AGNC Investment Corp. Aktie

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.

Good morning, and welcome to the AGNC Investment Corp. Second Quarter 2025 Shareholder Call. 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 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 and thank you all for joining our second quarter earnings call. Following the administration's tariff announcement in early April, elevated governmental policy risk caused investor sentiment to turn sharply negative and financial markets to reassess the macroeconomic and monetary policy outlook. After a sharp repricing in April, most markets retraced their early period losses and ended the quarter at better valuation levels. The performance of agency mortgage-backed securities relative to benchmark interest rates, however, was notably weaker quarter-over-quarter. As a result of this underperformance, AGNC's economic return for the second quarter was negative 1%. During the first 3 weeks of April, when the financial market stress was most pronounced, the yield on the 10-year treasury fluctuated by more than 100 basis points and the S&P 500 Stock Index declined by 12%.

This volatility and macroeconomic uncertainty adversely impacted agency mortgage-backed securities with spreads to treasury and swap rates widening meaningfully. A primary focus of AGNC's risk management framework is maintaining sufficient liquidity to withstand episodes of significant financial market stress. One important measure of this capacity is the percentage of equity that we hold in unencumbered cash and agency mortgage-backed securities, which are available to meet margin calls in the normal course of business. This focus enabled us to begin the second quarter with a strong liquidity position and to navigate the financial market volatility without issue and importantly, without selling assets. Moreover, we were able to take advantage of the wider MBS spread environment by raising accretive capital during the quarter and opportunistically deploying a portion of that capital in attractively priced assets.

Over the last 2 months of the quarter, most financial markets retraced the April losses and in some cases, set new record highs. For example, the S&P 500 Index rallied 25% from the April low and ended the quarter about 10% higher. Investment-grade and high-yield debt also performed well with spreads tightening 10 and 50 basis points, respectively. The one notable performance exception was agency mortgage-backed securities as the current coupon spread to a blend of treasury and swap benchmarks ended the quarter 7 and 14 basis points wider, respectively. Although the Fed and treasury have indicated that beneficial regulatory reforms are forthcoming, bank demand for MBS still appears to be constrained. Similarly, foreign investor demand may be hindered by U.S. dollar weakness and geopolitical risk. Looking ahead, we expect banks and foreign demand for Agency MBS to grow.

In addition, as we enter the third quarter, the seasonal supply pattern for MBS issuance should improve. We expect the net supply of new MBS will be about $200 billion this year, the low end of most forecasts. Since quarter end, MBS spreads have tightened slightly and are showing signs of stabilization. As a levered and hedged investor in agency mortgage-backed securities, AGNC's return profile is most favorable in environments in which mortgage spreads are wide and stable. Our favorable outlook for Agency MBS was further improved in the second quarter by the very positive message from key decision-makers related to the potential recapitalization and release from conservatorship of the GSEs. The White House, the Treasury Department and FHFA affirmed the government's commitment to maintaining the implicit guarantee for Agency MBS and also indicated that they are taking a do-no-harm approach to GSE reform.

Specifically, President Trump made an unprecedented statement in late May regarding the GSEs and the ongoing role of the government in the housing finance system. He said, our great mortgage agencies, Fannie Mae and Freddie Mac, provide a vital service to our nation helping hard-working Americans reach the American dream of homeownership. I am working on taking these amazing companies public, but I want to be clear the U.S. government will keep its implicit guarantees with the word guarantees emphasized in all capital letters. Treasury Secretary Bessent also made several important statements regarding the GSEs during the quarter. The one that stood out the most to us was when he said, the one requirement of this privatization is that they are privatized in such a way that mortgage spreads do not widen. And in fact, is there a way that we can make the spread between the risk-free rate and mortgages tighten as Freddie Mac and Fannie Mae are privatized.

Finally, Director Pulte weighed in with similar positive statements saying our #1 thing is to do no harm. -- and keep the implicit guarantees intact. We cannot have any disruption to the mortgage market. There cannot be any upward pressure on the mortgage rate, and I am very confident that the mortgage market will be safer and sounder as a result of any option that the President takes. These statements individually and collectively clarify the administration's approach and more importantly, should provide investors greater confidence that the credit quality of the $8 trillion of outstanding agency mortgage-backed securities as it is understood to be today, will not be impaired by actions associated with privatization. In fact, given the explicit statement of credit support made by the President of the United States that the implicit guarantee of Agency MBS will be preserved, investors could reasonably conclude that the credit quality of the outstanding stock of agency mortgage-backed securities has never been stronger. These statements also make it clear that maintaining stability in the mortgage market and lowering mortgage costs are 2 important guiding principles of GSE's reform. This is a very positive development that should lead to tighter mortgage spreads over time.

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

Thank you, Peter. For the second quarter, AGNC reported a comprehensive loss of $0.13 per common share. Our economic return on tangible common equity was negative 1%, consisting of $0.36 of dividends declared per common share and a $0.44 decline in tangible net book value per share as mortgage spreads ended the quarter moderately wider. As of late last week, our tangible net book value per common share was up about 1% for July after deducting our monthly dividend accrual. Quarter end leverage increased slightly to 7.6x tangible equity compared to 7.5x at the end of Q1. Average leverage for the quarter rose to 7.5x from 7.3x in the prior quarter. As of quarter end, our liquidity position totaled $6.4 billion in cash and unencumbered Agency MBS, representing 65% of tangible equity, up from 63% as of the prior quarter.

As Peter noted, we were able to navigate the substantial financial market volatility in April with our portfolio intact as a result of our risk management positioning and ample liquidity entering that period. Additionally, during the quarter, we opportunistically raised just under $800 million of common equity through our at-the-market offering program at a significant premium to tangible net book value. As of quarter end, we had deployed slightly less than half of the proceeds, and we have continued to deploy the remaining capital post quarter end. In utilizing the ATM, we attempt to maximize both the accretion benefit associated with the stock issuance premium and the investment returns on acquired assets. However, the optimal timing for stock issuances and capital deployment may not fully align. As a result, our investment of the new capital may lag the issuance as it did this quarter as we evaluate market conditions and wait for favorable entry points.

Net spread and dollar roll income declined $0.06 to $0.38 per common share for the quarter, primarily due to the timing of deployment of the new capital raised over the quarter with moderately higher swap costs also contributing to the decline. Our net interest rate spread decreased 11 basis points to 201 basis points for the quarter, largely due to higher swap costs. Our treasury-based hedges contributed additional net spread income of approximately $0.01 per share for the quarter, which is not reflected in our reported net spread and dollar roll income. Lastly, the average projected life CPR of our portfolio declined to 7.8% at quarter end from 8.3% as of Q1, consistent with higher mortgage rates. Actual CPRs averaged 8.7% for the quarter, up from 7% in the prior quarter.

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

Thank you, Bernie. I'll provide a brief review of our portfolio before taking your questions. Trade, fiscal and monetary policy uncertainty caused Agency MBS spreads to widen across the coupon stack with higher coupon MBS performing slightly better than lower coupon MBS. MBS performance also varied considerably by hedge type and maturity as the yield curve steepened significantly during the quarter and swap spreads tightened 5 to 10 basis points. As a result, MBS hedged with longer-dated treasury-based hedges performed materially better than MBS hedged with short- and intermediate-term swap-based hedges. Our asset portfolio totaled $82 billion at quarter end, up about $3.5 billion from the prior quarter. The mortgages that we added were largely higher coupon specified pools with favorable prepayment characteristics.

As a result, the percentage of our assets with some form of positive prepayment attribute increased to 81%. Our aggregate TBA position remained relatively stable at about $8 billion, consistent with our preference for specified pools in the current environment. With both our pool and TBA activity concentrated in higher coupons, the weighted average coupon of our asset portfolio increased to 5.13% during the quarter. The notional balance of our hedge portfolio increased to $65.5 billion at quarter end. In duration dollar terms, our hedge portfolio consisted of 46% treasury-based hedges and 54% swap-based hedges. In summary, despite the second quarter volatility and elevated geopolitical and government policy risk that still remains, we continue to have a very positive outlook for agency mortgage-backed securities.

In fact, we believe the outlook actually improved in the second quarter due to 4 factors. First, MBS supply appears to be manageable as seasonality factors turn more favorable and the mortgage rate remains high. Second, the demand for MBS appears poised to grow as a result of anticipated regulatory changes and relative value attractiveness. Third, agency spreads appear to be stabilizing at historically cheap levels. And lastly, key policymakers appear to be taking a cautious do-no-harm approach to GSE reform while reaffirming the government's ongoing role in the housing finance system. Collectively, we believe these positive developments create a very favorable investment outlook for agency mortgage-backed securities as a fixed income asset class.

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

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

Just kind of digging into the last comments you made about the attractive environment. As you look at that environment and you look to continue to take advantage of that, do you think that, that comes in the form of looking to raise additional capital? Or is increasing leverage from kind of this this area where you've been for the past couple of quarters, a consideration as well?

Sure. Well, I appreciate that question. And as you mentioned, our outlook really is favorable as we sort of start the second half of the year given some of the developments of the second quarter, particularly related to the GSEs. I think it sets up a strong backdrop for agency mortgage-backed securities. But what we're seeing now is really some stabilization. And I do expect spreads to move sort of gradually tighter, but it doesn't seem to be a big catalyst for them to move sharply lower over the near term. And I say that because that's important. As Bernie mentioned, we haven't -- we've sort of taken a patient measured approach to the deployment of capital that we raised in the second quarter.

She mentioned that we deployed a little less than half of that. So -- from that perspective, we still have capacity to deploy those proceeds at what are still very attractive levels today, Agency mortgage-backed securities current coupon to a blend of swap rates is at about 200 basis points. That's about the upper end of the range over the last 4 years. And then, of course, to the extent that we have capacity at some point during the quarter to raise accretive capital and deploy those proceeds, we would certainly look to do that as well as a way of generating incremental value for our shareholders. But we can -- we feel like we're in a good position now to deploy capital at a sort of a patient measured pace. And I think these opportunities are going to be with us for a little while, but we could certainly also have the capacity to operate with slightly higher leverage. Bernie mentioned that our unencumbered cash position at the end of the quarter was at $6.4 billion or 65%. That's 2% higher actually than it was at the end of the first quarter.

So despite all the volatility, despite growing our portfolio by $3.5 billion, we still have actually more unencumbered cash as a percentage of our equity at the end of the second quarter. So we're in a good position, Doug, essentially to do everything that you just described. We'll let the market dictate the pace of that and then the levers that we pull as we see mortgage spreads develop. And we see the backdrop of some of this still ongoing political uncertainty get resolved, which hopefully will get resolved over the next couple of weeks with respect to government policy and tariffs. And then, of course, we have a little bit of uncertainty still ongoing with monetary policy, but those should be resolved really over the next month or 2. So we have a lot of capacity and a lot of flexibility to be opportunistic in this environment.

The next question comes from Crispin Love with Piper Sandler.

Peter, can you speak to your views on the core earnings trajectory and what that means for the dividend level? Core returns are high, spreads are pretty wide. swaps continue to roll off. But curious what you view to be the run rate for earnings and core returns over the near to intermediate term?

Yes. We've talked about our net spread and dollar roll income for a lot of quarters now in terms of it coming down to be more aligned with the economics of our portfolio as we see it. And obviously, there's a lot of considerations when you're looking at net spread and dollar roll income in terms of the way accounting works for asset yields and for hedge costs. And it doesn't reflect necessarily the long-term ongoing economic earnings power of your portfolio. It's a current period earnings measure. So you have to look at it in that context. But that said, it has come down more in line with the economics of our portfolio today, and I'll share with you a couple of points.

One, if you look at that $0.38, that $0.38 in terms of a return on equity is, I think, in the 19.5% type range. I don't know exactly what that number, but something in the 19%, 19.5% range. I point that out because if you look at where mortgage valuations are today, that number I just talked about with current coupon to a blend of treasury rates and a current coupon to a blend of swap rates, current coupon to treasury rates right now at about 160 basis points, a blend of rates across the curve from 3 years to 10 years and 200 basis points to swaps. So you're looking at about 180 basis point return spread in the current environment. Leverage the way we leverage our portfolio, that translates again to about a 19-or-so percent ROE for marginal investments. So I would say that the environment that we're in right now, given where spreads are, I would call it in the high teens, somewhere between 18% to 20% returns. That aligns with our net spread and dollar roll income. But there's going to be period-to-period volatility in that number.

Bernie mentioned it came down this last quarter because of the slow pace of deployment primarily of the proceeds of the capital that we raised. And obviously, as we deploy that, that will sort of eliminate that drag that we were -- that we saw in the second quarter. But also, there will be a continued drag from our swap hedges rolling off. We had about $5 billion roll off in the second quarter. We replaced $2.3 billion of those. So over time, our swap cost will go up. I expect our repo cost to come down over time, particularly as the Fed eventually gets back into easing. And I expect our asset yields to gradually rise. They're still below market. So there's a bunch of different factors, but I would say our net spread and dollar roll income should stay generally in the kind of range that we're seeing, maybe high -- mid- to high 30s to low to mid-$0.40s range. I gave you a lot there, but I hope that answers your question.

Absolutely. No, that was very helpful, Peter. And then just following up on Doug's issuance question and comments you've made about deployment. You raised accretive capital, deployed about 50% of that in the second quarter. I believe that was a comment or it might be 50% to date. But can you just share where you stand today? How much more have you deployed since quarter end? And then just where are the best opportunities, coupons, investments, et cetera? And then just given the outsized issuance in the second quarter, would you expect issuance in the third to come down versus historical levels?

Say that last part again? -- the issuance?

Yes. Just given the issuance that you did in the second quarter, more elevated just with what you have to still deploy, would you expect lower issuance compared to historical levels?

Yes. I'll start with that one first, and then we'll go back. You give me a lot there. Again, it's going to be opportunistic. And I think we're in a good position to be patient with respect to our raising of capital. We really like the opportunity in the second quarter, particularly because there was so much volatility and we were able to raise it accretively. It gave us a lot of additional liquidity, if you will, to withstand further disruptions should they have occurred and then also allowed us to deploy those proceeds. So I wouldn't say that the second quarter is indicative of future quarters. We'll have to just take those as they come. Tell me -- repeat the first part of your question for me.

Yes. So you talked about deploying 50% of the capital. Just the timing of that, was that in the second quarter or to date? And I'm just curious where you are right now.

Bernie was in the second quarter, but she did mention that we have continued to deploy. We purchased about $1 billion worth of mortgages earlier this month. So we still like the market. We are still deploying capital at a very sort of disciplined measured pace. And in terms of where we like, as I mentioned, we continue to really favor the sort of upper coupons, particularly in specified pools with higher coupons, call it, in the 5% to 6% range, specified pools with some form of favorable prepayment characteristic. We like the yield profile there, and we like the prepayment protection we can buy with certain characteristics.

The next question comes from Trevor Cranston with Citizens JMP.

Another question on the capital raising. Obviously, for the last several quarters, you guys have been able to do a decent amount at pretty accretive levels. And obviously, there's a lot of benefits to being able to issue so accretively. I guess big picture, can you kind of give us an update on your thoughts as to how you think about kind of the optimal size of the company and particularly if you're continue to be able to issue accretively for the foreseeable future?

Yes. That's a great question, and it's one that we've talked about periodically. I would start by saying we're not growing for the sake of growing. We're growing because we can raise this capital accretively to the benefit of our existing shareholders and deploy those proceeds in a way that's supportive of our dividend. And to the extent that we can continue to do that, we would certainly look to continue to take advantage of that opportunity. And further, I would say that there are significant benefits of the scale that we operate. So first, if you look at our operating cost this last quarter, it was 111 basis points. So I think we're the lowest operating cost in the industry, but that's certainly very compelling. So that's one point. The other is that I think you're also seeing tremendous liquidity in our stock, which is also really valuable for shareholders. We are obviously now concentrated our portfolio in agency or agency-like securities.

So investors who want to get this exposure have a way now to buy our stock in a very liquid form. Our market -- our common equity is over $8 billion. So we have a lot of liquidity in our stock. It's very easy for investors who want this fixed income exposure in their portfolio to buy our stock in a very liquid way. So that's also very beneficial. And then the last point with respect to size from a positive perspective is that clearly, as we grow in size and our outstanding market cap, if you will, grows in size, it does make us more accessible for other indexes to add us as we grow in size. So there's that sort of virtuous benefit of growing in size and having more liquidity and being added to more indices and so forth. So those are the positives that we look at. On the negative, I would say that there are market capacity constraints, if you will, that we're very cognizant of in terms of size. The liquidity in the fixed income market, as I've talked about a lot in the past, is not as good today as it was 10, 15 years ago, pre-great financial crisis.

So we are very cognizant of the size of our asset portfolio, the ability to transact both in the hedge market and in the asset market. And those are considerations on the other side of that equation. So we're trying to find that perfect efficient frontier, if you will, between all of those various points but there's a lot of benefits to it and I think investors now are seeing it in size and scale and liquidity, but we're also cognizant that there's a limit to how big we will be.

The next question comes from Bose George with KBW.

First, given the level of swap spreads, how do you see the appropriate balance between swap hedges and treasury futures? And then when you gave the ROE number that 19-plus is that kind of reflect the mix that you guys currently have in the portfolio?

It does. When I did that calculation on the ROE, I came to 180 basis points because I used a 50-50 blend. And that's probably the right blend for us we think long term meaning that there's a lot of diversification benefits that we like about having sort of an equal mix of treasuries and swaps. But that said, a little overweighted swaps still in aggregate. And if you look at the way we set our purchases in the second quarter, about 2/3 of the hedges were in swap-based hedges. So we're a little more overweight. As we go forward in the current environment, I would say at the margin, we would probably favor a little bit higher percent of swaps than the long-term 50-50 average because I do expect stability in swap spreads to sort of develop over time and I do expect some downward pressure -- I should say, upward pressure, meaning swap spreads should widen which will be beneficial to us as the supplemental leverage ratio reform actually takes place, likely by the fourth quarter, but maybe even in the third quarter.

And when you really look at what happened in the swap market in the second quarter. That was really one of the sort of the most important points about mortgage performance. I mean the move we saw in swap spreads with longer-term swap spreads moving almost 10 basis points narrower was really dramatic, and it's indicative of sort of the balance sheet constraints that still exist in the market today, swaps versus treasuries. We do expect that balance sheet pressure to ease as bank regulation is implemented and particularly the supplemental leverage ratio has changed. So over time, I think we'll benefit from this overweight right now in swaps. But 50-50 is probably the right long-term mix going forward.

Okay. Great. And then in terms of your CPR, so it looks like the lifetime CPR declined. Does that just reflect the market expectation on rates?

Exactly right. And particularly, if you look at what happened in the second quarter with respect to the yield curve steepen. And there was -- when you look at -- when you look at what happened at 10-year, 10-year was almost unchanged over the quarter. I mean I think it was up 2 or 3 basis points. We had a big rally, 17 basis point rally in 2 years. But the back end of the yield curve was really the story and that was a particularly sort of negative event for mortgage portfolio. I try to point that out in my prepared remarks because the 20- and 30-year parts of the curve moved higher, the 30-year moved higher by 21 basis points and mortgages do have key rate duration out there and the propagation of mortgages is effect, the mortgage rate, the propagation of mortgage is affected by that 30-year move.

So in a sense, forward mortgage rates were pushed higher in the second quarter by that movement in the 20- and 30-year part of the curve. And so that's what led to the lifetime CPR change. So that's something to watch because most portfolios ourselves included, don't typically hedge the very long cash flows in a mortgage. We hedge really, as you well know, predominantly, in the intermediate part of the curve, maybe out to about 15 years. The back end is so idiosyncratic, it's -- and it's difficult to hedge from a mortgage perspective. So most of our hedging is concentrated in the 10-year part of the curve to cover that long duration. So to the extent that the curves moves significantly, that could be a driver of mortgage performance.

The next question comes from Jason Weaver with Jones Trading.

Despite the relative value implications we mentioned, I know we've been talking about the level of MBS spreads for quite a while now, just given the wideness. Would you say this that -- would it be fair to say that spreads have been just a bigger secular trend over time just given that the level of vols come down but we're still here at 200 million over.

Yes. Yes and no. Clearly, we have established a new trading range. And certainly, over -- when you look back at mortgage spreads, I looked over the last 4 years, so taking out the actual COVID event, but since COVID, if you will, we are at the sort of high end of the range. And we sort of broke out barely in this last episode of that range and we got the 220 basis points on the as a closing mark versus swaps. But we are -- that range is still intact. So I would say that range for mortgages versus swaps is probably in the 160 to 200 basis point range. And I would say that range versus treasuries is in call it, 160 to maybe 120 basis point range. I think that's the new norm.

And I think in the current environment, we're going to stay maybe in the upper half of that range because of the geopolitical and the fiscal policy and the monetary policy uncertainty. But I don't see a lot of catalysts for us breaking out of that range. And that, I think, is the important development over the second quarter. Clearly, there was significant tariff-related market stress that we got through, that's important. But also the one other big catalyst that could have sort of redefined the trading range, Jason, was GSE reform because there was so much under as to how that may play out. I think the key policymakers did a really, really good job of explaining their thought process and their approach and what was meaningful to them in terms of preserving the very special attributes that the market has today. And I think that takes of that upward spread pressure out of the equation.

So I think you're right, we're in a new range, but I think we're at the top of the range. And I don't expect it to continue up, I expect it to stay in this range and move lower.

Got it. That's helpful. And then just another 1 on the capital deployment progress in 2Q and even currently. 895830 How are you looking at relative value within the specified pool product just among the different sort of warehouses there.

Yes. Well, I gave a measure in my prepared remarks that about 81% of our portfolio has what I call some form of positive prepayment attribute. And then one of our tables, I think at the beginning of our presentation on the asset portfolio, we have another called high-quality specified pools, that's about 41%, I believe, the number was. The point is that we believe there's lots of attributes out there beyond just the typical high-quality attributes like low loan balance that can translate to really good mortgage performance and more stable cash flows. They include characteristics like FICO and LTV in geographies where taxes are recording or LTV characteristics or house price characteristics, loan type, whether it's primary residence or a second or an investor. So we think there's a whole bunch of other characteristics. So that's why we like adding specified pools, particularly the higher coupons, as I mentioned, where there's a significant yield pickup but also we know we're taking a more there's more convexity risk there.

But by buying some of these characteristics, particularly in the current environment where house prices are sort of stabilizing and maybe moving lower in particular areas -- we think there's a lot of value to adding those specified pools or pools with those kind of characteristics. The other thing I would say is in the current environment, and we saw this in the second quarter, there is some specialness, some fit to TBA position in terms of the role -- implied role financing levels, particularly for certain coupons in Ginnie Mae securities that make up most of our long position. But there isn't a lot of benefit for conventional TBA positions right now. There's no real funding advantage there. So given that we prefer to have these higher coupon specified pools rather than a TBA position in the current environment.

The next question comes from Jason Stewart with Janney.

So it appears to us like the curve trade is pretty crowded trade. And we've talked about hedges, but could you go through a little bit more on the asset side? I think you started in response to Jason's question. In a post steepener trade, how do you position the -- and is there enough flexibility? How do you position the asset side of the balance sheet in terms of coupons, et cetera, to optimize returns going forward?

Yes, there's certainly a lot of flexibility. I mean -- and you see us shifting our coupon position quite significantly quarter-over-quarter. There's lots of liquidity and capacity to do that. shifting between TBAs and specified pools. The characteristics that we talked about change our profile. So there's lots of ways on the asset side for us to do that, particularly if we have a TBA position, we could do that. We can move from TBAs to pools and different coupons. So as the yield curve changes, we can certainly change the asset side of our equation. And as you point out, it's really, it's really going to be driven by hedge location. That's really critical and we have a lot of capacity to do that. But most of our hedges are concentrated in the, call it, 7- to 12-year range. I think about 83% of our hedge duration is greater than 7 years.

And what that tells you is that when you think of our asset key rate duration profile and then you overlay our hedge profile, given that concentration, 1 could conclude that we have positioned our aggregate portfolio to benefit when the yield curve steepens 2 years to 10 years. And so we have benefit and will continue to benefit. If 2-year rates come down and 10-year rate to stay the same or go higher, our aggregate portfolio, given our asset composition and our hedge composition would benefit in that scenario. And we do expect that steepening -- that curve steepening to continue, particularly in light of all of this pressure that we're seeing with respect to the Fed. The 2-year to 10-year part of the curve right now today, I think, is at about 52 basis points. And that's about 50 or 60 basis points flatter than the 25-year average. So I expect the 2-year to 10-year part of the curve to deepen over time, and I expect our portfolio to benefit from that.

Got it. Okay. So perhaps too early to think about post deepen or trades. And then I apologize if I missed this in the comments of the questions. Did you give an updated estimate for book value quarter-to-date?

Yes. Bernie mentioned at the end of last week, it was up about 1%.

Nothing -- end of last year yes, okay.

Next question comes from Eric Hagen with BTIG.

Just 1 for me. In the repo market. I mean do you see the government budget deficit being a risk to the repo market, assuming it means the government is going to be issuing a bunch of longer-term debt how do you think that might trickle down to driving spreads for wholesale funding and other repo venues that you guys are active in? And then, I mean, maybe most importantly, if we assume the Fed has the tools to control repo volatility, all else equal, I mean, does that support higher range for your leverage versus where you've operated historically? .

Yes. There's a lot there. So you might have to reask some of those questions. But first, I would say that I don't expect the treasury issuance or the deficit, certainly over the near term to have any impact on the repo market. And the Treasury Secretary has been really clear, and I think it's been really beneficial to the market for them to really give stability in the refunding announcement. And that's not going to change. I think they continue to say for several quarters. But I do expect the composition of their issuance change. I do expect them to issue more shorter term and less long term. They're very focused on the 10-year part of the curve in terms of that rate. And so there could be a little bit of crowding out of those bills get issued and some of that money comes out of the repo market. But I don't expect that to have any material really impact on pricing.

There's plenty of liquidity in the markets. There's $7 trillion of money in money market funds. There's plenty of liquidity there. The other thing that I would point out, and this is really important with respect to the Fed, they continue to make really positive changes to the repo market. And I expect; one, I expect quantitative tightening to essentially end relatively soon, although it may likely go through the end of the year. But it's clearly a ton of discussion. It was in the minutes last meeting, so I expect it to be ongoing, and I expect them to stop the runoff of their balance sheet. But they also made some changes, positive changes to their standing repo facility that may or may not be understood. One of them was at quarter end, say, increase the number of operations, they added an operation in the morning, which is beneficial to the market.

But the big change that the Fed is considering that has not yet been implemented is that it's likely that the Fed will join the FICC for transactions on its understanding repo facility. And if they do that, that would eliminate the balance sheet constraints that currently exist and make that program effective. So if they join the FICC and they've written about this widely. I think they are considering that it takes time that would really enhance the liquidity associated with the standing repo facility. So that would be a really positive development. And I suspect they'll be doing that in conjunction with the changing of the bill issuance. So I don't know if I covered all your questions, you can ask me again.

Yes, that was really helpful. I mean the second half of the question was just whether it the whole dynamic allows you guys to take more leverage or how you feel about your leverage, just given the support the Fed has for the repo market in general? .

It's certainly a consideration that doesn't make us feel like we got to take our leverage lower, I'll put it that way. Yes, I think that's what's unique about our asset class. It is -- I think it's the only fixed income asset class that lends itself to a levered investment strategy because of the liquidity and pricing transparency of our security. But most of as you point out, where the repo market is today versus where it was pre 2019 is so dramatically different this asset class from a funding perspective, Clearly, the treasury and the Fed in particular, is focused every day on the liquidity in the repo market for treasury securities and for mortgage-backed securities. And when they talk about balance sheet and ending their quantitative tightening. They are looking at that market every single day to determine whether or not reserves have hit the ample level or not. And so they are keenly aware of any repo pressure, and they will adjust as soon as they see that repo pressure, which makes us very confident in our funding. In addition, we, of course, have our captive broker-dealer and almost 30 individual counterparties. So we love that diversification as well.

Great perspective there. I appreciate that. Actually, a follow-up here. I mean some changes to the credit scoring at the GSEs, FICO, Vantage score. I'm sure you guys are up on that. Do you see that driving or changing the prepayment environment in any way? Like does it support lower mortgage rates for some borrowers who may have not had access under the prior scoring regime? .

Yes. It's funny. From our perspective, this seems to be getting more attention than it's really worth from an investor perspective. We -- obviously, this has been the Vantage alternative, the name -- that's the name of the alternative has been discussed, I think, for 10-plus years. From our perspective, yes, it will likely lead to borrowers having the capacity for a better, higher credit score, which ultimately could increase their capacity and lead to higher slightly higher prepayments, if you will. But from our perspective, as an investor perspective, it's not that significant and not that complicated. What we would need to know as an investor is; one, we need to know the source of the data of the GSEs given us FICO or Vantage. And then two, we need to have sufficient time to implement so that we can then quantify the impact. And we'll all adjust it for -- we'll all adjust for the difference in speeds once we have sufficient data between the 2 data sources.

Very helpful for you guys. .

Pit's also worth pointing out on that one. The Vantage score I think, has some benefit over FICO in that it includes rent payment history, whereas FICO did not. So I think it could provide investors sort of a more comprehensive picture on credit. .

The next question comes from Rick Shane with JPMorgan.

Look, historically, the case in the space is always higher rates, but as you know well, the existential risk is actually sharply lower rates and rapid repayments. The mortgage industry is evolving. Strategically, it's evolving. From a technology perspective, it's evolving. You have borrowers. I think there's an evolving cohort of borrowers with a lot of pent-up demand for refi. You guys talk about your prepayment protection. Is there a risk that there's been enough of a change in terms of the underlying factors that speeds in a -- and we saw this in December where speeds picked up very quickly based on a brief moving rate that the thesis behind the prepayment protection doesn't actually provide as much protection as you're assuming? .

Sure. There is a risk of that. And again, there's a lot there. So I think what you're describing is in a sense that market is becoming much more efficient technology, all the access, all those things are happening since it's making the prepayment curve, if you will, more steep, the S curve is more steep today than it was 5-plus years ago, pre-Covid certainly. And you're right, we have seen episodes where the mortgage rate has dropped very briefly in the windows, down around 6%, and we had a little bit of spike in prepayments. But it's also important to think about where the market is in aggregate. Today, with the mortgage rate at $675 million, there is only about 5% of the universe that has a 50 basis point incentive. And from our portfolio's perspective, as I mentioned, our average weighted average coupon is it, call. That's 60 basis points out of the money still. So you need a significant move in the mortgage rate to get a significant amount of prepayments.

Another point here, the mortgage rate would have to drop from 75 down to 5%. So you can about a dramatic movement in interest rates. In order for the market to have, I think at that point, we would have about 27% of the universe would be refinanceable. So it sort of bookends the issue for you. You're right, as we move down in mortgage rate and if we get down to [ 6 ], there is an of pools, particularly the post-2022 pools will prepay the -- those will prepay very fast. But in order for you to have a really significant sort of market-wide refinance you're looking at a dramatically lower mortgage rate, which is hard to envision. It's not impossible, but hard to envision in the context of all the other questions we had this morning where you're talking about deficit spending and pressure on interest rates and if the Fed were to ease and the Chairman Powell were to change and the yield curve steepened, all those things should keep the mortgage rate may be higher than it otherwise would.

But you're right, there's certainly that risk. And you're also right that there are characteristics that we believe are going to give us protection that may not give us protection. But you'll have to wait and see. And you also have to wait and see what happens with the GSEs. This is the other important point over time. The sort of footprint, if you will, may change. They may change their mortgage, the mortgage capacity to various borrowers. They may curtail some of the business they can do today make it curtailed over time as they shift more toward sort of a profitable profitability objective. And so that may limit borrowers' capacity to refinance that have a capacity today. Those loans may not be GSE eligible in a future state. We don't know that but we do know that there is some attention toward shrinking that capacity. And also, it's also important to point out that house prices seem to be topped topping is certainly slowing nationally. But at the regional level, there's real variation. And that, again, is going to translate into a change in the refinance capacity for borrowers. So there's a lot that you'll have to consider as we go to lower rates.

Peter, thank you so much for quantifying that. It's really helpful. And look, we've both done this long enough. You know it's not the punch you're looking for that hurts you. It's the that you're not looking for that does the damage. .

Agreed.

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

Just thinking through one more on leverage. As we think back to maybe early April, leverage sort of drifted up just by virtue of market price changes to, call it, high [ 779 ]. And then perhaps rebalanced throughout the quarter to end basically Q1 levels? How are you thinking about leverage, right? Are there certain sort of rebalancing triggers that you're looking at in shock scenarios? Is it preserving that unencumbered asset that you talked about? And then maybe if we look ahead in the, call it, near to intermediate term, given you have certainty in spread volatility, given all the positives on DFE reform. Could you -- would you be more comfortable with leverage shift up today than maybe a quarter ago? .

Yes, a lot there. So first, I would say, when you refer to rebalancing in the quarter, you're right, the biggest driver of the leverage, obviously, is the change in our book value in the second quarter and that's going to put upward pressure on our leverage. And what's important, though, and I pointed this out in my prepared remarks and this is key for a levered investment strategy. That's why I mentioned that we were able to navigate the quarter and not having to sell assets. So we rebalanced, if you will, our risk position by raising capital accretively and deploying that at a slow pace. And over time, as conditions change and we become more confident in the macroeconomic outlook, we can have more confidence to deploy all of those proceeds. But importantly, what we didn't have to do is you didn't have to sell assets. You didn't have to rebalance the asset side of our balance sheet, if you will, by selling assets when spreads were really wide. And doing that, you crystallize those losses. If you hold all of those assets and our existing shareholders will get the benefit of the recovery over time whenever that may happen.

That's really important from a risk management perspective and from a levered investment portfolio perspective. And that's why I pointed it out in my prepared remarks this time is that making sure that we have capacity to withstand those spread moves, gives us the ability to gain back that value by not having to sell assets. And you're right, over time, as the market sort of evolves, we look at today's environment and where we stand today. And what I was trying to communicate is that I'm more confident about the outlook today than it was in April. And that's important because we're at widespread I don't think spreads, while they could certainly widen, I don't think that they will stay wider if they do move wider for some macroeconomic reason. And over time, I think they can go lower. And that does inform us about our leverage, and it does give us more confidence. To the extent that we get more and more confident that mortgages are going to stay in a range or not break out to the upside of the range gives us more and more confidence that we could operate with higher leverage. But all that being said, if you look at our portfolio today, let's just say at about 7.5x leverage, we are able to generate really attractive returns that are consistent with our dividend and give us a lot of unencumbered liquidity and risk management capacity. And that's sort of the perfect of the 2 and we look to optimize those 2 things.

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, we appreciate everybody's time and participation on our call today, and we look forward to speaking to you all again at the end of the third quarter.

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