AGNC Investment Corp. Common Stock 2026 Q3 Earnings Call

Please go ahead. Thank you all for joining AGNC Investment Corp's third quarter 2026 earnings call.

Before we begin, I'd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer, Bernice Bell, Executive Vice President and Chief Financial Officer, and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.

Good morning, and thank you all for joining our third quarter earnings conference call. Fixed income markets experienced significant pressure in the third quarter, particularly in the final weeks of September, as a confluence of adverse conditions caused bond market sentiment to turn decidedly bearish, interest rates to move sharply higher, and interest rate volatility to spike. Periods of instability in the Treasury market often drive more pronounced weakness in the Agency MBS market. This was indeed the case in the third quarter as Agency MBS was the worst-performing fixed income sector. As a result of the underperformance of our asset class, AGNC's economic return in the third quarter was negative 12.7%.

The challenging fixed income environment in the third quarter was driven by a number of negative catalysts, including substantial monetary policy uncertainty, mixed inflation data, the crowding out effect of historically high corporate debt issuance, heightened geopolitical risk, elevated energy prices associated with the Middle East conflict, and stronger than expected domestic economic growth. In a typical quarter, the impact of any one of these factors would have likely been considerable. Collectively, they led to historically poor quarterly fixed income and Agency MBS returns. Monetary policy was perhaps the most significant negative catalyst. At the Jackson Hole Symposium in August, Chairman Warsh signaled a more restrictive monetary policy stance. Consistent with that message, the Fed raised the federal funds rate by 25 basis points at the September meeting, the first increase since 2023.

Although the Chairman characterized the September rate hike as simply removing a dose of accommodation, the market's interpretation and subsequent repricing of monetary policy were much more dramatic. In late February, the Fed funds futures reflected the expectation of three rate cuts by year end, consistent with the Fed's own projections and its gradual progression toward a neutral policy stance. Following the September rate hike, however, the market priced in four rate hikes by the middle of 2027. In total, the expected path of monetary policy increased by about 200 basis points over a very short time period. In effect, over a six-month period, monetary policy expectations pivoted from a fixed income-friendly view that the Fed would provide additional accommodation by year end to the belief that the Fed had embarked on a full tightening cycle.

Against this backdrop, the yield on the 10-year Treasury increased 82 basis points over the course of the quarter, with 54 basis points of that move coming in September alone. A quarterly increase of that magnitude has occurred just on four other occasions over the last 30 years. This Treasury market weakness spread to other fixed income asset classes, as evidenced by the negative 3.5% total return of the Bloomberg U.S. Aggregate Bond Index in the third quarter. When Treasury yields rise sharply, as they did in the third quarter, it is not unusual for Agency MBS to experience greater weakness. This is evidenced in the performance of the Bloomberg Agency MBS Index, which posted a negative total return of 4.25% in the third quarter. Moreover, on a duration match basis, Agency MBS underperformed U.S. Treasuries by nearly 120 basis points.

Since 2010, the Agency MBS index has underperformed Treasuries by a wider margin in only two other quarters. Those two periods were the third quarter of 2022, when the Fed raised short-term rates by 150 basis points and was rapidly reducing its balance sheet, and the third quarter of 2011, when the S&P 500 index dropped 14% and 10-year Treasury yields fell below 2%. Despite this more challenging environment, there are a number of reasons to be optimistic about the outlook for Agency MBS. First, the return profile of Agency MBS is considerably more attractive at current valuation levels. At quarter end, the yield on a new production current coupon Agency MBS was close to 6.5%, which, for a security backed by the support of the U.S. government, should be appealing to a wide range of investors.

For hedged investors, the return opportunity is also compelling, with the spread between current coupon Agency MBS and benchmark rates ending the quarter near the upper end of a multi-year trading range at about 135 basis points to Treasuries and 165 basis points to swaps. Lastly, Agency MBS look increasingly attractive relative to investment-grade corporate debt. Second, mortgage cash flows have become more stable. When interest rates increase, the duration of Agency MBS also increases. This is the extension risk inherent in mortgage-backed securities. At a certain rate level, however, mortgage durations plateau and become relatively insensitive to further rate increases. Given the magnitude of the rate move in the third quarter, that inflection point has largely been reached, meaning the vast majority of the duration extension in the mortgage universe has already occurred. Prepayment risk for Agency MBS has also diminished.

A simple measure of prepayment risk is the percentage of outstanding mortgage-backed securities that have a 50-basis-point refinance incentive. With the primary mortgage rate meaningfully above the average note rate of the mortgage universe, less than 2% of the outstanding mortgage universe has a 50-basis-point refinance incentive. Moreover, if mortgage rates were to drop by a full percentage point, the refinanceable population would increase to only 10% of the outstanding universe. In summary, the aggregate cash flows of the mortgage universe are more stable today because extension risk is minimal and prepayment options are further out of the money. Finally, the technicals for Agency MBS continue to point to favorable performance once interest rate volatility subsides. With the primary mortgage rate near 7.5% and favorable year-end seasonality, the supply of new Agency MBS for the remainder of this year and into next year should be materially lower than previously anticipated.

At the same time, the demand for Agency MBS should remain steady due to heavy bond fund inflows, the finalization of bank capital rules, the reemergence of the GSEs, and an uptick from other investors as they seek to take advantage of attractive return opportunities in the Agency MBS market. Taken together, these conditions should benefit Agency MBS performance over time. That said, interest rate volatility and macroeconomic uncertainty are likely to remain elevated over the near term, and Agency MBS performance will likely remain sensitive to that backdrop. With that, I'll now turn the call over to Bernice Bell, our Chief Financial Officer, to review our financial results in greater detail.

Thank you, Peter. For the third quarter, AGNC reported a comprehensive loss of $1.28 per common share. Our economic return on tangible common equity was -12.7% for the quarter, consisting of $0.36 of dividends declared per common share and a $1.45 decline in tangible net book value per share due to the underperformance of our mortgage assets relative to our interest rate hedges. As of last Friday, our tangible net book value per common share was up 3% since quarter end, or a little over 2% net of our October dividend accrual. During the quarter, AGNC was added to the S&P MidCap 400 index, an important milestone for the company and a testament to the scale that AGNC has attained over our 18-year history. The announcement and subsequent index rebalancing activity drove significant trading volume in our common stock.

We took advantage of this outsized liquidity to issue $992 million of common stock through our at-the-market offering program at a significant premium to tangible net book value. Our access to capital at attractive levels enabled us to maintain our leverage profile within a reasonable band while growing our asset portfolio by $2.5 billion on a cost basis at wider spread levels. Even with this growth, leverage increased only modestly to 7.9 times tangible equity at quarter end from 7.4 times as of Q2. In addition, our liquidity position remained strong throughout the quarter, ending with $6.3 billion of unencumbered cash and Agency MBS, representing 57% of tangible equity. Turning to earnings, net spread and dollar roll income was $0.37 per common share for the quarter, down $0.03 from Q2. The decrease primarily reflects two factors.