AGNC Sees Stabilizing 2H Amid Rate Volatility and Hawkish Warsh Outlook

Outlook for AGNC’s second half amid rate volatility, a hawkish Warsh, a flattened curve, and possible hikes

1) The risk backdrop is clearly negative in the near term—but the firm sees it as time-bound

Management explicitly flags that the investment environment in the second quarter was “challenging” due to macro uncertainty and a pivot toward rate hikes by year-end, with treasury yields rising and the yield curve flattening during the quarter ¹. They also describe two key negatives worsening in Q2: (1) elevated geopolitical risk driving volatility across financial markets and (2) a deterioration in the monetary policy outlook due to more inflation concerns linked to energy/war impacts, compounded by a “new Fed Chairman” delivering a “much hawker message” than the market anticipated ².

They quantify the magnitude of policy re-pricing in expectations: “from 2 eases to 2 tightenings,” described as a “100 basis point move in monetary policy expectations… in one quarter” ².

Implication for the second half: the baseline is that policy/volatility remains a headwind for spreads and hedging costs, but management’s stance is that these negatives “are still with us for some period of time,” implying continuation rather than immediate reversal ².

2) Rate volatility and the Fed stance: management expects the market to be “overpriced,” limiting upside pressure on rates

With regard to the flattened curve and potential Fed hikes, management states they “really haven’t responded to this flattening” and that the Q2 flattening from 2s to 10s was “about 25 basis points” ³. They hedge across the curve and claim they do “not have a lot of curve exposure,” with some intentional mix adjustments depending on whether the curve steepens/steepens is expected ³.

Critically, management’s rationale for not changing strategy more aggressively is that (a) “maybe the market has overpriced the current environment” and (b) they believe it will be “difficult for the Fed to raise interest rates,” citing Warsh-related context (task forces) and room created by recent inflation readings ³. They further say Fed decisions likely depend on completing the work of the committee(s), with meaningful work “until probably the end of the year” ³.

Implication for the second half: even if “potential rate hikes” are contemplated by the market, AGNC’s outlook assumes that the risk of further, sustained tightening is less than what the market is currently pricing, which should reduce the probability of a disorderly rates regime shift that would severely hurt MBS valuations ³.

3) Flattened curve: management expects mean reversion to a steeper curve once war/inflation stabilize

Management asserts that once the war outlook stabilizes and inflation/energy stabilize, the flattening seen in Q2 “will likely not continue” and will “likely revert to a more steeper yield curve” ⁴.

They also argue against the idea that the curve flattening forces a change in hedge positioning, emphasizing their limited curve exposure and the intention to keep the portfolio hedged appropriately ³.

Implication for the second half: the flattened-curve regime is treated as transitional rather than a durable new base case, which is important because curve shape affects MBS duration/hedging economics and hedging basis risk. Management’s expectation of re-steepening acts as a supportive counterweight to the “hawkish Warsh / rate hikes” narrative ⁴.

4) Mortgage fundamentals and technicals: despite macro uncertainty, AGNC expects stronger supply/demand dynamics to support spreads in 2H

Management links their second-half outlook for Agency MBS to “underlying fundamentals” improving and to expected “tighter mortgage spreads” once negatives quiet down ⁵. They cite several technical supports:

• Falling supply: net new supply of Agency MBS this year “will likely drop to about $150 billion,” materially lower than earlier estimates ¹. They also quantify the reduction as “$100 billion to $150 billion less supply of mortgages this year” ⁵.
• High demand and resilient fixed-income inflows: they report bond fund inflows “more than $400 billion” through the first 6 months, running “about double the pace of last year,” and expect banks/foreign investors/REITs to “continue to be net purchasers” over the remainder of the year ⁶.
• Seasonality: Q2 is described as “sort of, the worst seasonal for mortgage activity,” and “seasonal should improve later in the year” ⁵.
• GSE “dry powder” and responsiveness: they note that the GSE purchases in the first 2 months of Q2 were “very slightly positive,” and that GSE purchase activity was relatively low in Q2—interpreted as behavior consistent with stepping in when spreads widen ⁷. They further state the GSEs have about $120 billion of purchase activity remaining ⁷. They also explain a mechanism: if mortgage spreads back up (e.g., “at 150” to “160 or 170 basis points”), “you’ll see the GSEs step in and buy them at a faster pace,” while if spreads don’t back up they maintain discipline and “keep their powder dry” ⁸.

They also add a relative-value argument: in Q2, corporate bonds outperformed Treasuries and Agency MBS by a wide margin, but that came with corporate spread levels “among the lowest on record,” and corporate issuance expected to exceed “$1.1 trillion” (their framing: largest corporate issuance year ever), which they treat as a backdrop that supports sustained demand for high-quality fixed income including Agency MBS ⁶.

Implication for the second half: even if rate volatility increases, AGNC is effectively relying on technical forces (lower supply, persistent buy-side demand, GSE capacity, improving seasonality) to partially offset the valuation and hedging headwinds from rates and policy uncertainty ⁵⁶⁷⁸.

5) Demand view: management does not expect a “rate-driven” surge in demand late in the year

A direct question about whether potential rate hikes or the macro picture implies a second-half demand uptick is answered in a way that constrains the upside:

• They say mortgage rates are around 6.5% to 6%, and “it does not feel like… the second half of the year, we’ll see an uptick in demand” ⁹.
• They instead give a “core view” from seasonality: they “would expect a sort of a downtick in demand through the remainder of the year” ⁹.

Implication for the second half: the bull case is not predicated on accelerating mortgage originations late in the year. It is more about spreads and technical supply/demand balance for MBS (including institutional inflows and GSE buying behavior) rather than a late-year surge in demand ⁹⁶.

6) Overall “outlook” synthesis: expect continued volatility, but management’s base case is supported by (a) lower MBS supply, (b) strong/structural demand, and (c) a probability-weighted view that rate/curve moves may be less severe than market pricing

Putting the excerpted statements together:

• Rate volatility/policy: elevated geopolitical risk and a more hawkish Warsh-related monetary policy outlook drove substantial re-pricing and flattening in Q2, and these negatives “still with us for some period of time” ²¹.
• But management’s hedging and macro view is cautious-but-constructive: they do not plan major curve-exposure changes, suggesting they believe the market may be “overpriced,” the Fed may find it “difficult… to raise interest rates,” and Fed actions may depend on task force work into year-end ³.
• Curve shape: they expect Q2 flattening to “revert” to a steeper curve after war/inflation stabilize ⁴.
• Technical support in 2H: they highlight reduced supply (~$150B net new supply; $100B–$150B less supply), strong inflows (> $400B in first 6 months, ~2x last year pace), improving seasonality, and substantial GSE remaining capacity (~$120B), all of which they expect to become “more apparent over time” and benefit Agency MBS performance in the second half ⁵⁶⁷.
• No demand surge late-year: they explicitly do not expect demand to increase in 2H; they expect a seasonal downtick ⁹.

Conclusion: The second-half outlook is best characterized as “constructive on Agency MBS technicals and spread tightening over time,” but with “persistent” macro/rates uncertainty due to geopolitical risk and hawkish policy repricing ²⁵⁴⁶. AGNC’s management appears to underwrite a scenario where curve/rate pressure does not worsen materially beyond market expectations—and where supply reduction plus ongoing demand (including GSE “capacity with discretion”) supports mortgage spreads despite volatility ⁵³⁶⁷.