translating to an economic return of 5.70%.

A key metric reflecting the operational performance of AGNC's core business is Net Spread and Dollar Roll Income (NSDI). For the first quarter of 2025, NSDI available to common stockholders was $0.44 per common share ($403 million), an increase of $0.07 from the fourth quarter of 2024 ($0.37 per common share, $406 million). This improvement was primarily driven by a 21 basis point increase in the net interest rate spread to 2.12% in Q1 2025, up from just above 1.90% in Q4 2024. Management attributed this to higher asset yields, a greater proportion of swap-based hedges, and lower funding costs as repurchase agreements fully reset to prevailing short-term rates. However, it's important to note that NSDI does not capture the carry from treasury-based hedges, which contributed an estimated $0.02 per share in Q1 2025. The decline in NSDI from Q3 2024 ($0.43 per share, $403 million) to Q4 2024 was due to a narrowing of the net interest spread, partly from the maturity of low-cost swaps and a shift towards treasury hedges. The decline from Q2 2024 ($0.53 per share, $406 million) to Q3 2024 ($0.43 per share) was more significant, driven by a 50 basis point narrowing of the net interest spread to just over 2.20%, with about half due to swap maturities and half due to the hedge composition shift.

AGNC's investment portfolio has seen consistent growth. It totaled $78.9 billion at the end of Q1 2025, up approximately $5 billion from $73.3 billion at the end of Q4 2024 ($72.1 billion at Q3 2024, $66 billion at Q2 2024). This growth was supported by opportunistic capital raises. Portfolio additions in Q1 2025 were concentrated in pools with favorable prepayment characteristics, increasing the percentage of such assets to 77%. The weighted average coupon remained steady at just over 5%. The company continued its trend of moving up in coupon in late 2024, adding approximately $8 billion in 5% and higher coupons while reducing lower coupon holdings.

Funding for this portfolio growth primarily comes from repurchase agreements. Repurchase agreements outstanding totaled $66.1 billion as of March 31, 2025, up from $60.8 billion at December 31, 2024. The weighted average interest rate on repurchase agreements was 4.47% with a weighted average maturity of 18 days as of March 31, 2025. The company also utilizes reverse repurchase agreements ($17.6 billion outstanding at Q1 2025 end) primarily to borrow securities for short sales of U.S. Treasuries. Approximately 49% of repurchase agreement funding was sourced through the captive broker-dealer, Bethesda Securities, LLC, via FICC's GCF Repo service in Q1 2025.

Leverage, measured as tangible net book value at risk leverage, increased to 7.5x at the end of Q1 2025, up from 7.2x at year-end 2024, driven by the decline in book value and capital deployment. Average leverage for Q1 2025 was 7.3x. AGNC maintains a strong liquidity position, ending Q1 2025 with $6 billion in cash and unencumbered Agency MBS, representing 63% of tangible equity (compared to $6.1 billion or 66% at Q4 2024 end, $6.2 billion or 68% at Q3 2024 end, and $5.3 billion or 65% at Q2 2024 end). This substantial unencumbered asset base provides crucial capacity to withstand market volatility and meet margin calls without forced asset sales.

The hedge portfolio is dynamically managed to mitigate interest rate risk. As of Q1 2025 end, the notional balance increased to $64.1 billion, covering 91% of outstanding repurchase agreements used to fund the investment portfolio. The composition shifted slightly, with about 40% treasury-based and 60% swap-based hedges on a duration dollar basis. This follows a period in Q3 2024 where the hedge ratio declined to 72% and there was a systematic shift towards longer-dated treasury hedges, followed by an increase back to 91% in Q4 2024, primarily adding treasury hedges due to market conditions. Management noted that while treasury hedges were favored recently due to swap spread behavior, a long-term base case might involve a more balanced mix (e.g., 50/50) for diversification.

Outlook, Strategy, and Risk Considerations

AGNC's outlook for the Agency MBS market remains constructive, despite the recent periods of volatility. Management's view is grounded in the expectation that the Federal Reserve is moving towards a more accommodative monetary policy stance. This shift is anticipated to lead to lower interest rate volatility, a steeper yield curve, and fundamentally improve the environment for fixed-income assets.

A key assumption underpinning this positive outlook is the belief that Agency MBS spreads, while currently elevated due to recent market dislocations (like the unprecedented narrowing of swap spreads), will likely remain within or even tighten from their recent trading range (e.g., 140-160 bps to Treasuries, 170-190 bps to Swaps). Management views current valuations as historically attractive, offering compelling levered and unlevered return opportunities that are unlikely to persist at these levels for an extended period. They see Agency MBS as an attractive alternative to corporate credit, especially given the weakening economic outlook.

The supply and demand dynamics for Agency MBS in 2025 are expected to be reasonably balanced. New issuance is projected to remain relatively muted, particularly with primary mortgage rates hovering in the mid-to-upper 6% range. On the demand side, management anticipates increased participation from banks, supported by potential regulatory relief (specifically mentioning more favorable capital requirements like the Supplemental Leverage Ratio). Additionally, accommodative monetary policy and a steeper yield curve are expected to drive demand from other investors, including potential flows out of large money market fund balances.

AGNC's strategy is tailored to capitalize on this outlook while managing inherent risks. The company intends to maintain its disciplined approach to balance sheet management, operating with leverage levels deemed appropriate for the environment and preserving a strong unencumbered liquidity position. This provides resilience against potential future volatility and allows the company to deploy capital opportunistically into attractively priced assets. The recent increase in the investment portfolio size and the focus on adding higher coupon and specified pools with favorable prepayment characteristics reflect this strategy.

Capital management remains a crucial component. The company actively utilizes its At-the-Market (ATM) offering program, having issued approximately $2 billion in common equity accretively in 2024 and $509 million in Q1 2025. A new ATM program authorizing up to $1.5 billion in common stock sales through December 31, 2026, was established in April 2025. This program provides a flexible source of capital for growth and liquidity, generating accretion for existing stockholders. The company also has an authorized stock repurchase plan.

Management's confidence in the current dividend level ($0.12 per common share) is based on the long-run economics of the portfolio. They compare the total cost of capital (estimated at 16.7% at Q1 2025 end, or closer to 18% based on recent book value) to the expected gross return on equity achievable at current market valuations (estimated between 19% and 22%). This alignment, despite fluctuations in reported NSDI, supports the sustainability of the dividend.

However, the investment thesis is subject to significant risks. Interest rate risk remains paramount, impacting net interest spread, asset values, and prepayment speeds. Prepayment risk (faster than expected) and extension risk (slower than expected) can adversely affect yields and the effectiveness of hedges. Spread risk, the variation in the market spread between asset yields and benchmark rates, is inherent and not fully hedged, potentially leading to declines in book value if spreads widen significantly. Liquidity risk arises from financing long-term assets with short-term borrowings, with potential challenges in renewing funding or meeting margin calls, particularly during periods of elevated volatility or declining collateral values. Credit risk exists on non-Agency holdings and counterparty exposures, though mitigated through selection, monitoring, and limiting counterparties to highly-rated institutions or clearinghouses. Macroeconomic uncertainty, government policy actions (including those related to tariffs or the GSEs), and market dislocations can exacerbate these risks. Management acknowledges the potential for continued volatility in the near term, particularly around significant economic data releases or political events like elections, and positions the portfolio cautiously in such environments.

Conclusion

AGNC Investment Corp. offers investors a focused exposure to the Agency MBS market, underpinned by a strategy centered on generating yield through actively managed, leveraged investments in government-guaranteed assets. The company's competitive position is supported by its deep analytical and operational sophistication, enabling it to navigate complex market dynamics and optimize portfolio performance. While recent periods have seen increased volatility and pressure on spreads, management views current Agency MBS valuations as historically attractive, presenting compelling return opportunities that align favorably with the company's cost of capital and support its dividend. The outlook for the asset class appears positive, driven by expectations for a more accommodative Federal Reserve and constructive supply/demand dynamics, suggesting potential for spread stability or tightening. However, investors must remain mindful of the inherent market risks, including interest rate, spread, and liquidity risks, which can be amplified by macroeconomic uncertainty and policy shifts. AGNC's disciplined balance sheet management, strong liquidity, and opportunistic capital strategy are key factors in mitigating these risks and capitalizing on the favorable long-term fundamentals of the Agency MBS market.