AGNC Investment Corp. Sees Positive Outlook for Mortgage Performance
2023-08-01
AGNC Investment Corp. recently held a call meeting to discuss their second quarter 2023 earnings and provide insights into the market conditions and investment outlook for agency mortgage-backed securities. The meeting aimed to inform shareholders and investors about the company's position in the market and its favorable return expectations.
The most important topic discussed in the meeting was the positive outlook for mortgage performance. The company's leverage outlook and its potential impact on their investment strategy was also a key point of interest. Peter Federico, the Director, President, and CEO of the company, mentioned that the leverage outlook is dependent on factors such as the interest rate environment, interest rate volatility, and mortgage spreads.
For the past eight quarters, the company has been operating with a defensive position, with declining or stable asset balances. However, in the second quarter, there was a change in trajectory as the asset balance increased, indicating a more positive investment outlook. This suggests that the company's confidence in the market conditions is growing.
Federico also highlighted that the company's current leverage is higher than the previous quarter, operating at around 7.5 times. This indicates that they have the capacity to take leverage higher as market conditions continue to unfold and their confidence in the outlook increases. Additionally, the company has a significant amount of unencumbered cash in mortgage-backed securities, providing them with the capacity to be opportunistic.
The market outlook discussed in the meeting is generally optimistic. Concerns and uncertainties from previous quarters have diminished, with factors such as the Federal Reserve's actions and the regional banking crisis being in the past. Stability in the coming months will depend on inflation data, and if it remains in line with expectations or lower, it could lead to a decline in interest rate volatility, which is positive for agency mortgage-backed securities. The liquidation process by the FDIC is expected to improve market technicals, coinciding with slower housing seasonals and less organic issuance, which should benefit performance in the second half. The company has been adding to its portfolio, focusing on production coupons due to the upward sloping spread curve and the dominant bid for mortgages from index-based investors. Overall, the market outlook is positive.
The key drivers of the business discussed in the meeting were leverage, asset balances, capital raising, and unencumbered cash and mortgage-backed securities.
The most important Key Performance Indicators (KPIs) discussed in the meeting were leverage and capital raising efficiency. The company's leverage outlook is dependent on the environment and varies over time. They have been operating with a defensive position for eight quarters, but in the second quarter, their asset balance increased, indicating a more positive investment outlook. Currently, their leverage is around 7.5 times, and they have the capacity to take leverage higher as market conditions unfold and they gain more confidence in the outlook.
In terms of capital raising, the company utilizes an ATM (at-the-market) issuance strategy, which is considered a highly efficient and low-cost way of raising capital. This approach allows for flexibility in raising capital when it is believed to be accretive to existing shareholders and enables quick deployment of the raised capital.
The company's outlook for the quarter/year is positive, as they have expressed a more positive view on the investment outlook and have added to their portfolio. They have a defensive position but have recently seen an increase in asset balances. They have the capacity to take leverage higher as market conditions unfold and they gain more confidence in the outlook. They also have a significant amount of unencumbered cash in mortgage-backed securities, providing them with the capacity to be opportunistic. They plan to continue being disciplined and opportunistic with capital raises.
The participants of the call mentioned in the text are Chris, the Executive Vice President and Chief Investment Officer, and Peter (last name not mentioned).
In conclusion, the discussion on the call highlighted the reasons for concern and uncertainty in the market, which have been outweighing optimism in recent quarters. However, several sources of uncertainty have now fallen away, such as the Federal Reserve nearing the end of its actions and the resolution of the regional banking crisis. The movement in deposits and the balance sheet-related banking crisis have not had a significant impact on the market. The outlook for mortgage performance is encouraging, although there is still some uncertainty related to the Fed's actions and inflation. The stability in the market will depend on the inflation data over the next few months. Additionally, the liquidation process by the FDIC has been successful, with strong inflows into the company.
The meeting outcome discussed the current state of the economy and factors influencing optimism and uncertainty in the market. The Federal Reserve's monetary policy was seen as positive, with rate hikes nearing completion and no issues with the balance sheet run-off. The regional banking crisis was viewed as being in the past, and any potential crisis from Silicon Valley Bank was expected to be easily absorbed. There was optimism about mortgage performance, but uncertainty remained regarding the Fed's stance on the economy and inflation. The key to market stability was seen as inflation data.