Despite the 11.8% decline in net book value during the second quarter, driven by marks on mortgage-backed securities investments as long-term interest rates rose, investors reacted with relief, since expectations of even worse results were apparently built into the stock price. AGNC lowered its dividend to $1.05 a share for the second quarter from $1.25 the previous quarter AGNC chief investment officer Gary Kain in the company's earnings announcement said that in response to "extreme volatility" in interest rates and mortgage rate spreads, the company "the size of our asset portfolio, adjusted our asset composition to be more consistent with a higher rate environment, and materially increased the duration of our hedges. As a result of these actions and evolving market conditions, our exposure to higher rates is lower than it has been in years and our 'pay-up' risk is now minimal." "On balance we see the 11.8% decline in book value as a relatively solid performance given the starting point and evolution of rates and MBS prices during the quarter," KBW analyst Michael Widner wrote in a note to clients late Monday wrote. "By our estimates, had AGNC done nothing during the quarter to manage portfolio composition (e.g., simply reinvesting principal paydowns in the same securities) and added no hedges we estimate book value would have been down closer to 20%." Following the "worst quarter in a couple decades for agency MBS, and a historically bad quarter for the sector," Widner wrote that "improved net interest spread opportunities can't quite make up for the sharp declines in book values and the realistic costs of appropriately hedging. That leaves most mortgage REITs in position where they can either cut the dividends or maintain an elevated risk profile." The analyst therefore lowered his price target for the REIT to $27 from $30, while maintaining his "outperform" rating for AGNC. KBW's estimates factor-in a continued quarterly dividend of $1.05 a share through the end of 2014. AGNC data by YCharts Interested in more on American Capital Agency Corp.? See TheStreet Ratings' report card for this stock.