THE EARNINGS Extract

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

Following the administration’s tariff announcement in early April, elevated governmental policy risk caused investor sentiment to turn sharply negative and financial markets to reassess the macroeconomic and monetary policy outlook. After a sharp repricing in April, most markets retraced their early period losses and ended the quarter at better valuation levels. The performance of Agency mortgage-backed securities (Agency MBS) relative to benchmark interest rates, however, was notably weaker quarter-over-quarter. As a result of this underperformance, AGNC’s economic return for the second quarter was (1.0)%.

During the first three weeks of April, when the financial market stress was most pronounced, the yield on the 10-year Treasury fluctuated by more than 100 basis points, and the S&P 500 stock index declined by 12%. This volatility and macroeconomic uncertainty adversely impacted Agency MBS, with spreads to Treasury and swap rates widening meaningfully.

A primary focus of AGNC’s risk management framework is maintaining sufficient liquidity to withstand episodes of significant financial market stress. One important measure of this capacity is the percentage of equity that we hold in unencumbered cash and Agency MBS, which are available to meet margin calls in the normal course of business. This focus enabled us to begin the second quarter with a strong liquidity position and to navigate the financial market volatility without issue and, importantly, without selling assets. Moreover, we were able to take advantage of the wider MBS spread environment by raising accretive capital during the quarter and opportunistically deploying a portion of that capital in attractively priced assets.

Over the last two months of the quarter, most financial markets retraced the April losses and, in some cases, set new record highs. For example, the S&P 500 index rallied 25% from the April low and ended the quarter about 10% higher. Investment grade and high yield debt also performed well, with spreads tightening 10 basis points and 50 basis points, respectively. The one notable performance exception was Agency MBS, as the current coupon spread to a blend of Treasury and swap benchmarks ended the quarter seven basis points and 14 basis points wider, respectively. Although the Fed and Treasury have indicated that beneficial regulatory reforms are forthcoming, bank demand for MBS still appears to be constrained. Similarly, foreign investor demand may be hindered by U.S. dollar weakness and geopolitical risk.

Looking ahead, we expect banks and foreign demand for Agency MBS to grow. In addition, as we enter the third quarter, the seasonal supply pattern for MBS issuance should improve. We expect the net supply of new MBS will be about $200 billion this year, the low end of most forecasts. Since quarter-end, MBS spreads have tightened slightly and are showing signs of stabilization. As a levered and hedged investor in Agency MBS, AGNC’s return profile is most favorable in environments in which mortgage spreads are wide and stable.

Our favorable outlook for Agency MBS was further improved in the second quarter by the very positive message from key decision makers related to the potential recapitalization and release from conservatorship of the GSEs. The White House, the Treasury Department, and FHFA affirmed the government’s commitment to maintaining the implicit guarantee for Agency MBS and also indicated that they are taking a do-no-harm approach to GSE reform.

Specifically, President Trump made an unprecedented statement in late May regarding the GSEs and the ongoing role of the government in the housing finance system:

“Our great mortgage agencies, Fannie Mae and Freddie Mac, provide a vital service to our nation, helping hardworking Americans reach the American dream of homeownership. I am working on taking these amazing companies public, but I want to be clear, the U.S. government will keep its implicit GUARANTEES.”

Treasury Secretary Bessent also made several important statements regarding the GSEs during the quarter. The one that stood out the most to us was:

“The one requirement of this privatization is that they are privatized in such a way that mortgage spreads do not widen. And in fact, is there a way that we can make the spread between the risk-free rate and mortgages tighten as Freddie Mac and Fannie Mae are privatized?”

Finally, Director Pulte weighed in with similar positive statements:

“Our number one thing is to do no harm and keep the implicit guarantees intact. We cannot have any disruption to the mortgage market. There cannot be any upward pressure on the mortgage rate. And I am very confident that the mortgage market will be safer and sounder as a result of any option that the President takes.”

These statements individually and collectively clarify the administration’s approach and, more importantly, should provide investors greater confidence that the credit quality of the $8 trillion of outstanding Agency MBS, as it is understood to be today, will not be impaired by actions associated with privatization. In fact, given the explicit statement of credit support made by the President of the United States that the implicit guarantee of Agency MBS will be preserved, investors could reasonably conclude that the credit quality of the outstanding stock of Agency MBS has never been stronger. These statements also make it clear that maintaining stability in the mortgage market and lowering mortgage costs are two important guiding principles of GSE reform. This is a very positive development that should lead to tighter mortgage spreads over time.

Bernie Bell | EVP and Chief Financial Officer

For the second quarter, AGNC reported a comprehensive loss of $(0.13) per common share. Our economic return on tangible common equity was (1.0)%, consisting of $0.36 of dividends declared per common share and a $(0.44) decline in tangible net book value per share, as mortgage spreads ended the quarter moderately wider. As of late last week, our tangible net book value per common share was up about 1% for July, after deducting our monthly dividend accrual.

Quarter-end leverage increased slightly to 7.6x tangible equity, compared to 7.5x at the end of Q1. Average leverage for the quarter rose to 7.5x from 7.3x in the prior quarter. As of quarter-end, our liquidity position totaled $6.4 billion in cash and unencumbered Agency MBS, representing 65% of tangible equity, up from 63% as of the prior quarter. We were able to navigate the substantial financial market volatility in April with our portfolio intact as a result of our risk management positioning and ample liquidity entering that period.

Additionally, during the quarter, we opportunistically raised just under $800 million of common equity through our at-the-market (ATM) offering program at a significant premium to tangible net book value. As of quarter-end, we had deployed slightly less than half of the proceeds, and we have continued to deploy the remaining capital post-quarter-end. In utilizing the ATM, we attempt to maximize both the accretion benefit associated with the stock issuance premium and the investment returns on acquired assets. However, the optimal timing for stock issuances and capital deployment may not fully align. As a result, our investment of the new capital may lag the issuance, as it did this quarter, as we evaluate market conditions and wait for favorable entry points.

Net spread and dollar roll income declined $(0.06) to $0.38 per common share for the quarter, primarily due to the timing of deployment of the new capital raised over the quarter, with moderately higher swap costs also contributing to the decline. Our net interest rate spread decreased (11) basis points to 201 basis points for the quarter, largely due to higher swap costs. Our Treasury-based hedges contributed additional net spread income of approximately $0.01 per common share for the quarter, which is not reflected in our reported net spread and dollar roll income. Lastly, the average projected life CPR of our portfolio declined to 7.8% at quarter-end, from 8.3% as of Q1, consistent with higher mortgage rates. Actual CPRs averaged 8.7% for the quarter, up from 7.0% in the prior quarter.

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

Trade, fiscal, and monetary policy uncertainty caused Agency MBS spreads to widen across the coupon stack, with higher coupon MBS performing slightly better than lower coupon MBS. MBS performance also varied considerably by hedge type and maturity, as the yield curve steepened significantly during the quarter and swap spreads tightened by five to 10 basis points. As a result, MBS hedged with longer-dated Treasury-based hedges performed materially better than MBS hedged with short- and intermediate-term swap-based hedges.

Our asset portfolio totaled $82.3 billion at quarter-end, up $3.4 billion from the prior quarter. The mortgages that we added were largely higher-coupon specified pools with favorable prepayment characteristics. As a result, the percentage of our assets with some form of positive prepayment attribute increased to 81%. Our aggregate TBA position remained relatively stable at about $8 billion, consistent with our preference for specified pools in the current environment. With both our pool and TBA activity concentrated in higher coupons, the weighted average coupon of our asset portfolio increased to 5.13% during the quarter.

The notional balance of our hedge portfolio increased to $65.7 billion at quarter-end. In duration dollar terms, our hedge portfolio consisted of 46% Treasury-based hedges and 54% swap-based hedges.

In summary, despite the second quarter volatility and elevated geopolitical and government policy risk that still remains, we continue to have a very positive outlook for Agency MBS. In fact, we believe the outlook actually improved in the second quarter due to four factors:

• Agency MBS supply appears to be manageable as seasonality factors turn more favorable and the mortgage rate remains high.
• The demand for Agency MBS appears poised to grow as a result of anticipated regulatory changes and relative value attractiveness.
• Agency MBS spreads appear to be stabilizing at historically cheap levels.
• Lastly, key policymakers appear to be taking a cautious, do-no-harm approach to GSE reform while reaffirming the government’s ongoing role in the housing finance system.

Collectively, we believe these positive developments create a very favorable investment outlook for Agency MBS as a fixed income asset class.