Diversity-generating retroelements (DGRs) are molecular evolution machines that facilitate microbial adaptation to environmental changes. Hypervariation occurs via a mutagenic retrotransposition process from a template repeat (TR) to a variable repeat (VR) that results in adenine-to-random nucleotide conversions. Here we show that reverse transcription of the Bordetella phage DGR is primed by an adenine residue in TR RNA and is dependent on the DGR-encoded reverse transcriptase (bRT) and accessory variability determinant (Avd ), but is VR-independent. We also find that the catalytic center of bRT plays an essential role in site-specific cleavage of TR RNA for cDNA priming. Adenine-specific mutagenesis occurs during reverse transcription and does not involve dUTP incorporation, indicating it results from bRT-catalyzed misincorporation of standard deoxyribonucleotides. In vivo assays show that this hybrid RNA-cDNA molecule is required for mutagenic transposition, revealing a unique mechanism of DNA hypervariation for microbial adaptation.