THE EARNINGS Extract

Peter Federico | President, Chief Executive Officer, and Chief Investment Officer

Government policy actions and their potentially adverse effects on economic growth and inflation caused investor sentiment to turn decidedly more cautious in the first quarter. This elevated macroeconomic and monetary policy uncertainty led investors to initially seek the safety of high-quality assets like U.S. Treasuries, Agency MBS, and cash over higher-risk assets like equities and corporate debt. Driven by our attractive monthly dividend, AGNC generated an economic return of 2.4% in the first quarter. AGNC’s total stock return with dividends reinvested for the quarter was positive 7.8%.

The tariff policy announcement at the beginning of April, however, caused volatility to increase significantly across all financial markets. With the breadth and magnitude of the tariffs being greater than anticipated, recession fears increased materially. Equity prices, in turn, fell further from their February peak and into bear market territory.

Interest rate volatility also increased substantially. Over the first nine trading days of April, the yield on the 10-year Treasury moved initially sharply lower and then sharply higher. In total, over this short period of time, the yield on the 10-year Treasury fluctuated by more than 100 basis points. This interest rate volatility and broad macroeconomic uncertainty caused normal financial market correlations to break down, liquidity to become constrained, and investor sentiment to turn negative.

The Agency MBS market was not immune to these adverse conditions and also came under significant pressure in early April. In spread terms, the current coupon spread to a blend of 5- and 10-year Treasury rates widened to 160 basis points, the top of the trading range over the last five quarters. The performance of Agency MBS relative to swaps was substantially worse given the unprecedented narrowing of swap spreads that occurred during the height of the market turmoil. As a result, the current coupon spread to a blend of swap rates reached an intraday peak of 230 basis points. For comparison, the widest level reached during the height of the Covid pandemic was 235 basis points for this measure. As of yesterday, this spread was about 220 basis points – still very elevated, but off the wides.

AGNC was well-prepared for the recent market volatility and navigated it without issue. While AGNC’s net asset value was negatively impacted by the mortgage spread widening, the expected return on our portfolio is also now higher, as it reflects these wider spread levels. Moreover, at current valuation levels, we believe Agency MBS provide investors with a compelling return opportunity on both a levered and unlevered basis. Recent trading history is supportive of this value proposition as well, as spreads historically have not remained at these levels for an extended period of time. Agency MBS also offer investors an attractive fixed income alternative to corporate debt and other credit-sensitive instruments, especially in light of the deteriorating economic outlook. For these reasons, and despite the fact that macroeconomic uncertainty is likely to remain elevated over the near term, our outlook for Agency MBS continues to be very favorable.

Bernie Bell | EVP and Chief Financial Officer

For the first quarter, AGNC reported total comprehensive income of $0.12 per common share. Our economic return on tangible common equity was 2.4%, consisting of $0.36 in dividends declared per common share and a $(0.16) decline in tangible net book value per share due to modest spread widening during the quarter.

Quarter-end leverage increased to 7.5x tangible equity, up from 7.2x at year-end, driven by the decline in tangible net book value per share and the deployment of recently issued equity capital. Average leverage was 7.3x for the first quarter, up slightly from 7.2x in the fourth quarter.

We ended the first quarter with a strong liquidity position, consisting of $6.0 billion in cash and unencumbered Agency MBS, representing 63% of tangible equity. During the quarter, we raised $509 million of common equity through our at-the-market offering program at a material premium to tangible net book value, generating meaningful accretion for common stockholders.

Net spread and dollar roll income increased $0.07 to $0.44 per common share for the quarter, driven by a higher net interest rate spread and a larger asset base. Our net interest rate spread rose 21 basis points to 2.12%. This improvement was driven by higher asset yields, a greater proportion of swap-based hedges, and lower funding costs as our repo positions fully reset to prevailing short-term rate levels during the first quarter. Our Treasury-based hedges generated additional net spread income of approximately $0.02 per share for the first quarter, which is not reflected in our reported net spread and dollar roll income.

Lastly, the average projected life CPR in our portfolio increased to 8.3% at quarter-end from 7.7% at year-end, consistent with lower rates. Actual CPRs averaged 7.0% for the quarter, down from 9.6% in the fourth quarter.

Peter Federico | President, Chief Executive Officer, and Chief Investment Officer

Slower economic growth expectations pushed equity prices meaningfully lower during the quarter. In contrast, fixed income returns, as reflected by the major Bloomberg indices, were positive, with Agency MBS being the best-performing fixed income asset class in the first quarter with a total return of 3.1%, followed by U.S. Treasuries at 2.9% and corporate debt at 2.3%. On a hedged basis, however, the performance of Agency MBS was more mixed, with spreads to Treasuries generally widening during the quarter, particularly in the low and middle coupon segments of the market. The current coupon spread to the blended 5- and 10-year Treasury rate widened eight basis points during the quarter.

Our asset portfolio totaled $78.9 billion at quarter-end, up about $5 billion from the prior quarter. The mortgages that we added were largely high-quality specified pools and pools with other favorable prepayment characteristics. As a result, the percentage of our assets with favorable prepayment characteristics increased to 77%. The weighted average coupon of our portfolio, meanwhile, remained steady at just over 5.0%. Our aggregate TBA position was relatively stable during the quarter, although the composition shifted to include a combination of Ginnie Mae and conventional UMBS in response to changing implied financing levels and delivery profile characteristics.

Consistent with the growth in our asset portfolio, the notional balance of our hedge portfolio increased to $64.1 billion at quarter-end. In duration dollar terms, our hedge portfolio composition was about 40% Treasury-based hedges and 60% swap-based hedges at quarter-end.

Despite the recent financial market volatility, our outlook for Agency MBS remains positive. On the demand side of the equation, we continue to believe that regulatory relief will eventually lead to greater demand for Agency MBS from banks. We also believe more favorable bank capital requirements are forthcoming, which could benefit the Treasury and swap markets.

Another noteworthy development in the first quarter relates to the future of the GSEs. The rapid recapitalize-and-release narrative that garnered significant attention at the end of last year, and that was a source of uncertainty for investors, seems to have quieted somewhat. Importantly, many key decision-makers have expressed the desire for lower mortgage rates, improved housing affordability, and for the preservation of the many positive attributes that characterize today’s housing finance system. There also appears to be a greater appreciation for the very complex and interconnected nature of our $14 trillion housing finance system, the cornerstone of which is the GSE conventional mortgage market. This most recent episode of financial market volatility is a good reminder that uncertainty related to the housing finance system can quickly lead to meaningfully higher mortgage rates.

In our opinion, the best way to improve housing affordability is to clarify and, importantly, make permanent the role of the government in the housing finance system as it exists today. If the government were to do so, the demand for Agency mortgage-backed securities would increase, the capital requirement for these securities could be reduced to be consistent with Ginnie Mae securities, and mortgage rates and housing affordability would improve. Also noteworthy, taking this action would not preclude the government from choosing a different capital structure for the GSEs at some point in the future.