The escalating trade war and tariffs (actual and threatened) have disrupted several sectors of the economy, including the bond markets. This, in turn, has had an impact on mortgage real estate investment trusts (mREITs) like AGNC Investment (AGNC 1.38%). The stock looked like it was starting to turn the corner following a difficult operating environment the past few years, but then the sudden shock to the bond market once again left it reeling.
However, AGNC management thinks the current market environment could set it up for strong future returns. Given the stock’s 17% dividend yield, it’s certainly worth investigating the mREIT’s recent quarterly results and management’s commentary.
Rates remain in focus
AGNC is a REIT that primarily holds a portfolio of mortgage-backed securities (MBSes) that are backed by government-sponsored agencies, such as Fannie Mae and Freddie Mac. MBSes are home mortgages that are bundled into bond-like securities. Because they are backed by government-sponsored agencies, they are generally regarded as virtually risk-free from default.
However, owning a portfolio of agency MBSes does come with other risks. One of the biggest is interest rate risk. This is where the value of older bonds declines when the coupon rates on newer issues increase. For mortgage REITs like AGNC, this gets reflected in their tangible book value (TBV). When the Fed aggressively raised rates a few years ago, AGNC saw its TBV nosedive.
That decline in TBV stemmed from both increasing interest rates as well as the widening spread between 10-year Treasury and mortgage rates. Most fixed-income assets tend to trade at a spread to Treasury yields, reflecting their inherently riskier nature. This applies even to agency MBSes, even though these assets carry virtually no credit risk.
The mortgage market had been calmer over the past year until the government rolled out tariffs haphazardly and initiated a trade war with China. In the first quarter, AGNC saw its tangible net book value per share fall from $8.41 at the end of 2024 to $8.25. However, ahead of earnings, it said that as of April 9, 2025, its TBV per share was down to between $7.75 and $7.85. On its earnings call, it said TBV was down another 7.5% to 8% from that level.
The biggest reason behind the decline wasn’t the increase in interest rates, but the widening of the spread between Treasuries and mortgages. It said this spread peaked at 230 basis points and was 220 basis points the day before its earnings release. It noted that the highest the spreads got during the COVID-19 pandemic was 235 basis points.
That, of course, is not good for investors. However, management offered up hope. It highlighted that spreads historically don’t tend to stay at these wide levels for an extended period. Meanwhile, the wide spreads now give it a compelling return opportunity.
Management also thinks that more favorable bank capital requirements will eventually lead to greater demand for agency MBSes from banks. This would be positive because more demand should also help lower spreads. Tighter capital requirements have kept banks out of the agency MBS market, which, together with the unwinding of quantitative easing (when the Fed bought MBSes), has left a dearth of MBS buyers and led to higher spreads.
Addressing the issue of the potential privatization of Fannie and Freddie, or GSEs (government-sponsored entities) as they are commonly called, AGNC management was unfazed. It noted the important role GSEs play in the mortgage market and how the Treasury secretary has talked about the importance of keeping mortgage rates low. As such, whatever capital structure they take, it is expected that the government will want the market to continue to operate as it has.
Image source: Getty Images.
Is AGNC stock a buy?
If the current wide spread between Treasuries and mortgages does turn out to be temporary, this could be a good time to buy AGNC stock. The company should be able to make attractive investments in this environment, while its portfolio should begin to recover when spreads start to normalize. The current high yield, meanwhile, gives investors an attractive dividend payout as they wait.
That said, there is still an elevated risk with the current environment, as well as the talk about privatizing the GSEs. If this were to happen, the current wide spreads could remain or even possibly widen.
As such, investors can dip their toes into AGNC stock, but I wouldn’t make a big bet on it at this time.
