AGNC Investment Corp. Aktie

Good morning, and welcome to the AGNC Investment Corp. Third Quarter 2026 Shareholder Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.

Thank you all for joining AGNC Investment Corp.'s Third Quarter 2026 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC.

All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law.

Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development.

With that, I'll turn the call over to Peter Federico.

Good morning, and thank you all for joining our third quarter earnings conference call. Fixed income markets experienced significant pressure in the third quarter, particularly in the final weeks of September as a confluence of adverse conditions caused bond market sentiment to turn decidedly bearish, interest rates to move sharply higher and interest rate volatility to spike.

Periods of instability in the treasury market often drive more pronounced weakness in the Agency MBS market. This was indeed the case in the third quarter as Agency MBS was the worst performing fixed income sector. As a result of the underperformance of our asset class, AGNC's economic return in the third quarter was negative 12.7%.

The challenging fixed income environment in the third quarter was driven by a number of negative catalysts, including substantial monetary policy uncertainty, mixed inflation data, the crowding out effect of historically high corporate debt issuance, heightened geopolitical risk, elevated energy prices associated with the Middle East conflict and stronger-than-expected domestic economic growth. In a typical quarter, the impact of any one of these factors would have likely been considerable. Collectively, they led to historically poor quarterly fixed income and Agency MBS returns.

Monetary policy was perhaps the most significant negative catalyst. At the Jackson Hole Symposium in August, Chairman Warsh signaled a more restrictive monetary policy stance. Consistent with that message, the Fed raised the federal funds rate by 25 basis points at the September meeting, the first increase since 2023. Although the Chairman characterized the September rate hike as simply removing a dose of accommodation, the market's interpretation and subsequent repricing of monetary policy were much more dramatic.

In late February, the Fed funds futures reflected the expectation of 3 rate cuts by year-end, consistent with the Fed's own projections and its gradual progression toward a neutral policy stance. Following the September rate hike, however, the market priced in 4 rate hikes by the middle of 2027. In total, the expected path of monetary policy increased by about 200 basis points over a very short time period. In effect, over a 6-month period, monetary policy expectations pivoted from a fixed income-friendly view that the Fed would provide additional accommodation by year-end to the belief that the Fed had embarked on a full tightening cycle.

Against this backdrop, the yield on the 10-year treasury increased 82 basis points over the course of the quarter with 54 basis points of that move coming in September alone. A quarterly increase of that magnitude has occurred just on 4 other occasions over the last 30 years. This treasury market weakness spread to other fixed income asset classes as evidenced by the negative 3.5% total return of the Bloomberg U.S. Aggregate Bond Index in the third quarter.

When treasury yields rise sharply as they did in the third quarter, it is not unusual for Agency MBS to experience greater weakness. This is evidenced in the performance of the Bloomberg Agency MBS Index, which posted a negative total return of 4.25% in the third quarter. Moreover, on a duration match basis, Agency MBS underperformed U.S. treasuries by nearly 120 basis points. Since 2010, the Agency MBS index has underperformed treasuries by a wider margin in only 2 other quarters. Those 2 periods were the third quarter of 2022 when the Fed raised short-term rates by 150 basis points and was rapidly reducing its balance sheet and the third quarter of 2011 when the S&P 500 Index dropped 14% and 10-year treasury yields fell below 2%.

Despite this more challenging environment, there are a number of reasons to be optimistic about the outlook for Agency MBS. First, the return profile of Agency MBS is considerably more attractive at current valuation levels. At quarter end, the yield on a new production current coupon Agency MBS was close to 6.5%, which for security backed by the support of the U.S. government should be appealing to a wide range of investors. For hedged investors, the return opportunity is also compelling with the spread between current coupon MBS and benchmark rates ending the quarter near the upper end of a multiyear trading range at about 135 basis points to treasuries and 165 basis points to swaps. Lastly, Agency MBS look increasingly attractive relative to investment-grade corporate debt.

Second, mortgage cash flows have become more stable. When interest rates increase, the duration of Agency MBS also increases. This is the extension risk inherent in mortgage-backed securities. At a certain rate level, however, mortgage durations plateau and become relatively insensitive to further rate increases. Given the magnitude of the rate move in the third quarter, that inflection point has largely been reached, meaning the vast majority of the duration extension in the mortgage universe has already occurred.

Prepayment risk for Agency MBS has also diminished. A simple measure of prepayment risk is the percentage of outstanding mortgage-backed securities that have a 50 basis point refinance incentive. With the primary mortgage rate meaningfully above the average note rate of the mortgage universe, less than 2% of the outstanding mortgage universe has a 50 basis point refinance incentive. Moreover, if mortgage rates were to drop by a full percentage point, the refinanceable population would increase to only 10% of the outstanding universe. In summary, the aggregate cash flows of the mortgage universe are more stable today because extension risk is minimal and prepayment options are further out of the money.

Finally, the technicals for Agency MBS continue to point to favorable performance once interest rate volatility subsides. With the primary mortgage rate near 7.5% and favorable year-end seasonality, the supply of new Agency MBS for the remainder of this year and into next year should be materially lower than previously anticipated. At the same time, the demand for Agency MBS should remain steady due to heavy bond fund inflows, the finalization of bank capital rules, the reemergence of the GSEs and an uptick from other investors as they seek to take advantage of attractive return opportunities in the Agency MBS market.

Taken together, these conditions should benefit Agency MBS performance over time. That said, interest rate volatility and macroeconomic uncertainty are likely to remain elevated over the near term, and Agency MBS performance will likely remain sensitive to that backdrop.

With that, I'll now turn the call over to Bernie Bell, our Chief Financial Officer, to review our financial results in greater detail.

Thank you, Peter. For the third quarter, AGNC reported a comprehensive loss of $1.28 per common share. Our economic return on tangible common equity was negative 12.7% for the quarter, consisting of $0.36 of dividends declared per common share and $1.45 decline in tangible net book value per share due to the underperformance of our mortgage assets relative to our interest rate hedges. As of last Friday, our tangible net book value per common share was up 3% since quarter end or a little over 2% net of our October dividend accrual.

During the quarter, AGNC was added to the S&P MidCap 400 Index, an important milestone for the company and a testament to the scale that AGNC has attained over our 18-year history. The announcement and subsequent index rebalancing activity drove significant trading volume in our common stock, and we took advantage of this outsized liquidity to issue $992 million of common stock through our at-the-market offering program at a significant premium to tangible net book value.

Our access to capital at attractive levels enabled us to maintain our leverage profile within a reasonable band while growing our asset portfolio by $2.5 billion on a cost basis at wider spread levels. Even with this growth, leverage increased only modestly to 7.9x tangible equity at quarter end from 7.4x as of Q2. In addition, our liquidity position remained strong throughout the quarter, ending with $6.3 billion of unencumbered cash and Agency MBS, representing 57% of tangible equity.

Turning to earnings. Net spread and dollar roll income was $0.37 per common share for the quarter, down $0.03 from Q2. The decrease primarily reflects 2 factors: a 14 basis point decline in our net interest spread as higher funding costs more than offset higher asset yields and a slight earnings drag from capital raised but not yet deployed.

Lastly, the average projected life CPR of our portfolio declined nearly 2 points to 6.7% at quarter end, consistent with higher rates. Actual CPRs for the quarter fell to 8.2% from 13% in the prior quarter.

And with that, I'll turn the call back over to Peter to discuss our portfolio.

Thank you, Bernie. The underperformance of Agency MBS was fairly uniform across the coupon stack in the third quarter. As measured by the Bloomberg Agency MBS Index, the negative excess return by coupon ranged from 110 to 140 basis points. Middle coupons, which were widely held, marginally underperformed as lower coupons benefited from a lack of supply and bond fund inflows and higher coupons benefited from sharply reduced prepayment risk. At quarter end, the market value of our asset portfolio totaled $94 billion.

During the quarter, we purchased $2 billion of primarily intermediate coupon specified pools. We also shifted the coupon composition of our portfolio somewhat higher given the more attractive yield profile of this segment of the market. As a result, the weighted average coupon on our portfolio increased to 5.13%. Through purchases and portfolio repositioning, the percentage of assets with favorable prepayment characteristics increased to 83%.

A common misconception regarding specified pools is that these securities only provide a benefit in faster prepayment environments. Certain pools, however, can provide both call protection in declining rate scenarios and importantly, extension protection in rising rate scenarios through seasoning and faster borrower turnover.

Our hedge portfolio, excluding receiver swaptions, totaled $86 billion at quarter end, an increase of more than $12 billion from the prior quarter, driven primarily by the addition of longer-term treasury-based hedges. This hedge portfolio repositioning reflects our decision to offset nearly all of the asset duration extension that we experienced during the quarter as it occurred.

Through these actions, our duration gap at quarter end was little changed at 0.8 years. Moreover, at current rate levels, the duration of our asset portfolio is close to fully extended and as such, relatively insensitive to further rate increases.

With that, we'll now open the call up to your questions.

[Operator Instructions] The first question comes from Crispin Love with Piper Sandler.

Peter, during your prepared remarks, you called out treasury market instability in the third quarter. Just compare that to what you've seen so far in October. The 10-year yield is down. Would you still say that there is instability, but perhaps even broader than treasury markets given the macro, what we've seen in fixed income markets, especially for some tech companies related to AI financing in recent days and some perceived flight to quality, which could actually help you guys?

Yes, there's a lot there, Crispin. And first off, I think you're absolutely right to sort of identify a shift that may be appearing now post quarter end. Obviously, I talked about the fact that for a good part of the third quarter, the sell-off was sort of contained and there really wasn't that much damage, if you will, to the bond market. Really, it sort of unraveled in the last 2 weeks of September. And there was obviously some positioning that had to take place, repositioning of portfolios, maybe some forced transactions, not across -- not specific to MBS, but just in general in the rates market given the 54 basis point move in the 10-year treasury, that's always going to happen.

But since quarter end, I would say that perhaps we're starting to see the market in what I would kind of define as a consolidation phase, meaning that the market has to trade at this new range for some period of time. People need to be comfortable with what the upper end of the range is and what the lower end of the range is. And obviously, when we ended September, with the 10-year treasury at 5.30-ish percent. The question was, is the upper end of the range 5.75% or is it ultimately 6%.

I think the important trading behavior that we've seen since quarter end is that we've bumped up against that 5.30%, 5.35% range, probably on 4, maybe even on 5 occasions. And often in that same day, it bounced off that level and ended the day lower. And I think that was a really good sign for the market. And as you point out today, we're back to maybe 5.15% or so this morning.

So our expectation is perhaps we're starting to see the new range and maybe that new range might be something like 4.90% to 5.40%. You're right, though, to point out that there are a lot of other macroeconomic forces, not the least of which might be what's happened in overseas instability in foreign bond markets and particularly in the French bond market. That was one of the catalysts that I think that ultimately started to rally back in the United States.

With respect to corporate issuance or not corporate issuance, but maybe AI, we did have some big transactions go through at the end of the third quarter. And importantly, I think what we started to see after those transactions, that Paramount transaction, in particular, that was like a $45 billion transaction, we did start to see some of those tranches widen materially after issuance. And so maybe that is also a sign that ultimately, corporate issuance in the fourth quarter may not be quite as high. The market may not have as much capacity to absorb all of that flow that we might see.

In fact, when you look at the amount of corporate issuance, it was sizable in the third quarter at a little over $200 billion. It was actually less than what was in the second quarter. So it's going to be really interesting to see going forward. Again, there's a lot of moving pieces, but I'm somewhat optimistic with what we're starting to see now with the treasury markets starting to perhaps find a new range. But I'll pause there and let you have a follow-up.

Great. I appreciate all the color there. And then just on return expectations. Last quarter, you talked about 15% to 17%, a lot that's happened since then. So just curious if you can give us an update on kind of where return expectations today, especially after kind of the heavy issuance in the ATM in the quarter.

Yes. Sure. And I ended my prepared remarks in the first part of them with really the outlook for Agency MBS. And I really do believe that the outlook for Agency MBS is really strong. We just have to get through all of this other macro uncertainty. And ultimately, I think those underlying conditions will really flow through. And it really starts with the return profile. When we have seen mortgages at these levels in the past, they have historically been good buying opportunities for both levered and importantly, unlevered buyers.

And I really do expect rotation into fixed income from unlevered buyers. I pointed out that the current coupon at 6.5% is really attractive. I expect fixed income flows to be heavy. And in fact, in the first -- I think it was the first week of October, we had $25 billion in fixed income inflows. So unlevered returns are really attractive. The return on the index, the yield is at a little over 6% or thereabout 6% right now. So I think you're going to see unlevered money.

And on a levered basis, when you look at where those spreads are, I quoted spreads at 135 and 165 basis points to swaps and treasury. That's across the curve. That was at the end of the quarter. They're a little bit lower than that today. But when you take those levels, you have to sort of make 2 adjustments when I do the calculation for what our expected return is. One is we got to have to have the right mix of, of swaps and treasuries. And typically, we use about an 80-20 mix as kind of our long-run average. So you would weight those 2 things, 80-20.

But then importantly, you also have to make a duration adjustment because looking at a current coupon MBS to the curve like I just described, would not be duration neutral, and there's actually a benefit because the hedge portfolio is too long of a duration for a current coupon. That's probably worth around 10 basis points. So you put all those together, if spreads were at 135 and 165, you would average those, make those adjustments. I think that would be a net spread of around 170 basis points after making the duration adjustment. Lever that return the way we typically would operate with leverage at around mid 7%, 7.5% range.

And I think -- and add to where current coupon yields are, which are now well above 6%, 6.25% today, 6.5% at the end. And you're going to get an ROE, expected ROE right around 19%, maybe a little bit above. So I would say expected returns are in the 18% to 20% range based on where mortgages are trading today. And I really do believe that mortgages look compelling relative to corporates as well.

The next question comes from Marissa Lobo with UBS.

So you've laid out a pretty constructive fundamental backdrop for mortgages, yet spreads remain near the wide end of the range. So what do you think isn't priced correctly today? Is it excessive compensation for rate volatility or something else?

Yes. I think that what often happens is that when you have this big move in rates, it's very common. In fact, it happens probably every time you have a move of that size in treasury rates. Mortgage market is going to feel the pressure more. It's the spread product that people can trade. So it's kind of a victim of its own liquidity. So when things move like that, and I talked about the duration extension, there was unwinding of mortgage positions due to duration extension, which was significant. Mortgage durations moved on average almost a full year in the quarter. So there is going to be some natural rebalancing due to that.

We also heard of structured mortgage trades, some cap trades that were -- there were some forced liquidations, there where a cap came into the money, maybe wasn't expected for a mortgage cash flow that was converted into a floating rate security. Those things naturally happen. And so the mortgage market feels the pressure of that.

And the other thing that happens is that liquidity just generally goes down in that environment. So small transactions have the effect of moving mortgage spreads more than they otherwise should. And once that stops, it just generally stops and it stops pretty sharply, and you can have convexity buying just as quickly as you have convexity selling.

And the other thing that sort of takes time is when the mortgage rate moves as sharply as it did and now up at 7.5%, you don't see the full benefit of the supply side reduction for some period of time. We're starting to see that right now. Somebody put out -- a dealer put out yesterday that they expect daily originations now to be down into the $1.5 billion range. I think they were actually in that range just yesterday. But we haven't seen that level of daily originations in a long time. Just a couple of months ago, that was in the $3 billion and $3.5 billion range. So it takes a little time for the market to recover from those forced transactions, illiquidity and ultimately, the fundamentals will start to show back up. So it will take time, but I think it will occur.

Okay. And you highlighted the role that the ATM played in maintaining leverage while allowing you to grow into wider spreads. How should we think about that playbook if the premium to book narrows from here? And does that hurdle your additional deployment charge?

Well, certainly, the level of the premium does factor into our consideration. And as Bernie mentioned, it was really fortunate for us. It was a confluence of positive factors that led to our sort of larger issuance, particularly the inclusion into the S&P 500. That created a onetime demand for our stock that was probably in the $1.5 billion range. So it was very substantial, and we're very proud to have joined the S&P 400. It was a great accomplishment for our company.

Unfortunately, it came in a difficult quarter. But it did allow us a lot of flexibility. And in certain markets, we're going to be able to use that ATM. As Bernie mentioned, it gave us great risk management flexibility. And then ultimately, it's going to give us great investment capacity going forward.

But yes, the level -- as you point out, the level going forward will certainly dictate whether we use it more or less and also the market conditions. But right now, we're in a really strong position, ending a really difficult volatile quarter with leverage below 8. And as Bernie mentioned, a really strong liquidity position. We got a lot of flexibility going forward. We just need market conditions to stabilize.

The next question comes from Doug Harter with U.S. Bancorp BTIG.

Can you talk about your leverage outlook, just given your viewpoint on the attractiveness of mortgages? Are you comfortable at this level? Could it go up? Does it drift back down? Just how are you thinking about those?

Yes. I've talked about this before. I mean the way we sort of approach our leverage, and this is important. This is one of the reasons why we ended the quarter where we did is we started the quarter, if you recall, with leverage in the low 7s. And our expectation when we set our leverage level, we're always thinking about what will that leverage be when the market moves positively and when the market moves adversely like it did.

And when we look at our -- we do our projections, we said what will happen if rates move against us and spreads move against us, what will that do to our leverage? And are we comfortable with leverage at that point? Because obviously, as a levered investor, what we're trying to do when we set our leverage level is set it in a range such that when the market does come under pressure, we are not forced to adjust our asset portfolio. And that was, in fact, the case in the third quarter.

Importantly, we did not have to adjust our asset portfolio. In fact, we were able to add assets during the quarter. And so going forward, I would just say that there's no change to that framework. We have plenty of capacity to operate at higher leverage should the market push us there. We have plenty of liquidity, plenty of capacity from a risk management perspective. But I think it goes back to making sure that you enter these periods with the right leverage, and I think we did enter this period with the right leverage. So there's going to be some natural movement up and down as spreads widen and tighten.

Got it. I guess, is there appetite to kind of proactively add to leverage, add more assets in this environment? Or is it kind of keep flexible for the risk position?

Yes. It goes back really to my answer to the first question. There is definitely capacity to take leverage up opportunistically, and it really just depends on when we see enough signs of stability that we feel like the sort of the macroeconomic backdrop is more conducive of that position.

We obviously had to prioritize for some period of time, risk management over opportunity. That's just a prudent thing to do in environments like these when there's that much uncertainty about what the forces are at play. But once we gain confidence and maybe we are starting to gain confidence, although there's still a lot of sort of macroeconomic uncertainty, at least the rate market is giving us some confidence that there could be an opportunity for us to take advantage of these levels. And ultimately, I expect that's going to be the case.

The next question comes from Bose George with KBW.

Bose, we can't hear. You might be on mute.

Bose. Please go ahead. Again, your line is open. All right, then we'll go to the next questioner. The next question comes -- is Trevor Cranston with Citizens JMP Securities.

Peter. A follow-up question on your comments on marginal ROEs. I guess if you look at the current dividend level on book value is around 20%. So I was curious if you could kind of give us an update on your thoughts around the appropriate dividend level. And if the Fed hikes that are currently priced into the market were to materialize, does that kind of incrementally change anything with your views on the dividend?

Yes. I'll start with the latter part first. And the answer is no, it doesn't with the Fed moves. First off, our expectation is not that will -- ultimate 4 rate hikes will be realized. But if they were to be realized, it would not have that meaningful of an impact. As Bernie mentioned, our hedge ratio was significant. We added a lot of mortgage -- and a lot of hedges. So when I look at our hedge ratio, I look at it adjusted for our receiver swaption position. And on that basis, our hedge ratio was 97%.

So it essentially means when that's close to 100% that we have very little exposure to short-term rate movements as all of our debt is synthetically hedged from that perspective.

With respect to ROE and dividend, I would say that they continue to be -- our dividend continue to be well aligned with the economics of our business. And you've heard me say this before, but the first thing I look at is what is our total cost of capital. And obviously, given the amount of movement we had in rates and spreads, our total cost of capital, as you would expect, did increase during the quarter, not because the dollar of the numerator increased, but predominantly because of the denominator and the book value going down.

So it ended the quarter probably somewhere right around 19-ish percent as a total cost of capital. And then you ask how does the economics of our business? What is the economics of our existing portfolio. Our portfolio, existing portfolio generated $0.37 of net spread and dollar roll income on an ROE basis, that's around a 20% return. That's consistent with -- obviously, given the dividend, it's consistent with the book value dividend yield of around 20%.

And then the new book of business, that goes back to the ROE I talked about. The new book of business comes on at around 19%. That also is aligned with our total cost of capital. So there's good alignment still.

The other thing that I would say is in a quarter when you have this amount of volatility and this amount of movement, we don't hyper focus on any one quarter in terms of the long-run alignment. I think the long-run economics are still aligned. There's a lot of moving pieces that drive these numbers. They'll change rapidly quarter-to-quarter. But I think the long run fundamental alignment is still there.

The next question comes from Hong Zhang with JPMorgan.

This is Hong on for Rick. I guess just on your hedging activity, you moved the hedging ratio up pretty meaningfully this quarter. I guess, is this more of a tactical move given volatility? Or is this kind of more structural change in how you view risk?

It's a good question. I would say it's more tactical in that because of the way the rates moved and trended the long-term rates during the quarter, it was a quarter where delta hedging was really important. And as you -- as we talked about at the beginning of our prepared remarks, we mentioned that our duration gap -- I mentioned that our duration gap was essentially unchanged at 0.8 years, and we started the quarter at 0.7 years.

And our mortgage durations extended by a full year. So we essentially offset all of that mortgage duration because we wanted to maintain our duration gap where it was. And that meant that we had to add hedges. And so I would say that, that was tactical in that, of course, if rates were to go the other direction, we would likely then take those hedges back off. So it was in response to the movement in the mortgage market.

The other thing I would say about hedging, and I think this is really important, is that we made a very conscious decision to end the quarter with a duration gap that was similar to the previous quarter and a positive duration gap of 0.8 years because -- and you look at -- and we showed this in our sensitivity table. I think this is really informative about the duration extension left in the mortgage market. Our duration sensitivity table shows that if rates were to go up 100 basis points from here, our duration would only extend 0.4 years. If rates move 50 basis points, it's only 0.2 years. So it's essentially saying that our portfolio is nearly fully extended.

That same applies for the mortgage universe, by the way. The mortgage universe duration, someone showed me this, this morning, has a positive convexity today for the first. There's only been 3 other occasions in the last 30 years where the index has had positive convexity. That means the mortgage universe is fully extended.

On the flip side, though, when you look at our duration sensitivity table, we do have more exposure to a rate rally. Obviously, mortgage durations are not going to move when rates go up, but they are going to shorten. And it shows that our duration would shorten by about a year.

So we want to operate with a positive duration gap because from a risk management perspective, the prudent risk management action is to have a long duration gap in the event that mortgages rally. We also obviously have some options in our position that give us some down rate protection as well. So that's the way we're looking at it from a risk management perspective in terms of our duration gap and our interest rate risk management.

Got it. And if I look at your net TBA exposure, it declined pretty significantly quarter-over-quarter. I guess could you walk us through what the main driver of that was and how you expect to use the TBA market from here?

Yes. Well, first off, with respect to the TBA going forward, I would expect that there's not -- when you look at dollar roll specialness and the benefit of TBA funding versus on-balance sheet funding, that has compressed recently. And on some coupons, I would describe it as sort of being back to like the historical norm of maybe 10 to 20 basis points of specialness, so not that much meaningful in terms of TBA specialness relative to on-balance sheet funding. So that would say all other things equal, there'll probably be less TBA going forward.

In the quarter, we did bring it down really opportunistically, and there was 2 factors that drove us bringing it down. One was we rotated out of TBA into specified pools because there were some really attractive opportunities to acquire specified pools at really attractive payups, at least what we believe are attractive payups. And the other was that because of the funding differential, we actually ended up taking delivery of some of our TBA position to take advantage of better funding in the repo market versus the TBA market. And that's -- so those 2 things together ended up bringing our TBA balance down.

The next question comes from Jason Weaver with JonesTrading.

On the capital raise, can you speak to the timing of the deployment during the quarter and when you might be fully deployed, if not already?

We are not fully deployed already, and I can't speak to the timing of it. That will be market and opportunity driven. So I'll have to tell you that after the fact, not before the fact. I wouldn't want to say that before the fact.

Right. I was also asking during the quarter when you raised the $992 million, when were those -- when was that pretty much...

When was that raised? Well, you can sort of judge for yourself in that. You can figure out the average dollar price of that capital. And the average dollar price, I don't know exactly, but it was a little over $10. What was it? $10.17, Sean just told me, $10.17. So that gives you an indication that where it was raised. And again, you can also look at -- Sean, what was the inclusion date of the -- yes, you can also look at that 2-week period around when the S&P 400 inclusion date was. But the $10.17 gives you an idea of when that capital was raised.

Got it. Got it. And if I may, with the index inclusion, that seems to expand the shareholder base quite a bit. Do you expect that to have a material beneficial impact on your cost of capital and how you use the ATM going forward?

Well, it definitely can. There's no doubt about it. I mean having the fact that just the inclusion required an additional $1.5 billion of demand for our stock, says everything you need to know. It is certainly positive. There will certainly be more buyers of our stock because we are in the S&P 400 on a go-forward basis. Only 1,500 companies in the S&P universe, so we're really happy with that. And obviously, it will be a new source of demand for our stock. Anytime anybody buys the S&P 400, they're buying some share of AGNC stock, which is great.

The next question comes from Jason Stewart with Compass Point.

Jason asked some of my questions. And I guess more of it was on the drag on earnings from the deployment of the capital during the third quarter. If you could quantify that. And then I guess the second part of that question goes into what are you looking for? Are you looking for more macro stability? Are you looking for more GSE participation? What markers are you looking for to fully deploy that capital?

Sure. First off, on the drag, Bernie mentioned it was slight. I would say it's maybe in the neighborhood of $0.01 since we deployed essentially $2 billion, maybe 20%, 25% of the capital, something like that. So it was about $0.01.

On a go-forward basis, I would say that, obviously, what will first be important is establishing confidence in the new treasury range. So that will be one. Obviously, we're going to get some more information on monetary policy. I just think the amount of uncertainty around monetary policy has really been challenging for the market over the last 4 months or so. And we'll have a Fed meeting coming up. We'll have another one in December. Economic data and inflation data is obviously going to have a big impact on that.

I expect the Fed to be on hold at this next meeting and then possibly raise again in December. So any sort of change in monetary policy outlook will be important for us.

With respect to the GSEs, we don't know what their purchase activity was in September yet. That's not yet been reported, although I do expect to see that there will be some portfolio growth that had occurred in the month of September. And the GSEs really can play and I think do play a really important role in the market now.

If you go back to look at the GSE portfolios from April to August, they were essentially unchanged. In the first quarter, they grew at a pace of around $12 billion a month or $35 billion, $36 billion in the first quarter. It would not surprise me to see the GSEs acquire mortgages at a similar pace in the fourth quarter as they did back in the first quarter because when you look at where mortgage spreads are at the upper end of this sort of multiyear range, it is a great opportunity for the GSEs. It's great for taxpayers.

And ultimately, having them participate in the market when the market needs it from a liquidity perspective really strengthens the mortgage market. And I think that it's likely that they did buy in September, and it's likely that they're going to buy going forward, and it's really beneficial to the U.S. housing finance system that they do that. And I expect them to be active in the fourth quarter.

And our last question comes from the line of Bose George with KBW.

Bose, good to get you back.

Peter, on the hedges, can you talk about just the current mix of swaps versus treasury hedges and what your thoughts are just on the current level of swap spreads?

Yes. When we have a market like we did in the third quarter, and we're very active in delta hedging, we do tend to delta hedge more in treasuries. In fact, it was almost exclusively in treasuries. And as a result of that, our hedge composition shifted down. I think at the end of the quarter, we were in high 50s, maybe 58%, maybe 60% of swaps versus treasuries. That's lower than our long-run average.

When I talked about our ROE, for example, going forward, I use usually a mix of 80-20. And so that would say that over time, I would expect that hedge composition to shift back up toward a greater share of swap-based. Obviously, they have a better carry profile to them. But often, the first move that we make, we rotate into treasuries and then ultimately, we rotate out of treasuries into swaps as market conditions change and we kind of get a feel for what the new run rate is of our hedge portfolio. So I would expect more swaps going forward. Said in another way, for example, when we acquire mortgages on a go-forward basis, they will likely be hedged 100% swaps.

We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.

Again, I appreciate everybody participating on our call this morning, and we look forward to speaking to you again at the end of the year.

Thank you for joining the call. You may now disconnect.

Good morning and welcome to the AGNC Investment Corp. Second Quarter 2026 Shareholder Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Turlington in Investor Relations. Please go ahead.

Thank you all for joining AGNC Investment Corp.'s Second Quarter 2026 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contain statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the reform act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC.

All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development.

With that, I'll turn the call over to Peter Federico.

Good morning, and thank you all for joining our second quarter earnings conference call. The investment environment in the second quarter continued to be challenging as escalating rhetoric and hostilities between the United States and Iran largely dictated financial market performance. With ship traffic through the Strait of Hormuz severely constrained elevated energy prices and supply chain disruptions were the dominant macroeconomic concerns for the quarter. These concerns caused treasury yields to increase the yield curve to flatten and the market's outlook for monetary policy to pivot from rate cuts to rate hikes by year-end.

Despite the elevated geopolitical and macroeconomic uncertainty, and the bare shift in fixed income sentiment during the quarter, AGNC generated a strong economic return of 6.7%, comprised of our attractive monthly dividend and improvement in our tangible book value per common share. Also notable, the monthly common stock dividend that we paid at the beginning of this month marked the 75th consecutive monthly dividend payment of $0.12 per share, a track record of performance that we believe illustrates the value of AGNC's disciplined approach to risk management and portfolio construction over a wide range of investment environments.

The improvement in our tangible book value was driven by the solid performance of Agency MBS, which generated a positive excess return to U.S. treasuries for the fifth consecutive quarter. This 5-quarter track record of outperformance is unusual and particularly noteworthy given the similar credit quality of these 2 asset classes. The catalyst for the favorable performance of Agency MBS was improving technical factors. With the primary mortgage rate continuing to be above 6.5%, the net new supply of Agency MBS this year will likely drop to about $150 billion, materially lower than the supply estimates at the beginning of the year.

Elevated mortgage rates have also caused prepayment speeds to slow. As a result, MBS runoff from the Fed's portfolio will be lower than expected this year. Against the backdrop of falling supply, the demand for agency mortgage-backed securities has remained strong. Through the first 6 months of the year, bond fund inflows have totaled more than $400 billion and are running about double the pace of last year. A significant portion of these inflows get invested in agency mortgage-backed securities and are an important source of demand. Banks, foreign investors and REITs should also all continue to be net purchasers of Agency MBS over the remainder of the year.

Lastly, with the outlook for private credit deteriorating and equity valuation stretched by many measures, the demand for high-quality fixed income assets should remain strong or perhaps even increase over the near term. We expect these favorable supply and demand dynamics to become more apparent over time and to benefit Agency MBS performance in the second half of the year.

Another important consideration that shapes the outlook for agency MBS is the compelling value that this asset class offers relative to corporate bonds. In the second quarter, corporate bonds were the best-performing fixed income sector by a wide margin, significantly outperforming both U.S. treasuries and agency MBS. The Bloomberg investment-grade corporate index and the Bloomberg U.S. High Yield Index ended the second quarter as spreads to U.S. treasuries of 75 and 290 basis points, respectively, levels that were among the lowest on record. Surprisingly, these historically tight spread levels come at a time when corporate issuance this year is expected to exceed $1.1 trillion, making 2026 the largest corporate debt issuance year ever.

In light of the approved technical backdrop and despite elevated geopolitical risk, our outlook for agency MBS remains encouraging. Agency MBS spreads have moved little this year and continue to be wide by historical standards, despite supply being lower than expected and demand being greater than expected. Corporate spreads on the other hand, have narrowed through the first half of the year and are tight by historical standards, despite record issuance and rising credit concerns.

Once the current elevated level of geopolitical and monetary policy uncertainty subsides, we believe these constructive dynamics will become more apparent and over time, drive favorable Agency MBS performance. Moreover, we believe AGNC is well positioned to continue to deliver strong risk-adjusted returns for our shareholders in this environment.

With that, I will now turn the call over to Bernie Bell, our Chief Financial Officer, to discuss our financial results in greater detail.

Thank you, Peter. For the second quarter, AGNC reported comprehensive income of $0.52 per common share. Our economic return on tangible common equity was 6.7% for the quarter, consisting of $0.36 of dividends declared per common share and a $0.20 increase in tangible net book value per share due to mortgage outperformance relative to our interest rate hedges. Our total stock return for the quarter was even more favorable at 12.3% with dividends reinvested which brings our 1-year total stock return to 36.1%.

As of late last week, our tangible net book value per common share was down about 1% or a little less than 2% net of our monthly dividend accrual for July. Both ending and average leverage were unchanged at 7.4x tangible equity for the quarter. and we ended the period with $7.5 billion of unencumbered cash and Agency MBS, representing 62% of tangible equity. Net spread and dollar roll income totaled $0.40 per common share for the quarter, down $0.02 from the first quarter. The decrease primarily reflects a 6 basis point decline in our net interest spread driven by lower asset yields from portfolio repositioning, partly offset by modestly lower funding costs.

The average projected life CPR of our portfolio decreased by 170 basis points to 8.6% at quarter end due to coupon and TBA versus specified pool repositioning. Actual CPRs were largely unchanged at 13% for the quarter.

Lastly, during the second quarter, we continued to actively manage our capital for the benefit of existing stockholders, issuing $167 million of common equity through our at-the-market offering program. at a significant premium to tangible net book value per share, while maintaining a disciplined and opportunistic approach to capital issuance.

And with that, I will now turn the call back over to Peter to discuss our portfolio in greater detail.

Thank you, Bernie. In aggregate, Agency MBS in the second quarter outperformed both treasury and swap based hedges, but the magnitude of the outperformance did vary considerably by coupon. Higher coupon and production coupon MBS experienced the greatest outperformance as the increase in interest rates curtailed both supply and prepayment concerns. The outperformance of higher coupons relative to lower coupons was also a reversal of the coupon performance in the first quarter. With swap spreads widening in the second quarter, MBS hedged with swaps also performed better than MBS hedged with treasury securities. At quarter end, the spread differential between a current coupon mortgage-backed security and a blend of hedges across the swap curve was about 145 basis points.

At this spread level, Agency MBS are trading near the middle of our expected range of 120 to 160 basis points. At quarter end, the market value of our asset portfolio totaled $97 billion. During the quarter, we purchased $2.2 billion of primarily intermediate coupon specified pools. Early in the quarter, we also sold some lower coupon MBS and bought higher coupon MBS to lock in gains from the strong performance of low coupons in the first quarter and to capture the yield benefit associated with higher coupon given the expectations for a more benign prepayment environment.

As a result, the weighted average coupon on our portfolio increased to 5.04%. The percentage of assets with favorable prepayment characteristics also increased slightly to 79%. The notional balance of our hedge portfolio totaled $66 billion at quarter end, up slightly from the prior quarter due to the addition of intermediate and longer-term treasury-based hedges. With the maturity of $3 billion of swap hedges and the additional treasury-based hedges, our overall portfolio allocation to swap-based hedges declined to 66% at quarter end.

Lastly, we ended the quarter with a duration gap of 0.7 years, unchanged from the prior quarter. We continue to favor operating with a positive duration gap, given the current level of interest rates the convexity profile of our portfolio and the expected correlation between mortgage spreads and interest rates.

With that, we'll now open the call up to your questions.

[Operator Instructions] The first question comes from Doug Harter with BTIG.

I was hoping you could talk about what -- where you're seeing returns today and incremental investments to kind of the current spread levels and how the ability to raise capital at your current valuation, how that impacts how you think about returns?

Sure. Welcome back. Yes. First off, in terms of marginal returns on new investment opportunities, as I mentioned, we ended the quarter with spreads. I like to look at them relative to the blend of the swap curve. I think it's important comparison over time. I mentioned that 145 basis points are actually probably closer to 150 basis points this morning to treasuries. They're probably in the 120 basis point range. So the returns will obviously depend on what combination of hedges we use in the current environment given the fact that our swap-based hedges are now a little bit lower back towards 65% marginal investments going forward will likely be hedged more with swaps.

So from that perspective, if you look at returns into, say, 130 to 150 basis point range you're getting ROEs when you leverage them the way we leverage them at 7 or 7.5x probably in the 15% to 17% range. So that aligns really well with the economics of our dividend. And from a capital perspective, you'll notice that our capital activity was a little lighter this last -- in the second quarter relative to some previous quarters. And as I mentioned before, that's not unexpected. We take a very disciplined, opportunistic approach to capital raising. It is not on any preset course, and we'll let the economics of the market and the environment drive our decision.

In the second quarter, we felt like our stock was trading a little bit heavy. And obviously, shareholder experience matters a lot to us. We don't want our ATM activity to interfere with the way our stock trades. And in fact, Bernie mentioned in the second quarter, our total stock return at a little over 12%. I think is evidence that a lighter touch in the second quarter was appropriate. And going forward, we'll just take that same opportunistic approach. Returns are good in the market. We do have some volatility that we still have to contend with, which is always a negative. But the underlying fundamentals look good from our perspective. And certainly, if we continue to raise capital in a way that is beneficial to our existing shareholders, we will do that.

But at the same time, we already have great size and scale and liquidity. And so we're very happy with where we are, and we're happy to be in a position where we continue to use capital activities as a way to generate incremental value for our shareholders.

The next question comes from Crispin Love with Piper Sandler.

You discussed how the investment environment has been challenging. There's plenty of macro uncertainty, but results have been solid. The technicals for agency MBS are good. So with that in mind, and can you speak to just the today outlook with the landscape because a few things that we could see, could see elevated rate fall with Wash's Fed Chair, another added layer of uncertainty, the curve is flat and could see some rate hikes. So I'm curious what you think about how those factors could impact the outlook in the second half?

Yes. There's no doubt that -- and in fact, if you go back to some of the comments I made at the beginning of the year, there's reasons to be optimistic and there's challenges in the market. And the 2 challenges actually sort of, in my opinion, deteriorated. And the 2 challenges are in the second quarter deteriorated. The 2 challenges are we do have elevated geopolitical risk, which is causing volatility in the market, all financial markets. And that's always a negative from a mortgage market perspective.

The second, which I also believe sort of deteriorated is the outlook for monetary policy and it deteriorated in the second quarter because we clearly have more inflation concerns to price in, if you will, to deal with in the market with respect to energy prices related to the war and how that may feed into the Fed's monetary policy. But we also now know that we have a new Fed Chairman who's taken a different approach and certainly communicated a much hawker message initially than I think the market had anticipated.

So putting all that together, we had monetary policy moving from 2 eases to 2 tighten. It's a 100 basis point move in monetary policy expectations, pretty dramatic in 1 quarter. Those are the negatives and those negatives are still with us for some period of time. But as I mentioned in my prepared remarks, I think when you look beyond those negatives, and I think the market is doing a really good job of looking beyond those particularly as it relates to inflation in the war, and you could see that because rates are higher, but not materially higher, and equity prices are still very elevated.

All those things are positive. The market is looking beyond it. The underlying fundamentals for the mortgage market have actually continued to improve sequentially through the first 2 quarters. And it's more pronounced today than it has been, particularly because the supply outlook, as I talked about, is materially lower. We're talking about maybe $100 billion to $150 billion less supply of mortgages this year. And I don't see any reason to think that demand is going to tail off in the second half of the year. I think demand will actually remain high. And now when you look at Agency MBS relative to corporates, it's a pretty compelling backdrop. It just takes time to work through those.

In addition, in the second quarter, the second quarter tends to be sort of the worst seasonal for mortgage activity is the highest mortgage activity quarter. So the seasonal should improve later in the year. Hopefully, those 2 negatives that I mentioned that you point out will ultimately quiet down. And once that happens, I think people will realize that the underlying fundamentals for mortgages are really attractive, and I think that will ultimately lead to tighter mortgage spreads. So I'll pause and let you ask a follow-up.

Great. I appreciate that. And then I just wanted to dig a little bit more into the stock issuance activity you covered in the prior question. And your word, you had a little bit of a lighter touch in the quarter. Was that based more on not seeing the right investment opportunities or not wanting to disrupt the stock? And -- just on that, does that change the strategy at all in capital raising over the intermediate term because I think this prior quarter had the least amount of issuance versus the last few years on any quarterly level. And the reaction was pretty good. So just curious if that changes anything going forward.

Well, it wasn't a change in our behavior. We always look at those factors, and we always look at how our stock is trading, and we want our ATM activity capital raising activities to be complementary to what's happening with the stock. So if we see a lot of reverse inquiry for our stock, if we see volumes trading really high, it was really strong. At the same time, when mortgage investments are attractive, then that's sort of like the perfect environment to be able to issue without disrupting the way your stock is trading to be able to get capital, deploy it quickly at attractive levels. Those are the kind of things that we always look at and we will continue to look at. We just didn't feel like in the second quarter, they kind of lined up as well as we wanted. .

The next question comes from Mariss Lobo with UBS.

Just looking at TBA income came in better than expected. Can you speak to how that's changing the hurdle rate for owning specified pools in this rate environment?

Yes, I talked about that last quarter, and it continues to be the case. TBA specialists has definitively improved this year relative to the last couple of years. TBA specialness over the last couple of years at times has been a negative, and it's been more favorable to own pools on balance sheet than in TBA. We have continued to see specialness in -- particularly related to Jenny pools, and I think that will continue, and that's a good opportunity for us in the TBA market. This last quarter, our overall dollar roll income was on a percentage basis, if you will, a little less than the previous quarter because of some long and short positions we had in the first quarter. But I do expect -- generally speaking, going forward, I do expect TBA specialists to remain attractive relative to repo funding, perhaps more in line with, on average, more in line with the long-term averages of maybe 10 to 20 basis points of specialness generally for TBA. So it's an opportunity for us going forward for sure.

Okay. And just going back to the outlook for agency spreads. You talked about strong supply and demand. driving a lot of that outlook. How much of that depends on GSE purchases and could spreads tighten if GSE activity remains below market expectations.

Yes, that's a really good question. And that's important because if you look at what happened to mortgage spreads, obviously, mortgage spreads did tighten in the second quarter. And as I mentioned, in particular, the greatest tightened the greatest outperformance which I think made it a little more challenging of a quarter to evaluate mortgage performance. The higher coupons, I'll call it, the 5% and 6% coupons really performed really well if you look at them relative to excess return on the Bloomberg index, it was somewhere close to 70 or 80 basis points, whereas the lowest coupons to 2% to 4% coupons. They only had 10 to 20 basis points of outperformance. So overall, that will continue to be the biggest driver. Ask me -- tell me that question again because I just got a little distracted. Where were you going with that with...

It's mostly to talk about GSE activity. How much is your outlook in on the...

So what's important in the second quarter with the GSEs is the GSE purchases in the first 2 months of the quarter were only actually very slightly positive from what we know from the -- for the first 2 months. So in the second quarter, mortgage spreads overall tightened, but the GSE purchase activity was actually relatively low. And that's really important because I think that tells you the are responding to markets like we collectively, I think, would want them to, which is when markets get disrupted and spreads get wide, they step in and they buy it at a more aggressive pace. And when they don't, like in the second quarter, they actually take a much lighter touch to the market. Going forward, what we know, I believe the GSEs still have about $120 billion of purchase activity. So I think they have dry powder going forward, which, as you point out, coupled with the underlying technicals, I think, sets up a nice backdrop for mortgages.

The next question comes from Jason Weaver with Jones Trading.

Peter, so on the same point you just made on the prior question, Marissa, with what we've seen about the GSEs effectively using the purchase program to sort of cap spreads here. Does that change you or maybe some of the other peers process and assessing what the appropriate amount of leverage is if there's limited risk to downside of prices, can you effectively support a higher level for some short period of time?

Yes. That's a great question. And it's something we've talked about a lot. When you're thinking about leverage, what you're -- really the key driver of your leverage profile has to be your assessment of where mortgage spreads are and what the range of mortgage spreads are. We talk about that all the time. And to the extent that there are forces in the market, whether it be government-related or GSE or actions from the treasury that reduce spread volatility and limit the upside on spreads, all other things equal, that should bring more capital into the market and allow people to operate with greater leverage.

So lower spread volatility for whatever the reason is a positive, which would allow us and just generally the market to operate with greater leverage, all other things equal. The challenge that we have, as you point out, is there are those forces in place that are reducing spread volatility. We do have to contend with the uncertainty of the macroeconomic environment, though, that it's actually increases volatility, both interest rates and spreads. But you're right, all other things equal, lower spread volatility would allow us to operate with greater leverage and would attract more private capital to the mortgage market.

All right. And on that same theme, actually, on the regulatory front, any insight on SLR reform or the Basel in game that unlocks more demand? Or is that still further over the horizon in your view?

No. From what we understand, on the SLO, I don't think there's any other changes than what have already been proposed. I think that issue sort of is closed with respect to the Basel and the new capital regs that have come out from proposal. From what we're hearing, the final rule will likely look very much like the proposed rule. [indiscernible] which is in this last quarter. I think when you look at the new proposed rule, it is positive for mortgage credit. It should allow banks to hold more mortgage credit at a lower capital requirement, which should be positive. It could be in various forms. It could be in full loan form. It could be in private label securities. Either of those still are beneficial to the agency mortgage market because what I'd likely mean is that higher quality mortgage credit can now be held by banks in those 2 forms at a lower capital requirement than the previous capital rules. And that is net-net positive for the mortgage market.

The next question comes from Bose George with KBW.

Just one more on the I think the market expectation earlier was that they would hit those caps, I think, by year-end or just given the slower pace, what's your latest thought on when they get there?

I think Bose, it's going to be driven by mortgage spreads and mortgage spread volatility. If we have a backup in mortgage spreads, if something happens and mortgage spreads get -- let's say, they're at 150 and if they get to 160 or 170 basis points for the swap curve or the comparable spread versus the treasuries. I think you'll see the GSE step in and buy them at a faster pace. And if they don't, then I think you'll see them maintaining their discipline and keeping their powder dry which I think is just really positive for the market. I mean, it is exactly what the market would want out of that activity. And it ultimately is just good because it helps attract a more diversified bid to the mortgage market, which from the administration's perspective is the end game.

You want their activity to be complementary, not squeezing out, and that's what it is. It's complementary. It's really helpful to mortgage affordability. Mortgage rates would be higher than they otherwise would be absent their behavior. So it's really positive, and I expect that to continue. And they have the ability to now still have a lot of capacity. They also -- it's not clear that TBAs count towards their portfolio limits. So they may have even greater flexibility than the market maybe understands based on whether they hold mortgages in loan form or in TBA form. So those are all positives.

The next question comes from Trevor Cranston with Citizens JMP.

Question on the hedge book, given the flattening of the yield curve and the prospects for potential Fed hikes later on this year. It looks like the net duration exposure was pretty constant quarter-over-quarter. But have you guys made any changes to kind of your exposure to curve steepening or flattening? Or how are you approaching that given the prospects of potential stakes?

Yes. We really haven't responded to this flattening and the flattening was substantial, obviously, in the second quarter, 2s to 10s, flattened, about 25 basis points or close to it. So it was a really substantial move. And as we have talked about in prior quarters continues to be the case. We obviously hedge across the yield curve. We hedge with a mix of hedges. So we don't have a lot of curve exposure. To the extent that we position our hedges sometimes more toward longer-dated hedges and less shorter dated hedges in an environment where the yield curve will steepen we do that with some intent to hedge our overall portfolio profile. We have not changed that sort of view.

And the reason why we haven't changed it is even though the market is now pricing and tightening, so from our perspective, we look at those and say, maybe the market has overpriced the current environment. I think it's going to be difficult for the Fed to raise interest rates, particularly in light of the fact that the Chairman has now announced these 5 task force in the work of those task force, as he said, largely won't be done until probably the end of the year. There's some really meaningful work that will be done related to how the Fed measures its performance relative to its inflation objective.

So in addition, obviously, the last inflation readings that we just got really give the room -- the Fed room, I believe, to certainly hold steady for some period of time. And I think that the Fed would want to see the work of that committee before it made any decisions on monetary policy. So our view is that once the war outlook stabilizes and inflation and energy prices stabilize that the steepening or the flattening of the yield curve that occurred in the second quarter will likely not continue and likely revert to a more steeper yield curve.

The next question comes from Rick Shane with JPMorgan.

This is [indiscernible] for Rick. I guess with the housing bill now passed and all the macro challenges that you cited, do you see an environment where housing demand could pick up by the end of the year? And if so, how do you think that could happen?

Oh, that's a hard question. It does not, from our perspective, does not feel that way. When we look at sort of the economy and we look at where mortgage rates are 6.5% or 6% and a little higher than that. It does not feel like -- the second half of the year, we'll see an uptick in demand effect. From a seasonal perspective, we would expect a sort of a downtick in demand through the remainder of the year. So that would sort of be our core view right now.

The next question comes from Harsh Hemnani with Green Street.

So you mentioned the task forces that the Fed has now put in place. One of them is on the balance sheet makeup of the Fed. What changes, if any, are you expecting this year a task force in terms of the Fed's MBS holdings and how you would think that would impact the mortgage market?

Yes. Thank you for that question, Harsh and that's related to the Fed's balance sheet. And you're right, there is a task force on that. I think that's one of the two really interesting task for us. I think the one related to how they measure inflation and performance, that's obviously a really critical one to monetary policy. And then obviously, from our perspective, the task force on the balance sheet. So just what I would say largely is that when you think about the balance sheet, the balance sheet peaked at $8.4 trillion and today, it's about a little under $6.4 trillion. .

And the Fed now is growing their balance sheet again. And what's important, and I think this is -- you can understand if I'm listening to Chairman Wash is there's 2 reasons why the Fed grows its balance sheet. One is to respond to market instability and they did that through all their QE. And that's why they got to $8.4 trillion. And then once they reduced it down to about the current level, the purpose of the balance sheet shifted from monetary policy stimulation to reserve management. and what they're using their balance sheet for now and they're growing their balance sheet at $10 billion a month in treasury bills in order to maintain the right amount of reserves in the system bank reserves are at like $3 trillion, and they have now a $6.4 trillion balance sheet. What they're doing is they're making sure that they are ample reserves in the system to allow for the funding markets to remain stable and very important I talk funding markets, I'm talking the repo market for U.S. treasuries and Agency MBS and make sure that, that rate stays essentially within the Fed funds range.

They want that repo rate to be right in the middle of their Fed funds target. Just last quarter, for example, for mortgages, it was a little elevated for us. I think it was 3.74%. So you would expect the repo rate to be somewhere right around 3.65%, 3.60%. That's what the Fed wants. And so they're using their balance sheet to maintain that stability. In order for them to reduce their balance sheet going forward, and they have talked about this. The first thing they would have to do is they have to reduce the amount of bank reserves required in the system. So like our previous question, they could change the bank requirements that would allow banks to hold less than $3 trillion of bank reserves, and that would allow them to reduce their balance sheet further. That would be important.

The other thing that they could do, and this is really important from our perspective is that rather than providing this excess liquidity to the market through their balance sheet like they are today, they could in a sense, use their funding capabilities to provide liquidity in an alternative form like, for example, rather than just buying mortgage securities and treasury securities and putting cash into the system, they could expand their repo facilities and allow greater access to those repo facilities and the market could gain its funding from those facilities rather than the sort of the permanent injection of liquidity through their balance sheet.

They could do open market operations, they could do that. That would allow -- that would be really positive for the funding markets for U.S. treasuries and agency and allow the bank and allow the Fed to have a lower balance. So those would be really important. The other last point would be that we'll be interested is what the Fed will decide about the long-term composition of their assets in their portfolio. And right now, we know and the market is pricing the expectation that the Fed will gradually allow their balances of mortgage-backed securities to decline organically, which is fine and the market's price that in, and that would be -- that's not an issue for the market. But they could also conclude that it would be valuable to own some portion of mortgages in the portfolio sort of indefinitely because that would allow them to maintain the constant presence and keep all the sort of processes up and running, which they will need at some point, perhaps in the future because the Fed will continue to use its balance sheet for market stabilization if it needs it. And so it's always worth I think, while having those processes up and functioning.

So perhaps there's a scenario where they own mortgages, at least in some portion of the portfolio going forward. But I think the key is making sure that they -- on the liquidity side, if they make changes to the liquidity market, that would allow them to have a lower balance sheet and not have any negative impact on the financial markets for the funding of both Agency MBS and U.S. treasuries, and that would be a really great outcome.

We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.

Again, thank you, everybody, for participating on our second quarter earnings call. We're really happy with the quarter. and we look forward to speaking to you again at the end of the third quarter.

Thank you for joining the call. You may now disconnect.

Good morning, and welcome to the AGNC Investment Corp. First Quarter 2026 Shareholder Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Turlington in Investor Relations. Please go ahead.

Thank you all for joining AGNC Investment Corp.'s First Quarter 2026 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.

Good morning, and thank you all for joining our first quarter earnings conference call. Agency MBS performance in the first quarter was driven by 2 very divergent investment themes. In January and February, the administration's focus on reducing interest rate volatility, maintaining mortgage spread stability and improving housing affordability drove strong performance across the fixed income markets. Agency MBS performance was particularly strong during this period as President Trump's January 8 directive instructing the GSEs to purchase $200 billion of agency mortgage-backed securities pushed spreads through the lower end of the recent 3-year trading range. In March, however, uncertainty associated with the war in Iran and the potential for a more widespread conflict in the Middle East caused interest rate volatility to increase, investor sentiment to turn negative and Agency MBS spreads to widen significantly.

As a result, AGNC's economic return in the first quarter was negative 1.6%. Despite the spread widening to swaps quarter-over-quarter, Agency MBS outperformed U.S. treasuries and investment-grade corporate bonds in the first quarter, again demonstrating the diversification benefits of this unique high credit quality fixed income asset class. At the beginning of the year, I discussed a number of factors that we believe would benefit Agency MBS performance in 2026. Among these were low interest rate volatility and an accommodative monetary policy stance. In the first quarter, however, the Middle East conflict caused interest rate volatility to increase and Fed rate cuts to become more uncertain. While the duration and economic implications of the conflict are still unknown, recent developments are encouraging, and these factors could once again be positive catalysts for Agency MBS performance.

More importantly, many of the other factors that I discussed actually improved in the first quarter and now further strengthen the outlook for Agency MBS. Most notably, at current spread levels, the return profile on Agency MBS is more attractive. At the time of our fourth quarter earnings conference call, the spread differential between current coupon MBS and a blend of swaps was 135 basis points. Over the last 2 months, that spread has ranged between 150 and 175 basis points as a result of heightened geopolitical and macroeconomic risks. We believe Agency MBS in this spread range represent compelling value on both an absolute and relative basis. The supply outlook for Agency MBS also improved in the first quarter. At the start of the year, the net new supply of Agency MBS was expected to be approximately $250 billion, assuming a mortgage rate of just below 6%.

With mortgage rates now about 50 basis points higher, MBS supply could be $50 billion to $70 billion lower this year. The demand outlook for Agency MBS improved in the first quarter as well. Money manager demand for MBS increased materially in the first quarter as bond fund inflows came in about double the pace of the previous 2 years. U.S. bank regulators also released their proposed bank regulatory capital framework for comment. As expected, the proposal includes lower capital requirements for high-quality mortgage credit. These favorable capital requirements could lead banks to retain a greater share of mortgage credit in whole loan form or to utilize the private label securitization path to a greater extent, thereby reducing the GSE footprint over time.

Finally, with mortgage spreads wider and the mortgage rate now in the low to mid-6% range, the administration may take further actions to improve housing affordability. Such actions could include more aggressive GSE purchases or increases in GSE portfolio size limits. Either or both of these actions would benefit mortgage performance. In addition, while the funding markets for Agency MBS are deep and liquid, further actions by the Fed to improve the functionality and accessibility of the standing repo program could also be catalyst for tighter mortgage spreads and lower mortgage rates. In summary, although the sharp increase in geopolitical and macroeconomic risk creates a more challenging investment environment over the near term, the return profile and technical backdrop for agency mortgage-backed securities improved in the first quarter.

In addition, actions by the administration to improve housing affordability are more likely. As we are continually reminded, market conditions change quickly. A prompt resolution to the Middle East conflict, while at times difficult to predict, could lead to a substantial reduction in volatility and inflationary pressures. Collectively, these conditions support our favorable outlook for agency mortgage-backed securities. Moreover, AGNC remains well positioned to capitalize on these favorable conditions and build upon our lengthy track record of generating strong risk-adjusted returns for our stockholders over a wide range of market cycles. With that, I'll now turn the call over to Bernie Bell to discuss our financial results in greater detail.

Thank you, Peter. For the first quarter, AGNC reported a comprehensive loss of $0.18 per common share. Our economic return on tangible common equity was negative 1.6% for the quarter, consisting of $0.36 of dividends declared per common share and a $0.50 decrease in tangible net book value per share, driven by wider mortgage spreads to benchmark rates. As of late last week, our tangible net book value per common share was up approximately 6% for April or 5% net of our monthly dividend accrual. With the recovery in April through the end of last week, our tangible net book value has now largely reversed the first quarter decline. We ended the first quarter with leverage of 7.4x tangible equity, up slightly from 7.2x as of Q4, while average leverage for the quarter was unchanged at 7.4x.

We also ended the quarter with a significant liquidity position of $7 billion of unencumbered cash and Agency MBS, representing 60% of tangible equity. Net spread and dollar roll income was $0.42 per common share for the quarter, up $0.07 from the fourth quarter. The increase was largely due to a 25 basis point increase in our net interest spread, which was driven by a combination of a greater allocation of interest rate swaps in our hedge portfolio, lower repo funding costs, more favorable TBA implied financing levels and a modest increase in the yield on our asset portfolio. Our quarter-over-quarter results also benefited from reduced compensation expense as our fourth quarter results included year-end incentive compensation accrual adjustments.

The average projected life CPR of our portfolio increased 70 basis points to 10.3% at quarter end from 9.6% as of Q4. The increase was largely due to prepayment model updates implemented in the first quarter and portfolio composition changes, partly offset by higher mortgage rates. Actual CPRs averaged 13.2% for the quarter compared to 9.7% in the prior quarter. Lastly, during the first quarter, we issued $401 million of common equity through our At-the-Market offering program at a significant premium to tangible net book value per share, continuing our active capital management strategy and generating meaningful accretion for our common stockholders. And with that, I will now turn the call back over to Peter to discuss our portfolio.

Thank you, Bernie. Agency MBS performance varied meaningfully by coupon and hedge type in the first quarter. Low coupon MBS meaningfully outperformed high coupon MBS due to heavy index buying from money managers in response to outsized bond fund inflows. This variation in performance by coupon was significant with lower coupon MBS tightening about 10 basis points to treasuries during the quarter, while higher coupon MBS widened about 5 basis points on average. MBS performance also varied materially by hedge type as swap spreads tightened during the quarter. 10-year swap spreads, for example, tightened by almost 10 basis points. As a result, an MBS position hedged with a 10-year pay fixed swap versus a 10-year treasury experienced spread widening of about 10 basis points, all else equal. This tightening in swap spreads was directly related to Middle East uncertainty. The market value of our portfolio totaled $95 billion at quarter end.

During the quarter, we purchased $1.7 billion of predominantly low coupon specified pools. In addition, we rotated a portion of our portfolio down in coupon. Consistent with these changes, the weighted average coupon on our portfolio declined to 4.95% from 5.12% in the prior quarter. And the percentage of our assets with favorable prepayment characteristics increased slightly to 77%. The notional balance of our hedge portfolio increased to $64 billion due to the addition of shorter-term pay-fixed swaps prior to the sharp sell-off in interest rates in March. We also reduced our exposure to treasury-based hedges during the quarter. As a result, in duration dollar terms, our swap hedge allocation increased to 78% from 70% the prior quarter. Lastly, in the current environment, we continue to favor operating with a positive duration gap, which we view as additional prepayment protection in a down rate scenario. With that, we'll now open the call up to your questions.

[Operator Instructions] The first question comes from Bose George with KBW.

Peter, you mentioned for spreads that you compared the spread level at the earnings call last time with where it is now. But if you compare it from the end of the fourth quarter to where it is now, are the returns pretty comparable? And what does the ROE currently imply?

Yes. Thanks for that question, Bose. Yes, that's a good way of putting it. In fact, Bernie mentioned that our year-to-date book value is almost unchanged from the end of the fourth quarter. So when you think back about where mortgage spreads were, again, I always kind of refer to them off the current coupon to the blend of the swap curve, but they were right in that neighborhood of around 150 basis points. And then when we got the announcement, on the purchases of the from the GSEs, it really pushed them, as you recall, about 15, maybe 16 basis points tighter, got us down to the 135 level.

And now we're right back to where we were this morning, they're at about 151 basis points. And at that level, that's the swap curve. The current coupon to treasuries is about 120 or so basis points to the curve, not to a specific point on the treasury curve. But you're looking at an average spread of somewhere between 140 and 150 depending on what amount of swaps we use. And at that level, I would say returns are kind of in the -- broadly in the 15% to 17% range, centered right around 16%, which aligns pretty well with our total cost of capital.

Okay. Great. And then it looks like specialness improved a little bit. Can you just talk about that and how much of a contribution that is now?

Yes. No, that's a very significant change from what we've really observed over the last couple of years. The TBA position -- like we've talked about our TBA position has not been very significant because the implied financing levels on TBA have really been unattractive. And in fact, for a lot of the last 2 years, TBA implied financing levels were well through, in some cases, the repo levels. And that really dates back to the regional banking crisis in 2023, where it was the combination of the regional banking crisis, it was QT, it was regulation. It was just a lot of things putting a lot of pressure on balance sheets. And that really had an implication for TBA funding. What we've seen is a lot of that pressure easing, and we really got the benefit of it in the fourth quarter. Obviously, the Fed has stopped QT. Importantly, at the end of last year, they started reserve management purchases and growing their balance sheet with really eased funding pressures.

They rebranded the standing repo facility to be the standing repo program. And then, of course, we now, as we expected, got reform to the original Basel end game. All those things have been really positive for funding, reducing balance sheet constraints. And as a result, the TBA implied financing levels are generally back to through or equal to repo levels. And in fact, for several coupons, they've actually been meaningfully better than TBA financing. So we were able to take advantage of that in the first quarter with our TBA position. We actually had both longs and shorts in our TBA position, which contributed to the uptick in our dollar roll income. So we expect these implied financing levels to sort of remain in this level in this area. So it's a new opportunity for us that we haven't had over the last couple of years.

The next question comes from Crispin Love with Piper Sandler.

Just on core earnings, net spread dollar roll income, very strong in the first quarter, I think highest since a year ago. Can you just discuss some of the dynamics there, the sustainability yields higher, cost of funds lower. And you just did mention some of those financing dynamics. But I think that's even with you just going a little bit down in coupon. So just as you look forward, would you expect core earnings to compress a little bit closer to the dividend? Just any thoughts there?

Yes. Great question. You're right. When you think about our net spread and dollar roll income and our margin, our margin, as Bernie mentioned, it did increase 25 basis points to 2.06%. And if you think about that on a return on equity basis, that's really close to 20%. I would describe that as being above the long-run economics of the current environment. But if you're looking for sort of a range, and we talked about this when our net spread and dollar roll income was down around $0.35, $0.36. We said generally that we thought it was going to move up. So I would say that probably a good range of expectation over the relatively near term, several quarters would be high 30s and low 40s. And some of the things that we talked about definitely showed up, particularly, as I just mentioned, the same benefits that we saw in the TBA implied financing levels, obviously, that's a tailwind now.

But just more broadly and more importantly, the easing of repo pressures that we -- thanks to the Fed and their activities really made a big difference. If you recall, we were seeing real significant month end and quarter end pricing pressure in the repo market. That has abated and repo is now trading right where the Fed wants it in the middle of the Fed funds target. Obviously, the timing of capital raises and how we deploy that capital can have a little bit of period-to-period implications. But generally speaking, I feel like the range that I talked about is probably the right range, somewhere in the high 30s, low 40s in terms of net spread and dollar roll income.

Okay. That makes sense. And then just on hedging, hedge ratio, it ticked up a little bit, but still fairly low when you look at historical levels. And just in today's environment, the war rate fall, the administration being supportive of the housing sector. Just how comfortable are you with the current levels in that 65% to 75% range versus if you kind of go back a little bit, you were in that 90% plus in the past?

Yes. Well, it goes back to the -- well, really what we talked about in the fourth quarter is we were positioned and we still are positioned. You're right, our hedge ratio increased. And the hedge ratio that I'd like to look at is the one net of our receiver swaptions, which is about 83%. And that tells you that we are still positioned to benefit from lower short-term rates, meaning that if short-term rates go down, we ultimately could close that hedge ratio. And we did some of that in the first quarter because there was a period of time in the first quarter where if you recall, the 2-year rate and 2-year swap spreads really got down into the -- I think they dropped down to around 3.18%, maybe it was the lowest rate. So not that far off of where the Fed's neutral target is. Obviously, that's not known right now, but it's probably somewhere in the -- right around 3% as the Fed fund's neutral target.

So as short-term rates approach that long-run neutral target, it would make sense for us to close our hedge ratio and move higher, essentially lock in that funding. Obviously, there's a lot more uncertainty about the direction of short-term rates right now. And in fact, during the first quarter, we went from pricing in 2 eases at least to -- and in fact, at one point during the quarter when the war got really going, there was expectation of Fed tightening. So we have more uncertainty on that. But still long run, we think that this ultimately will be resolved and that some of the underlying fundamentals will come back and that the Fed will ultimately adopt a more accommodative monetary policy stance later in the quarter, and we should stand to benefit from that. So I would describe us as sort of as neutral right now in terms of changes to our hedge position. But we did close it a little bit when we had the opportunity.

The next question comes from Marissa Lobo with UBS.

So how do you think about optimal leverage in a policy supportive environment, but where near-term volatility keeps remaining a recurring feature?

Yes. Certainly, an important question in today's environment. I guess I would start by saying, from our perspective, when we think about our leverage, we obviously are thinking about our leverage and setting our leverage according to the spread range that we expect to be operating in, and we saw that really play out really well for us in terms of being well positioned for the volatility and the spread volatility that we incurred in the first quarter. Obviously, you saw us grow our portfolio. And the key as a levered investor is you want to make sure that you have sufficient excess liquidity to withstand all of the uncertainty and stressful environments that we ultimately encounter on a regular basis and not have to change the asset composition, not have to delever your portfolio. And we've been able to successfully do that because we've sized our position accordingly. And during the quarter, for example, our leverage sort of stayed right in this range, maybe got as low as 7 and maybe got as high as 7.5.

And so we have to wait and see how the environment unfolds. Obviously, there's a lot that can change and a lot that will change over the next quarter or 2, both with respect to the economic outlook, the monetary policy outlook, the geopolitical uncertainty that we face and then the administration and what actions that they may take that will ultimately impact housing affordability. All those will go to inform us as to what the right the right leverage level is. But importantly, we are able to operate now in today's environment where spreads are and particularly since spreads have widened with a very reasonable leverage position and still generate excellent returns for shareholders. That gives us a lot of ability.

What we're trying to do is we're trying to generate the best return we can while putting ourselves in a position to preserve book value across a wide range of market conditions. So we're always trying to optimize that. We will be informed over time whether or not we have to take our leverage up or take our leverage down based on the market conditions and the stability of spreads. If we get the war resolved, if the inflation pressures come down, Fed's more accommodative and importantly, the administration goes back to focusing as they were on interest rate volatility and reducing interest rate volatility and importantly, reducing agency spread volatility, then ultimately, it would be a favorable environment we could operate with potentially a different leverage profile. But we certainly like the leverage profile that we're operating right now.

Got it. And then moving to GSE activity. It's been framed as more opportunistic than programmatic. How does that shape your trading strategy and your coupon selection relative value trade?

Yes, that's a great question because it goes back to your previous point about leverage. One of the things that we did expect, and it's very difficult to tell. What we kind of realized with the GSEs is while they put out their portfolio numbers through their monthly volume summaries about a month after the fact, I don't believe that those numbers capture their TBA position. So it's not quite clear exactly what the growth is of the GSEs quarter-over-quarter. But what I would say, and I would fully expect, and I believe that they do this, is that they would approach this from a really economic perspective. And when mortgage spreads widen, particularly like they did in March, I would expect the GSEs to take advantage of that. They're not only putting on more profitable book of business, but importantly, they're serving a very important role in the market, which is to reduce interest rate volatility -- excuse me, not interest rate volatility, but mortgage spread volatility.

And that ultimately is beneficial to the mortgage rate. So I do think that they would approach it that way from an opportunistic perspective. And ultimately, the more that they do that, the more other capital gets attracted to the system. And one of the things that really will benefit mortgage rates and mortgage spreads is having a more diverse investor base. And we're starting to see that now. We're seeing that on the bank side with the changes in bank capital, I do believe that banks will be a bigger buyer. We're seeing that with money managers. We're seeing foreign investors start to come back into the market. And obviously, to the extent that mortgage spread volatility comes down in part due to the actions of the GSEs that allows more levered money to come into the system. That's a virtuous cycle that will ultimately lead to lower mortgage rates. So I think that's a critical role that the GSEs do play and can continue to play.

The next question comes from Trevor Cranston with Citizens JMP.

A follow-up on the question you were just talking about with leverage. It looks like you guys didn't really add much to the portfolio during the widening in March, at least based on the quarter end numbers. Can you talk about kind of what you would need to see in future belts of volatility in order to significantly add to the portfolio and if the GSE is sort of being there as a potential buyer and widening scenarios sort of gives you any added confidence in potentially adding if spreads are to widen again in the future?

Yes. So you're right. We didn't -- our portfolio growth in the first quarter was, as I mentioned, $1.7 billion and that was through, obviously, the end of the quarter. Obviously, we have seen more stability in the market since quarter end, importantly, obviously, given the change in tone and what's happening in the conflict. And so to the extent -- as I mentioned that in my prepared remarks, to the extent that we continue to see positive developments that will ultimately change the macroeconomic outlook and particularly the inflationary implications, it will be positive from a growth perspective. So we do -- as I mentioned, I do believe that mortgages in this 150 to 160 range where we've been trading are attractive long run. And I do expect mortgage spreads to tighten over time once we have more resolution and once the monetary policy outlook starts to become more clear. So over time, that can all happen. And I do -- as I -- again, I do think that the GSEs stepping in and buying mortgages when they -- if in fact, that's what they have done, I think that would ultimately be positive.

Sure. Okay. That makes sense. And I think you said that the -- for the purchases you guys made during the first quarter, they were in lower coupons. Can you just maybe add some detail around that kind of where you guys are buying in the coupon stack and finding the best value right now?

Yes. We did both our purchases -- even though it was less than $2 billion, our purchases were concentrated in lower coupon specified pools. And importantly, we also did rotate a portion of our portfolio into lower coupons. And the reason why we did that is because we track on almost a daily basis, bond fund inflows, and we did see that bond fund inflows were coming in materially faster in the first quarter than the previous couple of years. So we knew that, that would ultimately translate to the outperformance of lower coupons. And now that has abated somewhat. So we are always looking for opportunities to move up in coupon, move down in coupon, be opportunistic. We were able to do that in the first quarter to some extent. And we'll continue to look for opportunities. We have seen bond fund inflows starting to actually slow down quite a bit. In fact, I think quarter-to-date, they're probably running slower than the pace of the previous 2 years in the second quarter of the year. So we'll watch that closely, but there was an opportunity in low coupons. So we took advantage of that, and we'll continue to be opportunistic. Any follow-up on that, Trevor?

No. That's very helpful.

Okay.

And our last question comes from the line of Harsh Hemnani with Green Street.

Peter, maybe can you talk a little bit about the timing of the equity raises last quarter? On the prior earnings call, it sounded like it would be more opportunistic. And given everything that happened with spreads this quarter, could you share some color on timing of those equity raises? And then can we expect the rest of the year to be similarly opportunistic?

Yes. Thank you for that, Harsh. Yes, I think you characterized at least my expectation from the last call that I did -- if I go back to the fourth quarter earnings call, I would say that my expectation for the capital issuance would have been a little slower than what we ultimately did. As Bernie mentioned, it was about $400 million in the first quarter. And the reason why that ended up being a little faster than the pace that I had anticipated was obviously, I didn't anticipate all of the volatility that we saw. And so having more capital certainly is beneficial from that perspective.

But importantly, when you think about the economic benefit to our existing shareholders of that capital, it was significant in the first quarter. Obviously, the capital that we raised was accretive from a book value perspective, given the fact that we are trading at a premium to book. But also, it was significantly accretive from an earnings perspective because we're able to deploy those proceeds, and we haven't deployed them all yet, by the way, but we have deployed most of them. We were able to deploy that at returns, call it, like as I mentioned, at around 16 or so percent and you can compare that to what the dividend yield on the stock is around 13.5%.

So it's accretive from an earnings perspective, it's accretive from a book value perspective and having more capital in times of volatility is certainly beneficial, and it gives us the opportunity now to take advantage of that. We -- there's a lot of times when the issuance of the capital does not align perfectly from a timing perspective with the deployment of it. Part of it is our risk management strategy. Part of it is trying to be opportunistic, waiting for the right opportunity to deploy those proceeds and assets at really attractive return levels. And so that's the approach we took in the first quarter and feel like we're in a good position as we start the second quarter.

Got it. That's helpful. And then maybe you talked earlier in the call about roll specialness improving and that should lead to more TBA in the portfolio. I guess, how are you comparing those puts and takes versus maybe capitalizing on the better roll specialness versus still seeking some prepayment protection with specified pools?

Yes. So a couple of points there. One, it doesn't necessarily -- the roll specialness may not necessarily translate into a net TBA position that's materially bigger. For example, our average TBA position in the first quarter was, I think, 10.3% versus 9.6% to previous quarter, yet our income was materially higher. And that is because, as I mentioned, we can have offsetting positions there that will allow us to take advantage of the TBA specialness, in particular, also not only did conventional TBA implied specialness levels improve, but we have as we -- as has been the case for now several quarters, there's significant specialness in the Ginnie Mae market. So we'll continue to do that. You may not necessarily see though, an uptick in the aggregate size of our TBA position.

To your point about specified pools, we obviously still are in this environment, very focused on managing prepayment exposure. We do believe that over time, once this uncertainty abates that, that prepayment risk will be sort of our predominant risk. And as I mentioned, we are operating now with -- from a positive prepayment pool characteristic perspective, a significant portion of our portfolio, 75% to 77% of our portfolio, for example, has some prepayment characteristic that we deem to be valuable, and we will continue to do that. What's important is in this environment, because TBA implied financing levels are where they are, we are able to now deploy capital quickly in TBA, not lose carry because of the funding levels. It gives us more time to then slowly over time, rotate out of TBAs into specified pools when those opportunities exist.

That has not been the case for the last couple of years. To have a TBA position, while you -- holding that while you wait for the opportunity to rotate into specified pools actually has cost us carry today in this environment, that's not the case. So it gives us a lot of flexibility to deploy capital and then ultimately rotate into specified pools, but we will continue to operate with a high percent of specified pools in this environment. We also, as I mentioned in my prepared remarks, will likely continue to operate with a positive duration gap. In fact, our duration gap in the first quarter was a little higher than what we reported for the last couple of quarters because we do want to position our portfolio to benefit from that in a lower rate scenario.

We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.

Well, again, I appreciate everybody joining the call this morning, and we look forward to talking to you again after our second quarter.

Thank you for joining the call. You may now disconnect.

Good morning, and welcome to the AGNC Investment Corp's. Fourth Quarter 2025 Shareholder Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.

Thank you all for joining AGNC Investment Corp.'s Fourth Quarter 2025 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law.

Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development.

With that, I'll turn the call over to Peter Federico.

Good morning, everyone, and thank you for joining our fourth quarter earnings conference call. 2025 was an exceptional year for AGNC shareholders. AGNC's 11.6% economic return in the fourth quarter drove our impressive full year economic return of 22.7%. Even more noteworthy, AGNC's total stock return in 2025 was 34.8% with dividends reinvested, nearly double the performance of the S&P 500. This outstanding performance on an absolute and relative basis clearly demonstrates the value of AGNC's actively managed portfolio of agency mortgage-backed securities and associated hedges.

Looking back, we were confident that AGNC was on the forefront of a uniquely positive investment environment as the Fed's unprecedented tightening cycle of 2022 and 2023, reached its conclusion. On our third quarter earnings call in 2023, we expressed our belief that a durable and attractive investment environment for AGNC was emerging as mortgage spreads began to stabilize at historically attractive return levels. That outlook proved to be correct. And in the 9 quarters since that call and despite several episodes of extreme market turbulence, AGNC has generated an economic return of 50% for its shareholders, comprised of a 10% increase in book value and monthly dividends totaling $3.24 per share.

Moreover, during that same time period, AGNC shareholders have experienced a total stock return of nearly 60% and or 23% on an annualized basis. And finally, since inception, AGNC has generated a total stock return of over 11% on an annualized basis with dividends reinvested, demonstrating the long-term benefit of investing in this unique fixed income asset class and the durability of our business model across a wide range of market environments.

Turning back to 2025, the Bloomberg Aggregate Agency Index was the best-performing fixed income sector in the fourth quarter and for the year, produced a total return of 8.6%. Also noteworthy, given the similar credit quality, the Agency Index outperformed the treasury index by 2.3 percentage points or 36% in 2025.

As I discussed throughout the year, the favorable performance of Agency MBS was driven by a confluence of positive factors. First, the Fed shifted its monetary policy stance toward lower short-term rates and greater accommodation, a promising development for all fixed income assets. The Fed also transitioned its balance sheet activity from quantitative tightening to reserve management. Second, interest rate volatility trended lower throughout the year due to the shift in monetary policy, greater fiscal policy clarity and a stable supply outlook for treasury securities which included a greater share of short-term debt.

Lastly, the uncertainty and potential risks associated with GSE reform that adversely impacted the agency market early in the year, gradually dissipated as the Treasury Department and other officials communicated and approached to GSE reform that focused on reducing the spread on agency mortgage-backed securities, maintaining mortgage market stability and improving housing affordability. Collectively, these factors, combined with the sizable purchase of MBS by the GSEs later in the year, caused spreads to tighten and drove the substantial outperformance of Agency MBS relative to other fixed income asset classes.

As we begin 2026, these favorable macro themes remain in place and provide a constructive investment backdrop for our business. In addition, other positive developments are possible including further actions by the administration to improve housing affordability. The recent $200 billion MBS purchase announcement is a good example of the type of action that could result in tighter mortgage spreads and lower mortgage rates.

The funding market for Agency MBS has also improved in response to the Fed increasing the size of its balance sheet and improving the functionality of its standing repo program. The Fed is also considering other actions to further improve the utility of the standing repo program, which if implemented would be highly beneficial to the Agency MBS market.

Finally, the supply and demand outlook for agency MBS remains well balanced. At current rate levels, the net new supply of Agency MBS this year is expected to be about $200 billion. When combined with the Fed's runoff, the private sector will have to absorb about $400 billion of MBS in 2026, an amount similar to the previous 2 years. On the demand side of the equation, however, the investor base today is more diversified and positioned to expand with GSE purchases potentially consuming about half of this year's supply.

At the same time, bank money manager, foreign investor and REIT demand should all remain strong. Pulling this all together, the underlying fundamental and technical backdrop for Agency mortgage-backed securities continues to be favorable and supportive of our positive outlook. Moreover, as the largest pure-play agency mortgage REIT, we believe AGNC is very well positioned to generate compelling risk-adjusted returns with a substantial yield component for our shareholders.

With that, I'll now turn the call over to Bernie Bell to discuss our financial performance.

Thank you, Peter. For the fourth quarter, AGNC reported comprehensive income of $0.89 per common share. Our economic return on tangible common equity was 11.6% for the quarter, consisting of $0.36 of dividends declared per common share and a $0.60 increase in tangible net book value per share driven by lower interest rate volatility and tighter mortgage spreads to benchmark interest rates.

As Peter mentioned, our full year economic return was 22.7%, reflecting our monthly dividend totaling $1.44 per common share and a $0.47 increase in tangible net book value per share. As of late last week, our tangible net book value per common share was up about 4% for January or 3% net of our monthly dividend accrual.

We ended the fourth quarter with leverage of 7.2x tangible equity, down from 7.6x at the end of the third quarter. Average leverage for the fourth quarter was 7.4x compared to 7.5x in the third quarter. In addition, we concluded the quarter with a very strong liquidity position of $7.6 billion in cash and unencumbered Agency MBS, representing 64% of tangible equity.

Net spread and dollar roll income was unchanged for the quarter at $0.35 per common share, which includes $0.01 per share of expense related to year-end incentive compensation accrual adjustments. An important driver of our net spread and dollar roll income is the level of unhedged short-term debt in our funding mix as well as the composition of our hedge portfolio. As of the end of the fourth quarter, our hedge ratio was 77%, reflecting the level of swap and treasury hedges relative to total funding liabilities and was unchanged from the prior quarter.

At the same time, during the fourth quarter, we opportunistically shifted our hedge mix toward a greater proportion of interest rate swaps. As a result, a meaningful portion of our funding remains short term and variable rate. This is consistent with the current more accommodative monetary policy environment and positions net spread and dollar roll income to benefit as additional rate cuts occur.

Looking ahead, we expect that lower funding costs from the October and December rate cuts and anticipated future rate cuts increased stability in funding markets resulting from recent Fed actions to maintain short-term rates within their target range and the shift in our hedge mix toward a greater share of swap-based hedges, will collectively provide a moderate tailwind to net spread and dollar roll income. The average projected life CPR of our portfolio increased 100 basis points to 9.6% at quarter end from 8.6% in the prior quarter due to lower mortgage rates. Actual CPRs averaged 9.7% for the quarter compared to 8.3% in the prior quarter.

Lastly, during the fourth quarter, we issued $356 million of common equity through our at-the-market offering program at a significant premium to tangible book value per share. This brought total accretive common equity issuances for the year to approximately $2 billion and delivered exceptional book value accretion for our common shareholders.

And with that, I'll now turn our call back over to Peter.

Thank you, Bernie. Before opening the call up to questions, I would like to provide a brief review of our portfolio. Agency spreads to both treasury and swap rates tightened across the coupon stack, especially on intermediate coupons as interest rate and spread volatility remained low and the demand for MBS, particularly from the GSEs accelerated.

Hedge composition was also an important driver of performance as swap spreads on 5- and 10-year swaps widened significantly during the quarter. This favorable move in swap spreads followed the announcement of the Fed's revised supplemental leverage ratio requirement and the Fed's actions to ease repo funding pressure. As a result, Agency MBS hedged with longer-dated swap-based hedges performed considerably better than positions hedged with Treasury-based hedges.

Our asset portfolio totaled $95 billion at quarter end, up about $4 billion from the prior quarter as we fully deployed our new capital that we raised during the quarter. The percentage of our assets with some form of favorable prepayment attribute remains steady at 76%, while the weighted average coupon on our portfolio fell slightly to 5.12%. Consistent with the growth in our asset portfolio, the notional balance of our hedge portfolio increased to $59 billion at quarter end.

The composition of our portfolio also shifted toward a greater share of swap-based hedges. In duration dollar terms, our allocation to swap-based hedges increased to 70% of our portfolio from 59% the prior quarter. In light of our more favorable outlook for swap spreads, we will likely operate with a greater share of swap-based hedges in our hedge mix, particularly 1 short-term rates near the Fed's long-run neutral rate.

With that, we'll now open the call up to your questions.

[Operator Instructions] The first question comes from Bose George with KBW.

Can you just talk about where you see spreads currently versus where you slowed in the fourth quarter? And then just help us walk through the dividend coverage. Spreads are obviously tighter, but you've got more capital with higher book value. Just help us do the math there.

Sure. Yes. Thanks for the question. I figured that would be one of the first questions. I'll start with the outlook in terms of ROE and spreads. Obviously, as you pointed out, spreads have tightened a lot. And I think maybe the best way to describe the current environment, and this is essentially what happened in the fourth quarter is that mortgage spreads, I think, have now sort of entered a new spread range. We broke through the range that we have talked about for a long time, really the range that has held for almost 3 years, which is really beneficial to our business and drove the outstanding results that we had in really the last 2 years and in 2025 in particular.

But I would say, as we sit here today, Bose, when I think about current coupon spreads to a blend of swap and treasury rates, and I will give you the -- I usually think about things across the curve. I would say that the potential spread for current coupon to swaps is maybe in the 120 to 160 range. And right now, we're just sort of right in the middle of that range, maybe a little bit through it, so call it in the 135-ish type range. I don't know where exactly it is this morning. But I would say that's the potential new range for mortgages relative to swaps and on a current coupon basis to treasuries, I would say it's probably in the 90 to 130 basis point range. And today, I think the number is around 110 when you think about it across the curve.

So taking that number and as I mentioned, we would -- we favor swaps in this environment. We have a lot more stability in swap spreads than we had as we start 2026 than we experienced in 2025, and that's really important it allows us to go back to sort of using swaps at a much more heavy pace than we were -- as I mentioned, we were at 70% and maybe going higher. But I would put it at maybe some of spread of around 130-ish, something like that and you look at the leverage that we typically employ, I would say that you could expect returns at the current spread range, maybe in the 13% to 15-ish type percent range, maybe a little bit maybe touch above that depending on the hedge mix.

So that translates, I think, into ROEs that are really competitive and really aligned with our dividend, which -- and let me go to the next question, which is I think when you think about the dividend, there's a bunch of considerations. We always talk about the dividend and the sustainability from that perspective, that marginal return. And that is important because one of the factors that will drive our dividend over a long period of time is how we replace our portfolio and these new marginal returns will matter.

But what's important about that is that will take an extended period of time to occur. Measured not in days, weeks or quarters but measured in years as the portfolio slowly runs off. The prepayment speed on our portfolio will drive that and also how we reposition the portfolio and how we grow our capital base. So that is something that's much more long term.

When you think about the dividend coverage today, it's important to look at what is the return on our existing portfolio. And we obviously were able to put on a really attractive returning portfolio over the last couple of years at this spread environment. If you think about our net spread and dollar roll income, for example, I call it normalized for this quarter, it was $0.35, but there was -- it was dragged down by $0.01 due to some nonrecurring performance-related compensation. $0.36 million and what is the ROE on that, think about the $0.36 relative to our book value of $8.88. That's about an ROE of 16%. And that aligns very, very well with our total cost of capital.

Our total cost of capital, when you add up all the common stock dividends, the preferred stock dividends, our operating costs normalized, it was right at, I think, 15.8% for the -- at the end of the year. So our -- the point is the total cost of capital aligns well with the existing portfolio. The new portfolio still looks really attractive at mid-teens. Obviously, that will take time. And then there's a bunch of other factors that we talk about these all the time. But when you think about our dividend, this is a very dynamic environment. As I talked about, we're kind of shifting spread environments. There's a lot of new information that we will get over the next weeks, months, maybe quarters that will determine sort of the direction and stability of mortgage spreads, that will have implications for our leverage that we'll operate with.

The hedge mix is going to be an important driver. And then there's always accounting considerations. Obviously, REITs have a dividend distribution requirement based on taxable income. That's also something that we'll have to factor into our thinking over time. So there's lots of factors, but I think all of that put together is our dividend is well aligned with the economics and the accounting of our business today.

Okay. Great. And actually, just -- so the existing portfolio, it seems like it covers the dividend well the incremental portfolio, is it fair to say it's a little bit sort of whatever closer or on the coverage just given the incremental returns are more in the 13% to 15% versus the economic -- versus kind of the breakeven ROE, it looks like it's like 15.5% or something?

Yes. I think that's right. And also, I think it's important when you think about the -- when you think about deploying new capital, if you raise capital, the required return on the new capital that we raised is not the total cost of capital. That's on the existing book of business. the new capital that you would raise, I think the right comparison from a dividend coverage perspective, is what is the dividend yield on your stock, which is around 12%.

So when you think about deploying new capital the returns today in the marketplace, as I've mentioned, sort of 13% to 15% are actually in excess of the dividend yield on our stock. So there's ample coverage from that perspective.

The next question comes from Doug Harter with UBS.

I appreciate the ranges for spreads you gave. Can you talk about how you're thinking about the risk or the potential benefit that could get you either to the high end or the low end of those ranges and how that informs your decision around leverage today?

Yes. Well, obviously -- yes, it's a great question. Obviously, the announcement at the -- I guess it was early in the year -- early this year that really pushed the current coupon spread into this new range was the announcement that the GSEs were going to essentially use all of their portfolio capacity. Now the market was monitoring. Obviously, I mentioned it, everybody knew that the GSEs were growing their portfolio. They have been doing so really since the second half of the year.

I think for the year, they grew their balance sheet. This is as of November, they added about $50 billion of mortgages. And I think from the low point, they added about $70 billion. I think -- Freddie Mac, I think, just announced their MVS for December and they had added another $15 billion of MBS in loans. So the market was anticipating that they would use and grow their portfolios and use the capacity that they had. That announcement obviously made it very clear that, that is their intention. And that really caused spreads to tighten quite a bit.

From here, what I would say is I think that maybe the most likely scenario is that they move sideways for some period of time. and we have to wait and see what type of actions come next from the administration and from FHFA. There are certainly a number of actions that I think could push spreads to the tighter end of the range, I'll give you some examples that I think would be highly beneficial to the agency market in terms of spread tightening. Things like changing their cap on their portfolios. And these are things that I think can be done without congressional approval, so they might be appealing from that perspective.

But changing the portfolio cap seems to be within their capacity. Maybe a change in the Fed's balance sheet with the potential of a new Fed Chairman in 2026. The Fed obviously now intends to run its portfolio off. So in a sense, the government through the GSEs, is buying $200 billion of mortgages and the Fed is essentially selling or running off $200 billion in mortgage. Perhaps that may change. That would be obviously something that's not priced into the market. given the credit guarantee from the government on the GSEs, their explicit guarantee of support, perhaps there could be there could be a rationale for changing the capital requirement, although I don't hear that being talked about very much.

So I think there's a number of things that could be very positive. I mentioned the funding market, I think that's a new positive development and maybe there's more changes that the Fed makes with respect to standing repo program, which would bleed into, I think, in a positive way, the agency market.

On the negative side, and there are negatives, there are ideas out there related to, for example, streamlined refinance or GPs or even the portability or a sitability of mortgages, those, I think, could have negative consequences, some of them significantly negative consequences. But they might -- some of those -- when you talk about accelerating prepayment risk, it is going to have some negative effect on mortgage spreads. So obviously, there are more convexes, more optionality, and that will cause mortgage spreads to widen. But putting all those together, I think the government has made it very clear it wants greater mortgage affordability and I think some of the changes they may make may just lead to sustainability at these new levels, which I think would be very positive.

Obviously, as a levered investor, we're looking for spread stability. That's key driver of our ability to generate attractive returns. And I think that's the most likely environment. But I think there are actions that they still could take that could be positive for the market.

And then how do you think about what that means for leverage kind of given that are you kind of comfortable in the current range, it would tick down kind of during the quarter, but the average was flat. How should we think about that?

Yes. That's really key. We did -- we have let our leverage come down consistent with the spread tightening. And I would say, right now, we need to see more information in order to make a determination whether we're willing to operate with a different leverage profile. And the key input in that equation is how stable do we believe spreads will be? So what are the actions that the government may take? And will they lead to greater spread stability. So will the actions that they take said another way, be sustainable? Or will they just lead to, for example, a quick, short tightening in mortgage spreads.

There's some actions that they take that cost mortgage spreads to tighten another 15 basis points. But if there is no follow-on action then spreads could actually widen back out. For example, if the GSEs were to use up their capacity quickly, mortgage spreads will be tight during that time period. But once they reach their cap, they will like -- mortgage prices will likely revert back to where they were prior to that action.

And so what we're looking for is greater insight into what actions they may take. And will they lead to spread stability. And I think that's -- that would be the best benefit for the overall mortgage market from an affordability perspective is can they keep spreads at these levels, which are obviously more attractive from the homeowners perspective than they were a year ago.

The next question comes from Crispin Love with Piper Sandler.

Peter, as you mentioned, the administration is very focused on affordability, lower mortgage rates. But supply here may be the major issue to broader affordability easing. And you did mention in the prior question, some of the things that could be in the toolkit for the administration FHFA that could be positive for spreads. But if you were in their shoes, what would you do to address the affordability questions.

Well, I think they've done a lot already. I think they deserve the administration, FHFA, the GSEs, they deserve a tremendous amount of credit for the actions that they took in 2025. starting with the guidance that sort of the guiding principles that I mentioned and I have mentioned that for a number of times and the treasury in particular, has come out with those guiding principles and the Treasury Secretary continues to reference them. The fact that they are focused on mortgage spreads and the Treasury Secretary in particular, talking about taking actions that maintain spread stability or make them tighter is obviously a really key and one of the benefits of why mortgages tightened so much.

So that sort of thinking is really, really important for the market because what it's doing is it's allowing other participants to come into the market. The greater spread stability that they can achieve will allow more and more investors into the market and create a more diverse bid for agency mortgage-backed securities, which will put less pressure on the GSEs to do that. But the combination of the guidance that they had the actions of the GSEs, those were all very positive. I think they can do other things like the cap, I think, would be one in particular that would give them more capacity and allow spreads to remain at these attractive levels. So I think that's just the key from their perspective is they've got to continue to focus on the stability of the mortgage market, which they are doing a great job of.

Great. That's helpful. And then just one follow-up on the leverage question. your view seems to be constructive on overall agency MBS investment environment, less rate fall and accommodative administration. Of course, there's always a risk of widening and something unforeseen. But how would you gauge your positivity on the investing environment right now for Agency MBS versus a quarter ago, 6 months, a year ago and how that might impact leverage? And if you do wait for something, could it be almost too late?

Yes. There's a couple of things that I've already mentioned, but I'll add to it because it's a good follow-on question. And that is that when you think about where the mortgage market is today versus a year ago or 2 years ago or 3 years ago, Yes, we are in a lower spread environment today, but it's still a widespread by historical standards.

So returns when we're talking about returns in the mid-teens, low to mid-teens. Those are outstanding returns, especially compared to returns that you can get in the marketplace, for example, look at the performance of our stock versus the S&P 500 or even the NASDAQ last year. You can get outstanding returns. And even at these lower spread levels, returns are still really excellent from a shareholder perspective.

The key differentiator, which is a very positive is that when you think back to where the environment we were maybe a year ago or 2 years ago, there was a lot more uncertainty about the upper end of the range. And I think what you can take away from the environment today, and this is the credit to the decision makers and the policymakers and the administration is that they are limited in the upside of the range. They are saying we want spreads to stay here or go lower.

And I would think if mortgages did move to the upper end of the range, then you would see actions being taken that would push them back down into the range. And that's really an important development and a very positive development when you're a levered investor like we are, is that the range -- the upper end of the range is more certain today than it was certainly a year ago. And I would expect actions to be taken if there were some sort of exogenous event that caused spreads to widen materially.

The next question comes from Trevor Cranston with Citizens JMP.

You talked a bit about swap spreads and increasing the amount of swaps in the portfolio during the fourth quarter. I was wondering if you could give us an update on your view going forward if you think there's room for spreads to continue widening in the swap market and sort of where you think ultimately those settle out?

Yes. I do believe that swap spreads will stay -- certainly stay in this range, but I think there is potential for further widening as we go through the year. The Fed is changing it's balance sheet focus from quantitative tightening to reserve management. It was obviously a really critical pivotal change from that perspective. They ease some of the regulatory requirements that I mentioned, the market had anticipated that, that is very positive long run. It makes treasuries more friendly from a balance sheet perspective, which has led to some of the swap spread widening.

But the overall funding market now is at a much better footing with the Fed growing its balance sheet, $40 billion a month. We'll see how long they do that, but they are adding reserves to the system. Reserves got below $3 trillion. Now they're back at $3 trillion or maybe even a little bit above. I expect that to continue. And I think, overall, that will put widening pressure on mortgage spreads.

So I think from a hedge perspective, will be better off in a swap-based hedge and a treasury-based hedge for some period of time. And even if spreads just stay here, then obviously, we can pick up 25 or 30 basis points extra carry, as I mentioned, when you think about those spread environments, that's substantial leverage, 6x or 7x we're talking about another 1% or 2% of ROE. So I think the outlook is favorable for swap spreads.

Yes. Okay. That makes sense. And then on MBS spreads, you talked about the positive technicals in the market, which have been pretty strong. I guess the other thing that's obviously helped MBS performance over the last several months has been volatility continuing to drop. So I was curious if we could get your thoughts on volatility going forward, if you think that continues to come down or what your thoughts are around that?

Well, you're absolutely right. I mean that was a key driver of the outperformance of our asset class in 2025 was the decline in interest rate volatility. So we all know anytime interest rate volatility increases, it's bad for people who own mortgage-backed securities because it changes the optionality profile from a borrower perspective. And when interest rate volatility declines like it has, it's obviously a positive from a mortgage bond perspective.

Just look at the sort of range of the tenure that we've been in, in the fourth quarter, I think it basically traded in a 25 basis point range. So hardly any movement in any given day. And when you look back over the year, I think I look back to -- so really from February on of last year, we traded in about a 50 basis point range. And again, this is to the credit of the administration and the treasury part of the stability that we're seeing, particularly in long-term rates is because of the focus of the Treasury Secretary and administration on keeping longer-term rates stable. The 10-year in particular, has been an area of focus. So I believe they will continue to approach their issuance from a perspective that will be beneficial to the 10-year rate.

Now we've been sort of trading in this 4 to 4.25 range. As we go forward, I think spread yield volatility or interest rate volatility will continue to be generally low maybe not as low as it has been, but generally, though, because there are some more geopolitical sort of risks in the market for sure today. But I think from the treasury's perspective, I think the direction of interest rates is more likely lower than higher given their focus on affordability. But I do believe it to be a slower grind lower if the tenure does go down to 4 or maybe break through for a little bit. But I think the volatility environment is going to be positive for Agency MBS in 2026 based on what we know today anyhow.

The next question comes from Jason Stewart with Compass Point.

Just 2 quick follow-ups. One on capital activity today. Could you give us an update on equity issuance?

You mean quarter to date? This quarter to date?

Correct.

None. No issuance.

Okay. And then in terms of your comments, maybe just tie in sort of expectations for ATM issuance? I mean, obviously, 2025 was a big year with your ROE profile, give us some 2 sense on that.

Yes. It was a great environment, a sort of a confluence of positive factors because we could obviously issue it very accretively and we could deploy it at really attractive return levels. Now we can still issue it accretively, and so that's a positive factor going forward. But obviously, the return profile is not quite as attractive as it was. But as I mentioned, it still exceeds the threshold. So it's something that we will continue to do.

But I would also say sort of that we're certainly very comfortable with our size and our scale and our liquidity. So there's no urgency on our part to feel like we need to grow the decision to issue capital will be just based solely on the economics that we see in the environment. So we're certainly very happy with our size and scale and liquidity and like where we are today.

Okay. Got it. That makes sense. And then in terms of the MBS market, we've talked a lot about demand from the GSEs. But outside of the GSEs, when we think about traditional buyers, banks as rates are going down, and there's been a little bit more mixed activity in terms of foreign demand. What's your take on how those 2 buyers evolve over the course of the next 12 months?

Yes. When you look at the market, I talked about the supply outlook. And again, the supply outlook really is going to be very similar, at least at today's levels. Now obviously, if rates come down and we have more refinance activity, these numbers will change. But again, from a supply outlook, it's about that will have to be consumed by the private sector. And we know that the GSEs, $200 billion, obviously, is very meaningful. So they could consume quite a bit of that of that supply, which would be very positive. But taking the GSEs out of it, I think what's also important, and this is a differentiator of the market today versus a year ago or 2 years ago, where the market was really dominated by money managers.

When we look at the demand for mortgages today, I see a more diverse investor base, and that's really positive for the overall market. When you look at what money managers have done given where given where returns are in the equity market, given the [ attempt ] of the administration's focus on long-term interest rates, I think bond fund inflows will continue to be very sizable. Last year, I think it came close to about $500 billion of inflows. The year before that, it was $450 million.

So I would expect bond fund inflows to remain strong in the environment -- in the current environment, which would translate to money managers buying is probably somewhere between $100 billion and $200 billion of mortgages. So money managers and GSEs could consume a lot of the production then we have banks, which we know are growing their position, but at a very gradual pace. But I do expect the regulatory changes that will come in 2026 will be positive for MBS and mortgage risk in general. So I expect banks to buy more than $50 billion, which is, I think, most people's projections.

Foreign demand has been stable but I expect that could also have a little bit of upside because I think the environment is a little bit better versus the last couple of years. And then REITs, again, they were a big contributor to the to the mortgage market in 2025. And I would expect that REIT demand can continue to be strong given all that we're talking about here this morning. So when you add up all the demand, I think you could credibly come up with a scenario where demand is outpacing the supply in 2026.

The next question comes from Rick Shane with JPMorgan.

I need to buzz in one question before Jason. He really covered my topics. But just one quick clarification. It sounds like you guys are slowing issuance given the incremental return on deployed capital, which makes sense. You also said in response to Jason, that you hadn't issued any equity through the ATM quarter-to-date. I am curious was that actually by choice? Or are you blacked out on the ATM until you issue earnings just so we understand really how much you're dialing back if it was a function of what you're allowed to do versus what you've chosen to do?

Well, that's a good clarification. I would say 2 things that I would describe my answer to the future issuance as being opportunistic and driven not by any desire to be larger or have greater scale, but just driven by the economics of the opportunity in terms of the value to our existing shareholders. And then from a quarter-to-date perspective, most companies, I think you will find in a blackout period from the end of the previous period to sometime around their earnings call. So that would be a typical pattern for companies to [indiscernible] market.

Perfect. That was the clarification I was looking for.

Yes. Good follow-up.

The next question comes from Eric Hagen with BTIG.

Good to hear from you guys. I just want to get your perspective on prepayment speeds, maybe at what level for mortgage rates do you think really gets the refi market moving? And would you guys modify the hedging in any way or take off some of the longer-dated hedges, if it looked like refis were really going to accelerate?

Say that last part again, Eric, please?

Would you adjust any of the hedges or take off some of the longer-dated hedges if it looked like the refi market was really going to accelerate?

So let me start with a couple of questions -- a couple of points, and then we'll -- then you can ask me some follow-ups. Obviously, prepayment risk is greater today and certainly, I think it's greater given the direction of the administration. So composition of the portfolio, I think, is going to be a real key in terms of mortgage performance going forward.

I think it's going to -- the story will not -- even though in a tighter spread environment, asset selection becomes a much more critical factor on a go-forward basis. And it's -- what are the assets that you're choosing and what are the assets that you're avoiding choosing, which is really important. Coupon composition is going to be really important. And the type of characteristics you have in your pools is going to be really important.

When I look, for example, just to give you a couple of numbers on the on the coupon distribution. I think this is really important. When I look at our position of 5.5 and above, when I think about the moneyness of mortgages and what that 5.5 means with a mortgage rate, 6.5 or something there, about 48% of our portfolio is in 5.5 and above. But what's important of that population, 87% of that population has some form of underlying attribute or characteristic that we believe will make those cash flows potentially more stable.

And so that's really what is really important when you look at the underlying characteristics, whether they're the channel they came through as a credit or the geography, all those fab loan balance, all those things, what's happening with the GSEs in terms of their pricing, how do they all fit together? They could be very significant drivers of performance on a go-forward basis. So the specified pool characteristics are going to be really important.

Chris and I were just actually looking at some numbers this morning, which I just thought were interesting. When we looked at, for example, our 6.5 population, which is only 5% of our portfolio. The cheapest to deliver cohort in the 6.5 populations age is paying at a 52% CPR. Our population is trading at just less than half of that from a CPR perspective. So the underlying characteristics matter a lot, the coupon composition will matter a lot. It will be the key driver.

We also, from an interest rate perspective and from a hedging perspective, as you point out, I think it's also going to be important to operate with a positive duration gap because, obviously, as rates go down. It will be more challenging for mortgages, and it will affect the supply outlook. So a positive duration gap will be important. And you'll also notice, we did this last quarter, but that's still there today. We also have actually a fairly substantial receiver option position, which will give us some incremental protection.

So all the combination of how do we position the portfolio from a hedge perspective, the duration gap using option-based hedges and in particular, avoiding the worst pools and selecting pools that we think have really attractive characteristics should benefit us in this rising prepayment environment.

And our last question comes from the line of Harsh Hemnani with Green Street.

So as we look at the composition of the mortgage market, it's more barbelled today versus what it was over its history. And in the context of the power coupon being close to 5%, the coupons at 4% and 5%, there's less outstanding there versus in higher coupons and lower coupons. And then also, it sounds like from the messaging from the administration, GSE purchases are going to come in at those power coupons. How is that environment sort of affecting your ability to, first off, tick pools in this environment where there's less outstanding at the coupons you favored and then also deploy capital into those coupons?

Yes. I think I got all that. I would say you're right. I mean one of the things that we have talked about and focused on is the fact that I would expect the GSEs to -- first off, I would expect the GSEs to make decisions based on the economics of the mortgage market, but I would expect their focus of their purchases to likely be around the PAR coupon because that will have the greatest impact on the primary mortgage rate, which is what they're trying to affect. And that's why when you -- for example, when you look at the performance across the coupon stack even quarter-to-date, that 5%-ish coupon is probably 15 basis points tighter. But the rest of the coupon stock on average, for example, our portfolio and Bernie mentioned our returns quarter-to-date, are more consistent with about 5 basis points on average because all the other coupons didn't move nearly as much.

So -- but from an overall perspective, I mean, that's not particularly challenging from our perspective. We certainly have a lot of liquidity in all of these coupons. Obviously, the largest cohorts are the lower coupons and you mentioned sort of those intermediate coupons. But there is ample liquidity. When you think about the $9 trillion market, there is ample liquidity for us to move into various coupons into floors, 4s, 4.5s. We have a sizable position in those coupons today. So there's plenty of liquidity for us to position the portfolio anyway we want from an overall coupon distribution perspective. And I would expect the current coupon to be the area that has the most focus from an external perspective.

Got it. That's helpful. And then maybe on the duration gap, you touched on this a little bit. It's been growing for the past few quarters, and it adds that downgrade protection in an environment where prepayment risks are elevated. How should we expect that to evolve over the coming quarters? And then what's the boundaries around that, that we should be thinking about?

Yes. You're right. I mean, I think we ended the quarter, our duration gap was like a year or something like that. It's larger than that today because the 10-year has backed up. So right now, we have about a half a year -- that was 0.4 at the end of last quarter. I think it's just a little higher than that, maybe 0.5 this morning. because the 10-year now is up about 420 or a little bit above. So to the extent that the 10-year rate stays here or maybe moves a little higher, I would expect our duration gap to widen even more because I think the risk to lower rates would obviously increase.

I don't expect the 10-year to move very much above, say, $435 million and I expect there to be some risk that it gets back down closer to 4%. So our duration gap probably in this neighborhood as where we'll operate from a historical perspective, just to give you some guidance. I mean, I would say in the half year-ish type range, somewhere between a quarter over year and 3 quarters of the year would be typically where we would operate.

We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico, for concluding remarks.

Great. Thank you, operator, and thank you, everyone, again, for participating. We're obviously very pleased to be able to deliver outstanding results for our shareholders in 2025, and we look forward to 2026 in the environment that we're in and look forward to speaking to you again at the end of the first quarter. Thank you.

Thank you for joining the call. You may now disconnect.

Good morning, and welcome to the AGNC Investment Corp. Third Quarter 2025 Shareholder Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Ms. Katie Turlington in Investor Relations. Please go ahead, ma'am.

Thank you all for joining AGNC Investment Corp.'s Third Quarter 2025 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law.

Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development.

With that, I'll turn the call over to Peter Federico.

Good morning, and thank you all for joining our conference call. In the third quarter, the Federal Reserve's pivot to a less restrictive monetary policy stance and the easing of fiscal policy concerns drove robust financial market performance and a significant improvement in investor sentiment.

Agency mortgage-backed securities were one of the best-performing fixed income asset classes during the quarter and have now outperformed U.S. treasuries for 5 consecutive months a sequence of outperformance that has not happened since 2013. In this favorable investment environment, AGNC generated a very strong economic return of 10.6%, comprised of our attractive monthly dividend and book value appreciation. At its September meeting, the Fed lowered the federal funds rate as expected and signaled further monetary policy accommodation with the possibility of rate cuts at the October and December meetings.

On the fiscal policy side, the passage of the tax bill early in the quarter and several positive tariff developments eased some of the concerns that dampened the investment outlook in the second quarter. These investor-friendly developments led to a material decline in interest rate volatility and contributed to the outperformance of Agency MBS. As we have discussed, a number of emerging factors support our constructive outlook for agency mortgage-backed securities.

The first relates to the improved spread environment for Agency MBS. Over the last 4 years, the spread range between agency securities and benchmark rates has become increasingly well defined with incremental investor demand consistently emerging when spreads trade near the upper end of the range. In addition, the administration has begun to focus on mortgage spreads as a means of improving housing affordability.

In an interview in late September, the Treasury Secretary reinforced this view when he said the really important thing is that we either maintain mortgage spreads or narrow them further to help the American people. This focus on spreads by the administration is good for Agency MBS and good for our business. Second, the supply and demand dynamic for agency mortgage-backed securities continues to be well balanced. With the primary mortgage rate persistently above 6%, the net new supply of Agency MBS this year will be about $200 billion, the lower end of initial expectations.

At the same time, the demand outlook has improved bank demand for Agency MBS has been relatively muted this year, but should increase as regulatory reforms get implemented. The money manager community is another important source of demand for Agency MBS. Demand from this sector increased meaningfully in the third quarter as the favorable shift in monetary policy led to $180 billion of bond fund inflows, which are now running slightly ahead of last year's pace. Third, the financing market for agency MBS remains strong. With bank reserves just under $3 trillion, the Fed will likely end balance sheet runoff within the next few months.

Importantly, the Fed is also considering joining the FICC for purposes of the standing repo facility and using a repo-based measure as its primary target rate. If adopted, these changes would be highly beneficial to the repo market for U.S. treasuries and agency MBS, particularly during times of stress. Fourth and finally, the potential path of GSE reform continues to move in a favorable direction. The treasury department has taken a leadership role in the reform process holding a series of roundtable discussions with a wide range of housing and mortgage market participants to gain insight into potential reform actions. This careful approach demonstrates the treasury's commitment to maintaining mortgage market stability.

To that end, the treasury has emphasized 3 important guiding principles for GSE reform, maximize taxpayer value, lower the mortgage rate through stable or tighter mortgage spreads and do no harm to the housing finance system. The mortgage market has responded well to this approach. Collectively, the 4 factors that I mentioned are currently pointing in a favorable direction for Agency MBS. Moreover, given the treasury's thoughtful approach, it is possible the agency market emerges from this reform process with a stronger and more durable structure. In this evolving investment environment, we believe AGNC as the largest pure-play levered agency investment vehicle is well positioned to generate attractive risk-adjusted returns for our shareholders.

With that, I'll now turn the call over to Bernie Bell, our Chief Financial Officer; to discuss our financial results in greater detail.

Thank you, Peter. For the third quarter, AGNC reported comprehensive income of $0.78 per common share. Our economic return on tangible common equity was 10.6%, consisting of $0.36 of dividends declared per common share and a $0.47 increase in tangible net book value per common share. driven by a significant decline in interest rate volatility and tighter mortgage spreads to benchmark rates. As of late last week, our tangible net book value per common share was unchanged to slightly up for October. We ended the third quarter with leverage of 7.6x tangible equity and average leverage of 7.5x, both unchanged from the prior quarter.

Our liquidity position remained very strong with $7.2 billion in cash and unencumbered Agency MBS at the end of the quarter, representing 66% of tangible equity. Net spread and dollar roll income declined $0.03 to $0.35 per common share for the quarter, driven by lower swap income due to the maturity of $4 billion of legacy swaps and a timing mismatch between the issuance and deployment of new preferred and common equity capital. Another important driver of our net spread and dollar roll income is the amount of unhedged short-term debt in our funding mix as measured by our hedge ratio.

As of the end of the third quarter, our hedge ratio was 77% and representing the amount of swap and treasury-based hedges, excluding option-based hedges relative to our total funding liabilities. This hedge portfolio positioning reflects our expectations for an accommodative monetary policy environment and positions our net spread and dollar roll income to benefit from rate cuts as they occur.

Looking ahead, we expect that lower funding costs from the September rate cut and widely anticipated future rate cuts, along with the full deployment of recently raised capital and a shift in our hedge mix toward a greater share of swap-based hedges will collectively provide a moderate tailwind to net spread and dollar roll income. The average projected life CPR of our portfolio increased 80 basis points to 8.6% at quarter end from 7.8% the prior quarter on lower mortgage rates. Actual CPRs averaged 8.3% for the quarter compared to 8.7% in the prior quarter.

Lastly, during the third quarter, we issued $345 million of fixed rate preferred equity the largest mortgage REIT preferred stock offering since 2021 and $309 million of common equity through our at-the-market offering program at a significant premium to our tangible net book value per share. Notably, the preferred issuance carries a cost significantly below the levered returns available on deployed capital, which is expected to further enhance future earnings available to common shareholders.

And with that, I will now turn the call back over to Peter for his concluding remarks.

Thank you, Bernie. Before opening the call up to your questions, I want to provide a brief review of our portfolio activity. Agency spreads to both treasury and swap rates tightened meaningfully across the coupon stack in the third quarter as interest rate volatility declined sharply. Intermediate coupons performed the best driven by strong index-based buying from money managers. Higher coupons also generated positive excess returns, but to a lesser extent, as the sizable interquarter rally in long-term interest rates, increased prepayment concerns associated with these coupons. Hedge composition was also a driver of performance in the third quarter as swap spreads widened 2 to 5 basis points across the curve.

Our asset portfolio totaled $91 billion at quarter end, up meaningfully from the prior quarter as we fully deployed the capital that we raised in the second and third quarters. As is often the case when we deploy new capital, the mortgages that we added were largely newly originated production coupon MBS. Over time, however, we optimize our asset composition by rotating into pools with favorable prepayment characteristics as opportunities arise. Consistent with the growth in our asset portfolio, our TBA position increased to $14 billion at quarter end.

As a result, the percentage of our assets with favorable prepayment attributes declined to 76% in the third quarter. The weighted average coupon of our portfolio increased slightly to 5.14%. The notional balance of our swap and treasury based hedges remained relatively stable during the quarter, but the composition of our portfolio shifted to a greater share of longer-dated swap-based hedges. In duration dollar terms, our swap-based hedges increased to 59% of our overall portfolio. Lastly, given the convexity profile of our assets and the large decline in interest rate volatility. We opportunistically added $7 billion of receiver swaptions during the quarter as an additional source of downgrade protection.

With that, I'll now open the call up to your questions.

[Operator Instructions] And the first question will come from Crispin Love with Piper Sandler.

Spreads have tightened materially over the last few months and just looking at your results, core earnings were $0.01 below the dividend. Can you just discuss expected ROEs have they shifted at all just given the spread tightening and then just touching on the sustainability of the current EBITDA.

Sure. Yes, I appreciate that question. First, from -- you're right, from a spread perspective, we had a really nice move in spreads and they're moving. As I talked about in my prepared remarks, I talked about that 4-year range. When you think about, for example, current coupon to blended swap curve, that range has been about 160 to 200 basis points generally over the last 4 years. And we are now trading closer to the lower end of that range, maybe about 170 basis points.

And take where mortgages are versus swaps, where they are versus treasuries, you think about that from an ROE perspective today, I would still say mortgages are in the, call it, the expected ROE range of for current coupon somewhere between 16% and 18%, which aligns really well with our total cost of capital. So when you think about dividend sustainability, I always like to go back to looking at that measure. And that's the important breakeven, obviously, that we're trying to achieve. That's the payment of all of our common stock dividends, our preferred stock dividends and our operating costs over our equity base. And that dropped as you would expect, as our equity base increase, that dropped about 1% quarter-over-quarter. So now it's at about 17%. So it aligns with the economics of where mortgages are trading today.

And there was some noise Bernie talked about, and I'm sure we'll talk more about this on the call, but there was some noise with our net spread and dollar roll income dropped to $0.35. And she talked about the drivers that drove that. Some of those were largely temporary drivers, the expiration of some of our short swaps and the hedge ratio -- swap hedge ratio was lower this quarter and day count. And a lot of little things contributed to that. But she also talked about the fact that we're probably at a low point or near a low point for that measure and that there's reasons to believe that, that measure of earnings is going to improve. But overall, you're right, spreads have tightened a lot. There's lots of factors that we'll talk about over the call that could drive them even tighter. But from a dividend sustainability perspective and from a return perspective, I think those 2 things are still well aligned right now today. I'll pause and let you follow up.

All really helpful. And then just -- you mentioned it in your prepared remarks, but decreased the hedge ratio meaningfully in the quarter. Can you discuss that a bit further? What drove that? Are you taking more of a near-term rate outlook view here, specifically decreased rate fall. And then what do you see as the key risk just given the lower ratio and do those receiver swaptions -- you mentioned [indiscernible] risks.

So there's a couple of important things happening with the with the hedge ratio. And we talked about -- I mentioned the receiver swaps. I'll get to those at the end of this question. And then Bernie also talked about our overall hedge ratio. Because we added receiver swaptions, we kind of gave you 2 hedge ratios this time. If you look at our overall hedge portfolio, it dropped to whatever the number was 68%, I think. The number that I look at, though, that I think is important when you think about our net spread and dollar roll income, this is important for -- the reason why net spread and dollar roll income has been under a little additional pressure on why we think we probably hit a trough and there's some upward momentum in our net spread and dollar roll income. Our hedge ratio when you think about our swap-based hedges and treasury-based hedges, which are the hedges that we use to convert our short-term debt to synthetic long-term debt. That hedge ratio was 77%, as Bernie mentioned, at the end of the quarter.

What that means is we have 23% funding in our funding mix, 23% of short-term debt. Think about where short-term debt costs are versus all other costs. The average repo cost on short-term debt last quarter was 4.43%. It's the highest cost mix in our funding mix. 23% of our funding liabilities, short-term debt at the highest cost. That cost will come down over time as the Fed eases. It will already come down after the first season. We expect further reasons. So we will get the benefit of that. Just to quantify that, that amount of short-term debt in our mix, having it funded at 4.43% versus, for example, where swap rates are in the 3- to 5-year sector. That's about 100 basis points of additional cost. Over time, that's about a $0.05 improvement that we should get as short-term rates come down. So we positioned the portfolio that way from a hedge ratio perspective to get the benefit of this Fed pivot to a more accommodative monetary policy and it looks like the momentum for rate cuts is actually increasing.

So I expect that benefit to show up over the next couple of quarters. We also made some changes to your other point about the composition of our portfolio because of the rate environment that we're in and the fact that the administration is so focused on longer-term rates, we do have to be more cognizant today versus a quarter or 2 ago. about the risk of lower long-term rates and an uptick in prepayments and mortgages. With the decline in volatility and our concern for wanting a little bit more downgrade protection. We do that through asset selection, but we also can do that through options. In this last quarter, we actually added $7 billion of receiver swaptions that will give us some additional down rate protection. But because that's a receiver position, it kind of throws off that hedge ratio calculation. That's why I wanted to explain that and break that up for you. But -- so there's 2 things going on in our hedge composition both of which are important. One, to understand our net spread and dollar roll income in that incremental drag that we're seeing right now, which should reverse over time and then just want an additional downgrade protection.

Your next question will come from Terry Ma with Barclays.

Maybe just touch on your comments around incremental demand for MBS from money managers in the quarter. Was that kind of episodic or do you think that appetite will be sustained going forward?

Well, yes, it's really fascinating. And it's to be expected, to shift in monetary policy really can't be underestimated. I mean it was a significant change, particularly for just fixed income broadly, and you really saw that. We've been -- we collectively, the fixed income market has been waiting for the Fed to pivot, and there's lots of uncertainty around tariffs. And now we got the pivot and actually, it looks like the pivot in my opinion, sort of gaining momentum.

But when you look at what happened to bond fund flows, there was $100 billion of bond fund inflows in the first quarter, $50 billion in the second quarter, so $150 billion in the first half of the year and then a huge uptick to $180 billion in the third quarter. And as I mentioned now, on a per day basis, I think it's a little over $8.5 billion a day of inflows. Right now, we are on pace for having bond fund inflows in the $450 billion range this year, and I don't think there's any reason to believe from what we've already seen this month, I think the inflows are continuing at that same sort of weekly pace.

So I expect on fund inflows to remain robust, particularly given the Fed move, obviously, the market expects them to ease at the next 2 meetings. I expect them to ease at the next 2 meetings. And you also have sort of a deteriorating, if you will, or less optimistic equity outlook in the current environment. So lots of money is still on the sidelines in money market funds, maybe the equity market because it's at all-time high. There might be some rotation out of there. So I expect bond fund flows to remain robust.

And that, I think, will continue to support, particularly the lower and middle coupons into the end of the year. And then the other important driver of demand, which is still uncertain, but I do think it's pointing in a very favorable direction is what's going to come from banks have added only about -- I say only, but it's still significant, but they've added about $50 billion of mortgages this year. But they've also added interestingly $200 billion of treasuries.

So the question is, as these bank reforms become a reality, and I think that they will become a reality, I think, for the new Basel end game, I think it's looking like it's going to be in the first quarter. But from everything that we are understanding, that's going to be, I think, a positive for bank capital, particularly as it relates to mortgage credit just generally. And so I think that there could be an uptick in bank demand for mortgages and maybe some rotation out of treasuries into mortgages once that bank regulation becomes clear. So from a demand perspective, I think the outlook is certainly stable, if not improving.

Got it. That's helpful. And then just a follow-up. I appreciate all the color on net spread and the dynamics around that. But I guess, to the extent that Fed easing gets delayed or pushed out or maybe doesn't need to materialize. Do you still expect a near-term tailwind to the net spread when you kind of factor in just I guess, capital deployment and then also just swaps rolling off?

Yes, I do. I mean -- so again, there's kind of a confluence of things that have dragged it down maybe $0.01 or $0.02 more than 1 might have expected. Bernie mentioned just timing mismatches between our capital raising. And we talked about this at the end of the second quarter when we raised, I think, $800 billion in the second quarter, we were slow to deploy those proceeds. We did that intentionally. So we ended the quarter with a little bit of excess capital that we ultimately got deployed. So when you do that, it can be a drag on our earnings, and we saw the kind of effect of that. But as I mentioned and as Bernie mentioned, all those proceeds have now been sort of fully deployed. So we got that headwind behind us. and that's really important.

And the other with respect to -- this is kind of a nuanced answer, but it's an important 1 with respect to short-term debt. What's important now is where is short-term swap and rates, for example, where are they priced relative to the Fed funds neutral rate or the target rate. So what's happened over the last couple of months as the Fed has transitioned, One, we got the first ease, that's important. -- but also take, for example, 2- and 3-year swap rates, they now reflect essentially the neutral Fed funds rate at around 3.5%. And -- so you can kind of get to the same answer by doing 1 or 2 things. You can wait till the actual eases occur, and that will get reflected in our repo balance or you could also term that out into the swap market at essentially the same long-run neutral rate. So I do expect that to be a benefit over the next, call it, 3, 4 quarters.

Next question will come from Rick Shane with JPMorgan.

Look, on the whiteboard in my office, I have a note that says it's never different this time. But when we look at the rate -- the refi environment, the distribution of outstanding mortgages is different than we've ever seen. It's not a bell curve, it's a barbell. You have borrowers over the last 3 years who really probably been sold mortgages with the idea that they are going to be able to refinance them. And I think we probably having to -- predicted this for decades may be finally on the cusp of the mortgage origination process being transformed by technology. Do you think -- are you guys seeing different behavior in terms of speeds? Is it a risk that we need to be thinking about at this point?

Yes to all of the above. And that's one of the reasons why I talked in the previous answer about wanting more downgrade protection, particularly given the administration is focused on mortgage rates and housing affordability, which are all very important. But we are seeing all of those factors. First, let me just put in perspective sort of the refinance outlook, if you will, from a mortgage perspective, from a traditional perspective. When you talk about -- when we talk about refinanceability of the universe, we talk about when mortgages are about 50 basis points in the money.

So at a 6% mortgage rate, which is about where it is today, this gets to your point about the composition of universe. Only 20% of the market has a 50 basis point incentive. And that mortgage rate has been persistent at 6% or above, and it's likely going to stay fairly high given that difficult for the tenure to get much below 4%. But that's about 20% today, a full 100 basis point drop in the mortgage rate to 5%, which is going to take some new information to get that mortgage right down to that. That's for sure. that percent increases to 30% of the universe. And it will take a full 200 basis point rally in the mortgage rate to 4% in order for 40% of the universe to become refinanceable. So in terms of the big numbers, you need a really sizable move in the mortgage rate to have a big prepayment event.

All that said, what we are seeing consistently is that there is a lot of capacity in the system for refinance activity. Technology is definitely having an impact. And you can see that -- for example, we've seen it for the last couple of quarters. In this last quarter, for example, when we see brief periods of the mortgage rate dropping, like, for example, I think it was in the month of September, the mortgage rate dropped below [ 615 ], maybe it got to as low as maybe [ 610 ] or something in that. And it stayed there for only a couple of weeks. What we're seeing is a very fast pull-through of refinance activity. So what that's telling you is there's pent-up demand, there's capacity to process those loans and the mortgage originators are pulling them through in a much faster time period than they do historically. So those are all things that we have to be cognizant of, and that's one of the reasons why we wanted more down rate protection, we'll likely operate with a positive duration gap.

And we are always trying to optimize the asset composition of our portfolio so that we have the best characteristics possible that will give us more prepayment protection. I talked about that percent being at around 75%, 76%. But we've been operating 80% or north of 80%. And certainly, for the higher coupons we want that percent to be very high. One final point I'll make on the prepayment outlook. One of the other things that you'll see in the coupon composition of our portfolio, I talked about focusing our purchases at the production coupon, which is in the 5% to 5.5% range. You'll see that we've gone down in coupon somewhat have the concentration of our portfolio is now between 4.5% and 5.5%. So that, too, gives us additional prepayment protection.

Got it. Peter, this is why I love this job. That's such an interesting answer. I do appreciate it. If I can ask 1 follow-up, which is that as policymakers are looking for ways to improve affordability do you see levers out there that are available to reduce the incentive that borrowers need to narrow that 50 basis points in a way that could increased speeds as well.

Well, so 1 is -- I'll answer that in 2 ways because it is really fascinating. First, they're actually -- because there's so much capacity in the origination business right now from a mortgage originator perspective and the refinance and the technology and so forth, there does appear to be some anecdotal evidence that they are getting mortgage borrowers to refinance with something less than a 50 basis point incentive.

So there could be people refinancing for as little as 25 basis points of incentive -- because if the technology is so it's that easy, if the costs are low, and a lot depends on where you are the geography matters an incredible amount when it comes to refinance cost. The state you live in, the locality, the title, taxes recording all of those things vary greatly from one location to another. So that certainly -- that certainly is a consideration. There are things that can be done that would streamline this further. One would be the GSEs certainly have, at times, taken actions that would do that, for example, waving of appraisals or other sort of insurance, there's a discussion about the insurance waiver for refinances, which is an interesting title insurance. That's very interesting. I don't know that, that will go through or not because there's risk associated with that. But that's a clear example of the GSEs and the regulator trying to come up ways to improve the refinanceability they could also do it with their GPs.

One final point. From an administration perspective, and this is why I brought this up. The administration's focused on mortgage spreads, in my opinion, is unprecedented. I've never heard of the administration and the Treasury Secretary identifying the spread between the mortgage rate and the risk-free rate as clearly as he has. That's a clear sign that they believe that if they can take actions through their -- perhaps through their reform to stabilize or lower that spread further that, that will transfer into the mortgage rate and transfer into refinanceability.

They can certainly do things with respect to treasury issuance and they are clearly focused as a treasury are clearly focused on the 10-year. So that's something that we have to watch, whether they change the composition of their interest some more short-term entry short-term issuance versus long term? And then sort of when you think about just the GSE reform process, I still believe that there are things that can be done, how they treat from a capital perspective in this new bank regulation is going to be important to watch. That could be another source that would lead to greater refinance activity and maybe even an adjustment to the capital requirement for Agency MBS depending on how the path of reform goes. So there's lots they can do, and there's lots that's happening. It's a very interesting time.

Next question will come from Trevor Cranston with Citizens JMP.

Peter, you painted a pretty positive picture in terms of the supply-demand outlook for MBS. I guess the other thing that could have a major impact on spreads would be implied volatility and how that's being priced. So can you maybe share your outlook on volatility if you think there's room for that to continue coming down or if there are things you guys are thinking about that could cause that to move back to a higher level?

Yes. Yes, it's a great question. I think it's really important because as we talked about, I think it was in the first question, we talked about where spreads are today and the fact that spreads are nearer the lower end of the range. And the question that really, I think everybody asked at this point is -- are we going to bounce back up into the range? Is there a reason for spreads to bounce off these lows and then sort of move back into the middle of the range, which it's been to practice? Or how are the forces sort of evolving that will drive spreads in one direction or another.

The way I would describe sort of our outlook on spreads from a macro perspective is that -- as we went through the last several years, there were lots of reasons why we had a question what the upper end of the range was. There was so much uncertainty in the system monetary policy, fiscal policy, geopolitical risk, all those things the Fed tightening monetary policy in an unprecedented way in the balance sheet runoff. All those things made us question where the upper end of the spread range was. Today, I feel highly confident in the upper end of the spread range.

And I feel less confident if you think about it, that's a way, in the lower end of the spread range, that there are now a number of factors that are pointing as possible reasons why spreads could break through the lower end of the range. We talked about the administration -- just what we just talked about, the administration is focused on spreads. The demand outlook improving while supply stays relatively in check. The funding market is an interesting one because the Fed is right at the inflection point with respect to its balance sheet.

And given where funding rates are now, I really do expect the Fed to end its balance sheet very soon, I'm kind of looking for them to and their balance sheet at this meeting and announce it for either November or December, but I do expect it, certainly by the end of the year, given the way the funding markets are behaving. And then they are also considering, as I pointed out, other changes that I think would be really good for the repo market. So that's a positive. And then I think that the treasury's leadership on GSE reform indicates that they, like we just said, are looking for reasons and actions that they can take that would improve the spread outlook.

From a volatility perspective, we certainly have a very favorable monetary policy stance evolving. That's really good. It should be good for volatility. And if there is some clarity coming in the next month or 2 with respect to tariffs, in particular, then I think we have an environment from a volatility perspective where interest rates could remain relative volatility can remain relatively benign. And that's a really -- put all that together, those are reasons why mortgages could break through the lower end of the range. So that's the way I look at it. And there are less reasons to be concerned about mortgages going wider and certainly going through the upper end of the range, and there's more reasons to believe that mortgages could go through the lower end of the range.

Yes. Okay. That makes sense. And then you guys recently announced the creation of these current coupon indices. Can you maybe just briefly talk about kind of what the economics are for AGNC and if there's kind of any other things you guys are sort of exploring on the like third-party asset management side of things?

Yes. We did that not for any reason for economics. I don't think there's any economics to it. But we did spend a lot of time on putting that index together. And we did it just because we felt like it would be beneficial to the market. When you think about the mortgage market. It's -- and we talk about this a lot. It's sort of an under-understood it's not a very transparent market. There's a huge fixed income market, but it's hard for retail investors to gain access to this market, and it's certainly hard for them to gain information about the market. If you don't have a Bloomberg, it's very difficult to find out how mortgages behave. And when you think about mortgage performance, there's really just 1 benchmark out there. It's an important benchmark. It's the Bloomberg Mortgage index. It represents the entire, what is it, $9 trillion universe. So it has a very different characteristic than sort of certain aspects of the market.

I'd point that out because if you look at the index, the aggregate index, Bloomberg [ Ignis ], the average coupon on the outstanding universe is around 3.5%. So if an investor invests in a bond fund and is gaining exposure to the mortgage market, they're getting it because that bond fund is buying that index of exposure, and they're getting an average coupon of around 3.5%. But there's no index that shows, well, if you want to just go out and buy a production coupon, a newly originated mortgage coupon this month, what are the characteristics of that? So we created an index that rebalances every month, right, Sean, rebalances every month. That is the right mix between the 2 coupons that will center around the par coupon. And the yield associated with that [ PAR ] coupon, that, for example, today is 5%.

So it's a way for investors to gain some more information. We gave you the whole history of performance on it. It's on our website, so you don't need Bloomberg terminal. And it's just our way of trying to bring transparency give investors more to look at, more to understand, maybe it can be used for some other measures -- there is 1 ETF out there, for example, that is a current coupon ETF. That's a great way for investors to gain access to this power price production coupon. So we just did it because we thought -- more information is better, ultimately with more information, we can hopefully attract more investors to this fixed income asset class.

Next question will come from Doug Harter with UBS.

It's actually Marisa Lobo on for Doug today. If you could talk to us about your view of optimal leverage in the current spread and ball environment?

Yes. Yes. Well, I would say right now, as you look at our leverage, we're sort of operating right where we have normally been. It's -- it was a little higher at times when mortgages were cheaper, we're back to around 7.5x leverage, as Bernie mentioned, I think that's a good place to be. I think at that leverage, we have the ability given where mortgages are priced today to generate really attractive returns that are consistent with our dividend. So this is not an environment that requires us to stretch from a leverage perspective. We certainly have a lot of capacity. Bernie mentioned the fact that we had $7.2 billion of unencumbered cash, which is 66% of our equity. So we have a lot of flexibility. And what I would just say is that given all that flexibility and given all the considerations and the factors that we are looking at, as they evolve, over the next couple of months. Those factors will inform whether or not we want to continue to operate with this leverage or higher leverage or lower leverage. But certainly at this level, we have a lot of capacity, a lot of flexibility, and we're able to generate really attractive returns. Got it.

And I know you touched on this with Trevor's question. But what do you see as the biggest near-term risk to your constructive view on spreads?

Yes. Well, I would say they're sort of the macroeconomic ones. I mean, obviously, if something changed significantly in fiscal policy, for example, that flowed through to inflation outlook that those would be not priced into the market. And then if there's something that causes inflation to go up and volatility to go up and the Fed have to pause again, those would be factors that would put pressure on fixed income generally and on Agency MBS specifically. So those would -- those has to -- I think at this point, they're the sort of the big macroeconomic forces.

Something happens significantly in the tariff outlook or for some reason, the Fed believes that the inflation outlook has changed dramatically that they'll have to change course. But that change in inflation outlook would have to be really, I think, very significant probably not tariff-related because the tariffs seem to be now viewed at the Fed as being a level price change, not as an ongoing tariff or inflation pressure. So it would have to be something along those lines, and that inflation pressure would have to exceed and outweigh the weakening that is clearly apparent in the labor market, which the Fed is going to have to respond to.

The next question will come from Kenneth Lee with RBC Capital Markets.

Just 1 for me. And then I think you touched upon this briefly. In terms of the hedges, net duration gap didn't change that much. Is the thinking here that it could potentially be more positive over the near term as you look to get more down rate protection, but just wanted to get your thoughts around that.

Yes. Well, we certainly would like to operate with a -- maybe a slightly larger duration gap than we have today. I think today was it Chris duration gap right now. So it's not very substantial. But then again, the 10-year rate is at 4%or a little bit below 4%. And just from a -- just from a rate perspective, I think the nearer-term risk for the 10-year rate is that it's a little higher, not a little lower. So I think there could be at a point in time where we want to operate with a higher duration gap, but at a little bit below 4%, it may not be right now.

Your next question will come from Harsh Hemnani with Green Street. .

You touched on this in the prepared remarks a little bit, but there's 2 ways to manage that down rate risk. The first is asset selection, as you mentioned and the second with the path you took this quarter was maybe expanding TBAs and getting outright convexity hedges. Given that you've deployed all the capital you raised in, call it, the second quarter and third quarter, was this sort of a decision driven by sizing at all in the sense that it might be harder for you so those specified pools in the market at this time or at the speed you would like to. Anything on that front in terms of space.

Yes. No, it's a really good question, Harsh. Thank you. You're right. So quite often, as I mentioned, when we raise capital, we want to deploy it sort of immediately. And so we do that by buying generic kind of mortgages, TPAs or production coupons that have the most negative convexity, if you will. But what's important is that over time, we continue to refine and upgrade, if you will, our asset composition. And there's lots of opportunities and capacity to do that.

In the third quarter, for example, what you don't see in our overall numbers is that we actively rotate out of certain specified pools into new specified pools as those opportunities arise as the GSEs, for example, sell new specified pools. Just to put a number on that in the third quarter, about $8 billion of our specified pools rotated and changed into different specified pools that had slightly different characteristics that we preferred more than our existing holdings. So that optimization happens all the time in our portfolio, and that is an important source of alpha generation for us.

And I think that there's lots of capacity to do that. It does take some time months and quarters, but you can do that in significant size on a regular basis. And so what you'll likely see us because we are always trying to give ourselves greater down rate protection, particularly in the current environment. You'll see us rotate out of those generic pools as opportunities arise into specified pools with certain characteristics that we think are beneficial in the current environment could relate to credit. It could relate to LTV, I could relate to HPA in certain areas, lots of little factors can have a big impact on the refinanceability of a mortgage.

Next question will come from Bose George with KBW.

Actually, a couple of little things for me. Peter, you mentioned the $0.05 tailwind. What's the time frame for that? Is that sort of looking at the forward curve and by the time the Fed is done? Or just any color on that?

Well, the $0.05 -- the way I calculated the $0.05 that was -- you think about that is that was the drag if short-term rates instead of being at [ 4.43 ], were reflected basically at about 100 basis point difference. So it is then short-term rates going to the neutral rate. So if that were to happen, for example, over the next, let's say, 6 months, that would be that $0.05 would occur over that time period. So it all depends on the pace with which the Fed lowers the short-term rates or the pace with which we which we term out that short-term debt into swaps at the comparable rate.

Okay. Yes, that makes sense. And then in terms of -- to these tens spreads tighten further, I mean is that a good thing or a bad thing? It obviously takes up your book value, but does it make it harder to cover the dividend? Or does the math still work since you're getting the lower ROE just kind of higher dollar amount of equity.

Well, you're right in that if the entire change of our book value is due to spreads, then from an investor perspective, they get the benefit, the same economics of the benefit. So if spreads stay where they are, for example, then there's no change in our book value and the future earnings stay strong. Conversely, if the only thing that changes is that spreads tighten, then our book value goes up by the present value of those earnings that you give up. So from an investor perspective, you're sort of indifferent from a return perspective, you're going to get the same economics of the return whether it's in the form of future earnings or in book value appreciation. From that point forward, then the dividend yield on our book value would be lower. The return on our portfolio would be lower, but they would still be aligned. And from an investor perspective, they would have gotten the same economic benefit all in.

Okay. Makes sense. I just 1 more on spread. To the extent -- and you noted that Q2 is likely done fairly soon. But to the extent the Fed is continuing to run off Agency MBS and reinvesting in treasuries, does that create potential spread risk just of widening of spreads versus treasuries.

Yes. Chairman Powell actually talked about this just a couple of days ago in his meeting where he indicated that they were essentially at the turning point for the balance sheet and that they were going to end the runoff. And now I think it's become clear that they are. It's -- right now, they continue to -- he, for example, continue to reference the outstanding guidance which is that they intend to hold primarily treasury securities. What they haven't defined for the market, and this is important for the mortgage outlook, is what primarily means. You can make the case that primarily means 95% or primarily might mean 60%. I don't know, and that's an important distinction. But he said that they will study that and they will they will clarify that.

And certainly, they have a clear mandate to whatever they do with respect to runoff, do so in a way that does not create instability in the market, and he mentioned that. So I don't expect them to do anything with respect to the mortgage portfolio that would destabilize the market. And right now, the runoff pace of the Fed's balance sheet, about $200 billion a year, is certainly an amount of mortgages the private sector can handle those mortgages will get redeployed into treasury. So I think there's still some discussion and outlook there that might change with respect to the balance sheet and the composition.

And ultimately, as we talked about, that could be a lever that -- the government believes is an important 1 that would actually improve mortgage affordability by changing that composition to include mortgages. And if that were the case, that would certainly put downward pressure on mortgage spreads and downward pressure on the mortgage rate.

Your next question will come from Eric Hagen with BTIG.

Can you walk through the approach behind raising the preferred stock and how much leverage in the capital structure you feel like you're comfortable taking both maybe in the near and longer term. And just generally, I mean, what are the variables that you consider to raise preferred stock is like a substitute for common stock.

Sure. Yes. The transaction that we did, it was nice to be able to access that market. So was last time it was like we shut off for really 5 years out of that market. So I mean, that market has been dormant for a good 4 years. So I think it was important to reopen that market. I think we were the second transaction to get done in that market. And it was a really -- from our perspective, when you think about -- it was a higher coupon than what we had issued previously. But consistent with where the breakevens, if you will, with respect to our floating rate were so it's 8.75% coupon on that transaction, it was traded really well in market -- so we're really happy with it. And that 8.5% coupon is what you want to think about from the economics from a common shareholder is if we can turn around and take that -- those proceeds from the preferred lever that the way we lever it. Then that means that we're going to generate a return, let's just say, make it simple as like 16%. There's 9 extra percent of carry that's going to accrue to the benefit of our common shareholders.

So we pushed up, we wanted to issue that, and we pushed up our overall percent of preferred. I think after that transaction, it's around 18% of our overall capital mix. So we feel like that's a good sort of relative mix in our capital structure. It could be a little higher. It has been a little higher. I think at some points in our past 22% to 25% was about the highest it's been. So we have a little bit of flexibility there. But certainly, we want to take advantage of the reopening of this market because we do believe, and Bernie mentioned this is another reason why there's additional earnings that will accrue to the benefit of our common shareholders because of that preferred.

Our last question for today will come from Jason Weaver with Jones Trading.

Can you talk a little bit about how you see risk in those higher coupon 30s in the [ 6% and 6.5% ] range. I think a bit under half are spec, but what specific type of collateral protection are you focusing on there?

Yes. No, that's really -- it's an important point. And that's one of the reasons why we give you a table that shows like what we call high-quality prepayment characteristics and that's what you're referencing there. But there are other characteristics that we seek that aren't just low loan balance, for example, that are categorized there that have other prepayment protection. So was in the back of our presentation. But that's why I talk about 76% of our portfolio has other characteristics. So with respect to those higher coupons, we end up Yes. We end up with -- on Page 8, we give a breakdown, we say 39% high-quality prepayment characteristics and 37% of other characteristics. Well, those other characteristics matter a lot. They could be loan age and that could be credit and they could be FICO and they could be geography, and they could be certain MSAs, all those kinds of things come together.

But with respect to our higher coupons, almost 100% of those higher coupons, I think it's in the high have some sort of embedded prepayment characteristics that we like. So even though we do have some higher coupons and they are exposed to prepayment risk, particularly in this environment, like we talked about, -- we are also very condensate of the characteristics of those pools. And can we source pools that have characteristics that we believe will give us more stability in those cash flows. So that's the way we kind of look at that. But we did rotate down, as I mentioned, in coupon. So we do have a smaller exposure to the higher coupons and the ones that we do still have in our portfolio have characteristics that we like.

That's helpful. And then maybe 1 more for Bernie. I know you gave an unchanged book value estimate to date, but can you give me any sense of the level of liquidity into October and whether it's substantially different from your cash on hand at quarter end?

Sure. Yes, we -- our liquidity is largely unchanged since quarter end.

We have now completed the question-and-answer session. I would like to turn the conference back over to Peter Federico for concluding remarks. Please go ahead.

Well, again, I appreciate everybody taking the time to join our call today. We are certainly happy to be able to deliver the results that we did in the third quarter. In fact, I think the third quarter may have been 1 of the our fourth best quarter over the last 10 years. So we're certainly pleased to be able to deliver that for shareholders. And as I mentioned, we continue to be optimistic about the outlook for the agency market and for our business. So we look forward to speaking to you again at the end of the fourth quarter, sometime in January.

Thank you for joining the call. You may now disconnect.