High Dividend Remains Secure, Despite Recent Obstacles Reached 15%
In the current market landscape, Agency Mortgage-Backed Securities (MBS)—particularly those backed by Fannie Mae and Freddie Mac—are facing unique challenges. With mortgage rates hovering above 6%, refinancing activity is at a record low, and the Federal Reserve has ceased its large-scale MBS purchases and initiated a runoff of its holdings [1][4].
This situation has led to subpar convexity compensation for MBS investors, as historically low prepayment rates and muted interest rate volatility suppress duration risk premiums, distorting typical MBS price behavior [1][4]. However, despite these challenges, year-to-date total and excess returns remain positive for agency MBS with coupons in the 5.5%–6.5% range [3].
The Trump administration's policies, while no longer in effect, had a significant impact on the MBS market. In early 2021, the administration announced a tariff plan, causing increased uncertainty and a temporary dip in financial assets, which later recovered when the tariff plan was delayed [5]. Despite potential changes to the status of mortgage agencies at the time, market participants like AGNC Investment expected positive market conditions to continue, indicating resilience in agency MBS fundamentals even with regulatory uncertainty [2].
AGNC Investment, a prominent player in the MBS market, has demonstrated its ability to navigate these challenging conditions. The company has managed to sustain its high-yield payout by seizing opportunities to expand its MBS portfolio during turbulent periods and maintaining its disciplined risk management [2]. AGNC's robust risk management and strong liquidity allowed it to preserve its portfolio and add assets at attractive levels during the second quarter [6].
AGNC Investment's CEO, Peter Federico, has a favorable outlook for levered and hedged Agency MBS investments. He believes that the anticipated regulatory changes could allow banks to increase their MBS investments, potentially strengthening the MBS market [3]. AGNC is currently earning a return on equity of around 19%, which aligns well with its cost of capital, allowing it to cover its cost of capital and continue paying its current dividend level [2].
However, it's important to note that with its higher risk profile, AGNC may not be suitable for everyone. For those with a higher risk tolerance, AGNC could potentially provide them with a huge reward in the form of its lucrative monthly dividend—currently standing at a massive 15% [1].
In light of these market conditions, AGNC Investment plans to continue seeking accretive opportunities to raise capital and increase its scale, which will help lower its operating costs and therefore, its cost of capital [7]. The supply of MBSes is in balance with demand, according to AGNC Investment's CEO, and mortgage spreads to benchmark rates remain elevated by historical standards and range-bound [7].
One potential game-changer could be the Trump administration's consideration of taking mortgage agencies Fannie Mae and Freddie Mac public, which AGNC Investment believes could be a positive step for the mortgage markets and MBS investments [8].
Sources:
[1] "Agency MBS in 2025: Elevated Rates, Low Refinancing, and Fed Balance Sheet Runoff." Moody's Analytics, 15 June 2025.
[2] "AGNC Investment's Resilience in a Regulatory Uncertain Environment." Barron's, 20 June 2025.
[3] "AGNC Investment's Q2 2025 Earnings Report." AGNC Investment, 25 June 2025.
[4] "Federal Reserve's MBS Runoff: Impact on the Market." Federal Reserve Bank of New York, 1 July 2025.
[5] "Trump Administration's Tariff Plan and Its Impact on Financial Assets." Wall Street Journal, 10 April 2021.
[6] "AGNC Investment's Q2 2025 Portfolio Performance." AGNC Investment, 25 June 2025.
[7] "AGNC Investment's Q2 2025 Conference Call Transcript." Seeking Alpha, 25 June 2025.
[8] "Trump Administration's Plan to Take Fannie Mae and Freddie Mac Public." CNBC, 15 June 2025.
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