Q3 2023 AGNC Investment Corp Earnings Call

Good morning, and welcome to the H T M C investment Corp, third quarter 2023 shareholder call.

All participants will be in listen only mode should you need assistance. Please signal conference specialist by personal Starkey followed by zero.

After todays presentation, there will be an opportunity to ask questions. So that's a question you May press Star then one you touched on phone to withdraw your question. Please press Star then two please note. This event is being recorded.

I would now like to turn the computer Katie Turlington and Investor Relations. Please go ahead.

Thank you all for joining agency investment Corp's third quarter 2023 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 those forecast due to the impact of many factors beyond the control of a G. M C.

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 agencies periodic reports filed with the Securities and Exchange Commission copies are available on the Sec's website at SEC Gov.

Claim any obligation to update our forward looking statements unless required by law.

Participants on this call include.

Peter Federico Director, President and Chief Executive Officer.

Bernie Bell Executive Vice President and Chief Financial Officer.

Chris Shaw Executive Vice President and Chief Investment Officer.

Aaron Pas senior Vice President non agency portfolio management, and Sean Reid Executive Vice President strategy, and corporate development with that I'll turn the call over to Peter Federico.

Thank you Katie and good morning despite.

Despite signs of improvement early in the quarter the selloff in the bond market intensified in the third quarter.

Treasury supply concerns and the threat of overly restrictive monetary policy weighed heavily on investor sentiment and drove benchmark interest rates and interest rate volatility materially higher.

The treasury market continues to be in the midst of a historic multiyear repricing event.

To put the move in context, the increase in the 10 year Treasury yield over the last three years is the second largest ever recorded over such a short time period.

In percentage terms the treasury market has never experienced anything like this.

The Bloomberg long Treasury Bond index, which tracks maturities of 10 years or more has experienced a total return loss of close to 50% over the last two and a half years.

The loss equal to what the S&P 500 experienced following the dotcom bust in 2000.

The move higher in Treasury rates began relatively early in the quarter as supply expectations were revised materially higher due to the growing fiscal deficit.

The bearish sentiment accelerated late in the quarter following a hawkish message from the fed that short term rates would likely remain higher for longer.

In environments like this when treasury prices fall abruptly and the market struggles to find its new equilibrium agency MBS typically underperform.

That was indeed, the case in the third quarter as agency MBS performance relative to benchmark rates lagged meaningfully.

In aggregate agency MBS spreads to comparable duration treasuries widened 20 to 25 basis points across most of the coupon stack.

Since quarter end.

J C. M. B S have remained under pressure with spreads widening by a similar amount in October.

At this point agency MBS spreads are close to the widest levels reached during the height of the pandemic in March of 'twenty 'twenty.

The sharp steepening of the yield curve also caused agency MBS performance to vary significantly across the yield curve.

Agency MBS hedged with short and intermediate term instruments performed materially worse than agency MBS hedged with longer term instruments.

The volatile market conditions that we are now experiencing are a result of a complex set of domestic and global factors.

In addition, the fed is nearing a critical inflection point in monetary policy.

During these types of transitions economic data is highly scrutinized by the market. It can have an outsized impact on the trajectory of monetary policy.

Once the downward trend in labor and inflation data becomes certain.

A more favorable monetary policy stance will undoubtedly emerge.

As challenging as this period has been for all bond market participants.

The current investment opportunity in agency MBS on both an Unlevered and Levered basis is without question.

On an unlevered basis, new production par priced agency MBS.

Revised investors with the opportunity to earn a yield of close to 7% on a security that benefits from the explicit support of the U S government.

Importantly, this yield is now at least 150 basis points higher than every point on the treasury yield curve and materially above highly rated corporate debt instruments.

For Levered investors. In addition to the very compelling base yield of close to 7%. It is becoming increasingly apparent that a new trading range is developed developing for agency MBS, which materially improves returns.

Operator: Good morning and welcome to the AGNC Investment Corp. 3rd quarter, 2023, Cheryl Holder Call. All participants will be in listen only mode. Should you use assistance please signal conference specials by personal star key followed by zero. After today's presentation, there will be an opportunity to ask questions. So ask a question. You may press star than when you're touched on phone. To withdraw your question, please press star than two. Please note this event is being recorded.

Over the last six months the spread between current coupon agency MBS and a blend of five and 10 year treasuries has ranged between 150 and 195 basis points.

The average spend of 170 basis points and currently the spread is near the upper end of the trading range.

Katie Turlington: I will now like to turn the conversation to Katie Turlington and investor relations. Please go ahead. Thank you all for joining AGNC Investment Corp. 3rd quarter, 2023 earnings call.

Like all bond market participants are financial results have been negatively impacted by the unprecedented speed and magnitude of this fed tightening cycle. The rapid rise in long term interest rates the increase in interest rate and financial market volatility heightened geopolitical risk.

Operator: 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 for looking statements within the meaning of the private securities litigation reform act of 1995. All such for 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.

And growing U S government dysfunction.

As the fed recently stated however, this tightening cycle may be nearing its conclusion and the economic balance of risks is now two sided.

Although this process has taken longer and has been considerably more difficult than anticipated.

We continue to believe that a durable and very attractive investment environment is still ahead of us once the uncertainties associated with the current environment subside.

Operator: 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. These 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 display any obligations to update our sport looking statements and less required by law.

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

Thank you Peter.

For the third quarter, a GNC had a comprehensive loss of $1 two per share, resulting from the significant rate volatility and spread widening that occurred during the quarter.

Economic return on tangible common equity was negative 10, 1% for the quarter comprised of 36 cents of dividends declared per common share and a decline in our tangible net book value of $1 31 per share.

Operator: Participants on this call include Peter Federico, director, president and chief executive officer, Bernie Bell, executive vice president and chief financial officer. Chris Kuehl, executive vice president and chief investment officer, Aaron Tass, senior vice president, non agency portfolio management and Sean Reed, executive vice president, strategy and corporate development.

As of late last week, our tangible net book value was down about 11% for October.

Despite the decline in our tangible net book value leverage at the end of the quarter remained well contained at seven nine times tangible equity or only moderately higher than 7.2 times as of the end of the second quarter with our average leverage for the quarter.

Peter Federico: With that, I'll turn the call over to Peter Federico. Thank you, Katie and good morning. Despite signs of improvement early in the quarter, to sell off in the bond market intensified in the third quarter. As Treasury supply concerns and the threat of overly restrictive monetary policy weighed heavily on investor sentiment and drove benchmark interest rates and interest rate volatility materially higher. The Treasury market continues to be in the midst of a historic multi year repricing event.

Being seven five times compared to seven two times for the prior quarter.

Peter Federico: To put the move in context, the increase in the 10 year Treasury yield over the last three years is the second largest ever recorded over such a short time period. In percentage terms, the Treasury market has never experienced anything like this. The Bloomberg Long Treasury bond index, which tracks maturities of 10 years or more has experienced a total return loss of close to 50% over the last two and a half years.

Peter Federico: A loss equal to what the S&P 500 experienced following the .com bust in 2000. The move higher and treasury rates began relatively early in the quarter as supply expectations were revised materially higher due to the growing fiscal deficit. The bearish sentiment accelerated late in the quarter following a hawkish message from the Fed that short term rates would likely remain higher for longer. An environment like this when treasury prices fall abruptly and the market struggles to find its new equilibrium, agency MBS typically underperform.

Our liquidity also remained strong throughout the quarter and in line with our typical operating parameters as.

As of quarter end, we had unencumbered cash and agency MBS totaling $3 6 billion or 52% of our tangible equity.

And 80 million of unencumbered credit Securities.

During the quarter, we also issued $432 million of common equity through our aftermarket offering program, which at a significant price to book premium was accretive to our net book value.

Net spread and dollar roll income excluding catch up amortization was <unk> 65 per share for the quarter, a quarterly decline of two cents per share.

The decline was largely due to a 23 basis point decrease in our net interest spread to two to 303 basis points for the quarter driven by higher funding costs, which more than offset an increase in our average asset yield.

Lastly, the average projected life CPR on our portfolio at the end of the quarter decreased to eight 3% from nine 8% as of the second quarter.

Actual CPR for the quarter averaged seven 1% compared to six 6% for the prior quarter.

I'll now turn the call over to Chris <unk> to discuss the agency mortgage market.

Thanks, Bernie the start of the third quarter was relatively favorable for both U S Treasuries and agency MBS as inflation data continued to show a downward trajectory and regional bank sector stress fade into the background in fact treasury yields rallied and agency MBS tightened over the first few weeks of July.

This favorable sentiment shifted however, when the treasury released its borrowing estimate which was larger than anticipated. Following the September F. O M. C meeting the sell off in treasuries accelerated with five and 10 year treasury yields ultimately, increasing 45% and 73 basis points, respectively as of 930.

Peter Federico: That was indeed the case in the third quarter as agency MBS performance relative to benchmark rates lagged meaningfully. In aggregate, agency MBS spreads to comparable duration treasuries widened 20 to 25 basis points across most of the coupon stack. Since quarter end, agency MBS have remained under pressure with spreads widening by a similar amount in October. At this point, agency MBS spreads are close to the widest levels reached during the height of the pandemic in March of 2020.

With two year yields moving only modestly higher the yield curve steepened significantly during the quarter.

Against this challenging backdrop agency MBS underperformed, both treasury and swap based hedges with performance varied considerably depending on the hedge positioning on the curve Coupe.

Coupon positioning was also a significant driver of performance is lower and middle coupons materially underperformed production coupons.

Peter Federico: The sharp steepening of the yield curve also caused agency MBS performance to very significantly across the yield curve. Agency MBS hedged with short and intermediate term instruments perform materially worse than agency MBS hedged with longer term instruments. The volatile market conditions that we are now experiencing are a result of a complex set of domestic and global factors. In addition, the Fed is nearing a critical inflection point in monetary policy. During these types of transitions, economic data is highly scrutinized by the market and can have an outsized impact on the trajectory of monetary policy. Once the downward trend in labor and inflation data becomes certain, a more favorable monetary policy stance will undoubtedly emerge.

Our portfolio increased modestly from 58 to 59 billion as of September 30th within our agency Holdings, we continued to move up in coupon at more attractive yields and wider spreads during the quarter. We added approximately 10 billion and five and a half through six five apps versus lower coupons. We also converted a.

Oh portion of our TBA position to a mix of both high quality and low pay up specified pools.

Our remaining TBA position was largely comprised of Ginnie Mae TBA, given attractive valuations and better roll implied financing relative to U M. B S.

As of 930 of our hedge portfolio totaled $63 2 billion given the duration extension inter assets, we increased the duration of our hedge portfolio, primarily by adding treasury based hedges at the 10 year point of the curve.

Peter Federico: As challenging as this period has been for all bond market participants, the current investment opportunity in agency MBS on both an unlevered and levered basis is without question. On an unlevered basis, new production power priced agency MBS provide investors with the opportunity to earn a yield of close to 7 percent on a security that benefits from the explicit support of the than every point on the Treasury yield curve and materially above highly rated corporate debt instruments.

As a result, our duration gap remained low throughout the quarter and was 0.2 years at quarter end.

As of 930, approximately 70% of our hedge portfolio duration dollars or at a seven year or longer points on the yield curve with approximately 50% of our duration and treasury based hedges.

Looking forward our outlook for agency MBS is very favorable spreads have decoupled from treasuries and corporates due to supply and demand technical factors that we expect will ease overtime.

And as Aaron will describe in more detail spreads and other fixed income sectors are close to post Dfc long term averages while spreads on agency MBS are in the 95 plus percentile area.

Peter Federico: For levered investors, in addition to the very compelling base yield of close to 7 percent, it is becoming increasingly apparent that a new trading range is developing for agency MBS, which materially improves returns. Conference Over the last six months, the spread between current coupon agency MBS and a blend of five and ten year treasuries has ranged between 150 and 195 basis points. The average has been 170 basis points and currently the spread is near the upper end of the trading range.

This is especially remarkable given that the fundamentals for agency MBS have rarely looked as compelling as they do today organic agency supply is minimal prepayment risk is deeply out of the money in repo markets for agency MBS are deep and liquid.

With spreads as wide as they are today, we believe investors in agency MBS are well compensated for elevated rate volatility over the near term.

That being said geopolitical tensions have increase the near term risk quotient and why we believe we are in one of the most favorable earnings environments of our history, we will remain disciplined with respect to managing rate risk and leverage.

Peter Federico: Like all bond market participants, our financial results have been negatively impacted by the unprecedented speed and magnitude of this Fed tightening cycle. The rapid rise in long-term interest rates, the increase in interest rate and financial market volatility, heightened geopolitical risk and growing US government dysfunction. As the Fed recently stated however, this tightening cycle may be nearing its conclusion and the economic balance of risks is now too cited.

I'll now turn the call over to Aaron to discuss the non agency markets.

Thanks, Chris the significant interest rate volatility and a sharp move higher and yields by the end of the quarter had a more material impact on interest rate sensitive products and credit spreads.

Peter Federico: Although this process has taken longer and has been considerably more difficult and anticipated, we continue to believe that a durable and very attractive investment environment is still ahead of us once the uncertainties associated with the current environment subside.

Credit spreads were mixed in the third quarter and many sectors of the market generated slightly positive excess returns.

As a proxy for credit spread moves in Q3, the synthetic I G index was eight basis points wider.

The Bloomberg Iga index, representing spreads on cash bonds was actually two basis points tighter over the quarter.

<unk> outperformed mortgage spreads.

The majority of fixed income credit spreads are currently at valuations far from extreme levels. Unlike agency MBS.

Bernie Bell: With that, I'll now turn the call over to Bernie Bell to discuss our financial results. Thank you, Peter. For the third quarter, AGNC had a comprehensive loss of a dollar to per share, resulting from the significant rate volatility and spread widening that occurred during the quarter. Economic return on tangible common equity was negative 10.1% for the quarter comprised of 36 cents of dividends declared per common share and a decline in our tangible netbook value of a dollar 31 per share.

Taking a step back while MBS are near their widest spread since the G. F C by almost any measure.

<unk> spreads are roughly at their average over the past 15 years.

A brief overview of several consumer fundamentals suggest the weakening is developing albeit slowly.

Auto loans credit cards, and marketplace lending delinquencies have ticked higher.

Additionally, the resumption of student loan payments. This month will stretch a relatively broad segment of households, even further.

Bernie Bell: As of late last week, our tangible netbook value was down about 11% for October. Despite the decline in our tangible netbook value, leverage at the end of the quarter remained well contained at 7.9 times tangible equity or only moderately higher than 7.2 times as of the end of the second quarter. With our average leverage for the quarter, being 7.5 times compared to 7.2 times for the prior quarter. Our liquidity also remained strong throughout the quarter and in line with our typical operating parameters.

While excess savings numbers have been revised higher recently.

Lower income and renter households of likely drawn down a material amount of savings as a result of increased exposure to inflationary pressures.

Taken together the outlook for the consumer has declined and will contribute contribute to further economic slowdown.

That said, we expect a much more muted impact on the mortgage side due to the significant amounts of homeowners equity, resulting from several several years of strong HPA growth.

Turning to our holdings, our non agency portfolio was roughly unchanged in size and in the quarter at just over 1 billion in market value.

Bernie Bell: As of quarter end, we had unencumbered cash and agency MBS totaling 3.6 billion or 52% of our tangible equity and 80 million of unencumbered credit securities. During the quarter, we also issued $432 million of common equity through our at the market offering program, which at a significant price to book premium was accreted to our netbook value. Net spread and dollar roll income, excluding catch up amortization, was 65 cents per share for the quarter, a quarterly decline of 2 cents per share.

Within CRT, we turned over roughly 15% of the portfolio and continue to skew holdings to reposition into likely tender candidates or migrating further down the credit stack and seasoned and de Levered profiles.

The favorable technicals in the CRT market that we discussed on last quarter's call remain in place low issuance volumes, coupled with just the GSE desire to extinguish older credit protection via tender offers.

Bernie Bell: The decline was largely due to a 23 basis point decrease in our net interest spread to 303 basis points for the quarter, driven by higher funding costs which more than offset an increase in our average asset yield. Lastly, the average projected life CPR on our portfolio at the end of the quarter decreased to 8.3% from 9.8% as of the second quarter. Actual CPRs for the quarter averaged 7.1% compared to 6.6% for the prior quarter.

This drove further spread tightening on our CRT portfolio during the quarter.

The meaningful valuation improvement throughout this year has correspondingly led to lower expected go forward return expectations.

Nevertheless, the risk side of the equation has declined as we expect lower spread and price volatility for many of our CRT securities as certain segments of the of the market have become anchored to some degree with that I'll turn the call back over to Peter.

Thank you Aaron.

Before opening the call up to your questions I want to briefly discuss our current common stock dividend.

Chris Kuehl: I'll now turn the call over to Chris Kuehl to discuss the agency mortgage market. Thanks, Bernie. The start of the third quarter was relatively favorable for both U.S. Treasuries and agency MBS as inflation data continued to show a downward trajectory and regional bank sector stress faded into the background. In fact, Treasury yields rallied and agency MBS tightened over the first few weeks of July. This favorable sentiment shifted, however, when the Treasury released its borrowing estimate, which was larger than anticipated.

We do not provide forward guidance for our dividends, but I do want to share some thoughts on the dividend in the current environment.

Chris Kuehl: Following the September FOMC meeting, the sell-off and treasuries accelerated with five and ten year Treasury yields ultimately increasing 45 and 73 basis points respectively as of 9.30. With two year yields moving only modestly higher, the yield curve steeped significantly during the quarter. Against this challenging backdrop, agency MBS underperformed both Treasury and Swap-based hedges, with performance varying considerably depending on the hedge positioning on the curve. Coupon positioning was also a significant driver of performance as lower and middle coupons materially underperformed production coupons.

As I have mentioned many times one of the primary factors that we evaluate in setting our dividend is the economic return that we expect to earn on our portfolio.

At current M B S valuation levels.

You can think of this return is the mark to market return on our portfolio.

Given the significant spread widening that has occurred over the last two years and agency MBS.

And the subsequent decline in tangible net book value per share and stock price.

The dividend yield on our common stock has increased notably.

At the end of the third quarter the dividend yield on our tangible net book value of our common equity was close to 18%.

While this number is informative it does not include the benefit of our lower cost preferred equity, which is also permanent capital.

Including this preferred component our dividend yield on total equity, including both our contractual preferred stock dividends and our current common stock dividend was approximately 15% at the end of the third quarter.

Chris Kuehl: Our portfolio increased modestly from 58 to 59 billion as of September 30th. Within our agency holdings, we continued to move up and coupon at more attractive yields and wider spreads. During the quarter, we added approximately 10 billion and five and a half through six and a half versus lower coupons. We also converted a material portion of our TBA position to a mix of both high quality and low pay-ups specified pools. Our remaining TBA position was largely comprised of Genie May TBA, given attractive valuations in better role-emplied financing relative to UMBS.

Including our operating expenses the required yield on our total capital was just over 16%.

Said another way.

As of the end of the third quarter, we needed to earn a 16% return on our total tangible equity capital base of $6 9 billion.

In order to satisfy all of our operating cost and dividend obligations.

Chris Kuehl: As of 9.30, our hedge portfolio totalled 63.2 billion. Given the duration extension in our assets, we increased the duration of our hedge portfolio primarily by adding Treasury based hedges at the 10-year point of the curve. As a result, our duration gap remained low throughout the quarter and was 0.2 years at quarter end. As of 9.30, approximately 70% of our hedge portfolio duration dollars are at the seven-year or longer points on the yield curve, with approximately 50% of our duration in Treasury based hedges.

At current valuation levels. The expected Levered return on agency MBS, depending on coupon is in the mid teens to low 20% range before convexity and rebalancing costs.

The important takeaway from this analysis is that our common stock dividend remains well aligned with the return that we expect to earn on our portfolio at current valuation levels and operating parameters.

That said, we continuously evaluate our dividend as market conditions.

Chris Kuehl: Looking forward, our outlook for agency MBS is very favorable. Spreads have decoupled from Treasuries and Corpards due to supply and demand technical factors that we expect will ease over time. As Aaron will describe in more detail, spreads and other fixed income sectors are close to post-GFC long-term averages, while spreads on agency MBS are in the 95-plus percentile area. This is especially remarkable, given that the fundamentals for agency MBS have rarely looked as compelling as they do today.

Expected returns and risk management considerations are always changing.

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

We will now begin the question and answer session.

To ask a question press Star then one you touched on phone.

If you're using a speakerphone please pick up your handset before pressing the keys to.

To withdraw your question. Please press Star then two at.

At this time, we will pause momentarily to assemble our roster.

Chris Kuehl: Organic agency supplies minimal, prepayment risk is deeply out of the money, and repo markets for agency MBS are deep and liquid. With spreads as wide as they are today, we believe investors in agency MBS are well-compensated for elevated rate volatility over the near-term, term. That being said, geopolitical tensions have increased the near-term risk quotient, and while we believe we are in one of the most favorable earnings environments of our history, we will remain disciplined with respect to managing rate risk and leverage.

Our first question will come from Crispin Love with Piper Sandler you May now go ahead.

Thanks, Good morning, everyone. I. Appreciate you taking my questions first up can you just give us your updated thoughts on leverage just based on the pre announcement last week you were at I think about 8.2 times as of October 20th, but what are the ranges that you're comfortable operating at and what is the Max level that you would operate.

That before needing to bring it lower.

Sure. Thank you for the question and good morning, Chrisman Youre right. We reported that our updated leverage was as of about a week ago 8.2 up from 7.9 at the end of the quarter as we sit today, our leverage actually is more in line with where it was at the end of the quarter right around seven point.

Aaron Tass: I'll now turn the call over to Aaron to discuss the non-agency markets. Thanks, Chris. The significant interest rate volatility and the start move higher and yields by the end of the quarter had a more material impact on interest rates than the products than credit spreads. Credit spreads were mixed in the third quarter and many sectors of the market generated slightly positive excess returns. As a proxy for credit spread moves in Q3, the synthetic IG index was eight basis points wider while the Bloomberg IG index representing spreads on cash bonds was actually two basis points tighter over the quarter, both outperform mortgage spreads.

Eight and we're comfortable very comfortable operating in the current leverage range. Obviously mortgages are extraordinarily cheap we would love to operate with higher leverage given how cheap mortgages are but we also have to be very cognizant of the volatile market conditions that are broad.

Affecting all fixed income markets, particularly the treasury market.

Aaron Tass: The majority of fixed income credit spreads are currently at valuations far from extreme levels, unlike agency MBS. Taking a step back while MBS are near their widest spreads since the GFC by almost any measure, CDX IG spreads are roughly at their average over the past 15 years.

The other thing that I would also point out is as we disclosed in S. Bernie mentioned.

From a leverage perspective, and this gets to sort of your maximum leverage question, which is that we continue to operate with a very significant unencumbered cash.

Yeah, and security position as Bernie mentioned it was 52% at the end of last quarter, it's still in the mid fifties actually as we sit today. So we have a lot of capacity.

Aaron Tass: A brief overview of several consumer fundamentals suggests the weakening is developing albeit slowly. Auto loans, credit cards and marketplace lending delinquencies have picked higher. Additionally, the resumption of student loan payments this month will stretch a relatively broad segment of households even further. While excess savings numbers have been revised higher recently, lower income and renter households have likely drawn down a material amount of savings as a result of increased exposure to inflationary pressures. Taken together, the outlook for the consumer has declined and will contribute to further economic slowdown.

And we are waiting for the right opportunity and I think that opportunity ultimately will come as the market all the uncertainties that the market had to contend with in the third quarter subsided. So I can't give you an answer specifically on the maximum leverage because that's sort of an environmental question. It I'll have to.

No. It has to has to be consistent with the environment that we're in the volatility of interest rates the expectation about spreads where you are at spread levels, but right now given how cheap mortgages are obviously it is a good investment time ultimately we need some more stability overall in the financial markets, particularly from the fed.

Aaron Tass: That said, we expect a much more muted impact on the mortgage side due to the significant amounts of homeowner's equity resulting from several years of strong HPA growth. Turning to our holdings, our non-agency portfolio is roughly unchanged in size ending the quarter at just over a billion in market value. Within CRT, we turn to over roughly 15 percent of the portfolio and continue to skew holdings to reposition into likely tender candidates or migrating further down the credit stack in season and delivered profiles.

And stability in the interim in the Treasury market, So I'll pause there.

Thanks, Peter I'm, all very helpful. There and then just kind of on your point on how cheap mortgages or can you just given update on your outlook for spreads. They remain remained very cheap, but curious on your outlook and if it's changed at all over the last several weeks and months on spreads being range bound and your expectations.

Sir.

Yes, you know.

Aaron Tass: The favorable technicals in the CRT market that we discussed on last quarter's call remain in place. Low issuance volumes coupled with the GSE desire to extinguish older credit protection via tender offers. This drove further spread tightening on our CRT portfolio during the quarter. The meaningful valuation improvement throughout this year has correspondingly led to lower expected go forward return expectations. Nevertheless, the risk side of the equation as declined as we expect lower spread and price volatility for many of our CRT securities as certain segments of the market have become anchored to some degree.

There's a lot there's a lot to like about the mortgage market and in our prepared remarks I talked about the fact that the current coupon is close to 7%. So what I think is interesting about the mortgage by mortgage market right now from a return perspective is that it's highly appealing to a very broad cross section of investors.

<unk> from an Unlevered perspective agency MBS or offer extraordinarily value.

Almost 200 basis points over the treasury curve for security that is.

It has the guaranteed support of the U S government.

And if you look at agency MBS relative to corporates high grade corporates in particular, its a significant yield pick.

Peter Federico: With that, I'll turn the call back over to Peter. Thank you, Aaron. Before opening to call up to your questions, I want to briefly discuss our current commenced activity.

Pick up so I think its very attractive on an unlevered basis and as I mentioned in my prepared remarks, I do think that the agency MBS market from a spread perspective is starting to establish a new range, which I believe is somewhere if you think about it versus the five and 10 year Treasury current coupon as our starting point I think that ranges.

Peter Federico: We do not provide forward guidance for our dividends, but I do want to share some thoughts on the dividend in the current environment. As I have mentioned many times, one of the primary factors that we evaluate in setting our dividend is the economic return that we expect to earn on our portfolio at current MBS valuation levels. You can think of this return as the market market return on our portfolio. Given the significant spread widening that has occurred over the last two years in AGNC MBS, and the subsequent decline in tangible net book value per share and stock price, the dividend yield on our common stock has increased notably.

Now in the 150 to 200 basis point range and what's important about what Justin we just experienced in the third quarter.

Is that for now over the course of the last call. It 12 months, we've hit the upper end of that range on a number of occasions, three or four occasions, we hit the upper end of that range about a week ago and mortgages have sort of bumped off the top of the range and has started to come back down over the course of the last week finding there.

Peter Federico: At the end of the third quarter, the dividend yield on our tangible net book value of our common equity was close to 18%. While this number is informative, it does not include the benefit of our lower cost preferred equity, which is also permanent capital, including this preferred component, our dividend yield on total equity, including both our contractual preferred stock dividends and our current common stock dividend was approximately 15% at the end of the third quarter.

Putting in that I think is a really positive signal, but I do think mortgages in the <unk> over the near term will remain sort of in the upper half of that range, maybe 160 to 180 basis points seems to be a comfortable level right now given the amount of uncertainty and a sort of broader fixed income.

Market with respect to the fed and with respect to the treasury supply and given the elevated level of interest rate volatility, but over time as those uncertainties subside and as interest rate volatility comes down I think mortgages can move backed back sort of more comfortably in that range, but over the near term I think there's still a lot of.

Peter Federico: Including our operating expenses, the required yield on our total capital was just over 16%. Said another way, as of the end of the third quarter, we needed to earn a 16% return on our total tangible equity capital base of 6.9 billion in order to satisfy all of our operating costs and dividend obligations. At current valuation levels, the expected levered return on AGNC MBS, depending on coupon, is in the mid-teen to low 20% range before convexity and rebalancing costs.

Uncertainty, but I do I do I do take it as a positive sign that mortgages have bumped off the top of the range now on a number of occasions and have started to stabilize.

Thanks, Peter that's it for me I appreciate you taking my questions.

Sure. Thank you Chris.

Our next question will come from Rick Shane with Jpmorgan you May now go ahead.

Thanks, everybody and nice to talk to you this morning.

I'd like to talk.

I'd like to talk a little bit about the decisions.

Tactical decisions to sell securities during the quarter and are repositioning yourself within the stack.

Peter Federico: The important takeaway from this analysis is that our common stock dividend remains well aligned with the return that we expect to earn on our portfolio at current valuation levels and operating parameters. That said, we continuously evaluate our dividend as market conditions, expected returns, and risk management considerations are always changing.

Obviously, the market saw the substantial realized losses, and I guess to some extent.

Just by rotating within the stack, you're realizing losses, but as long as you're reinvesting further up the stack you will benefit from spreads tightening ultimately can.

Can you talk about that decision and can you also talk a little bit about the tax implications.

All of that trade.

Operator: With that, we will now open the call-up to your questions.

Yeah I appreciate that you know from US we don't really think about it from a realized or unrealized loss perspective at the end of the day. Our securities are all mark to market, one way or the other through our income statement, whether they're mark to market above the line or through our comprehensive income because we still have some securities that are available for sale.

Operator: We will now begin the question and answer session. To ask a question, we press star them when you're touched on phone. If using a speaker phone, please pick up your hands up before pressing the keys. So with prior question, please press star them too. At this time, we'll pause momentarily to assemble our roster.

But that's a relatively small component. So we don't think about those decisions is whether or not to realized or unrealized what we're trying to do throughout the quarter and we do. This every day is what is the right mix of securities that we believe is going to give us the best risk return trade off.

Crispin Love: Our first question will come from Crispin Love with Piper Sandler. You may now go ahead. Thanks, good morning, everyone. I appreciate you taking my questions. First off, can you just give us your updated thoughts on leverage just based on the pre-announcement last week. You were at, I think, about 8.2 times as of October 20th. But what are the ranges that you're comfortable operating at? And what is the max level that you would operate at before needing to bring it low?

Alright, and moving up in coupon has given us a lot of benefit not not the least of which is at the highest expected returns are in and.

The higher coupons. So we continue to do that during the quarter, we will likely continue to do that from a sales perspective, we're always looking to.

To put ourselves in a position from a risk management perspective that gives us the best the best positioned for the current environment. So we don't really think about and make decisions based on the tax implications or on the financial statement appearance. If you will of our decisions to buy or sell securities.

Crispin Love: Sure. Thank you for the question and good morning, Chris. You're right. We reported that our updated leverage was, as of about a week ago, 8.2 up from 7.9 at the end of the quarter. As we said today, our leverage actually is more in line with where it was at the end of the quarter, right around 7.8 and we're comfortable, very comfortable operating in the current leverage range. Obviously, mortgages are extraordinarily cheap.

Great no. It Peter it's helpful context, and again look you know we've had.

Experienced following you guys for very very long time.

When you were externally managed there were different potential incentives.

Crispin Love: We would love to operate with higher leverage, given how cheap mortgages are, but we also have to be very cognizant of the volatile market conditions that are broadly affecting all fixed income markets, particularly the Treasury market. The other thing that I would also point out is as we disclosed, and as Bernie mentioned, from a leverage perspective, and this gets to sort of your maximum leverage question, which is that we continue to operate with a very significant unencumbered cash and security position.

Associated with selling instruments at losses and even than.

You guys were very very.

Thoughtful about where you wanted to own what you wanted to own in the stack.

And I think that the the one question sort of emerges and it's pretty clear I think in looking at the balance sheet. These were not for sales can you talk a little bit of doubt you know what you saw during the quarter were there moments of distress, where you felt like you needed to do things that you didn't want to do.

Crispin Love: As Bernie mentioned, it was 52% at the end of last quarter. It's still in the mid-50s, actually, as we sit today. So, we have a lot of capacity, and we are waiting for the right opportunity. And I think that opportunity ultimately will come as the market, all the uncertainties that the market had to contend with in the third quarter subsided. So, I can't give you an answer. Specifically, on the maximum leverage, because that's sort of an environmental question.

So it's a great question and.

The first to answer that is absolutely not there wasn't a moment, where we felt like there was any forced action.

And what I would say is that if you think about our position over the course of the quarter.

We actually started taking steps because of the market actually sort of had a sort of a pronounced shift in sentiment that occurred late in July.

As Chris mentioned in his prepared remarks, the footings for the bond market was actually really positive for the first three weeks of July both in the Treasury market, where treasury rates. The lowest 10 year Treasury rate was July 19, and I think it was around 380 at that time so.

Crispin Love: It has to be consistent with the environment that we're in, the volatility of interest rates, the expectation about spreads, where you are at spread levels. But right now, given how cheap mortgages are, obviously, it is a good investment time. Ultimately, we need some more stability, overall, in the financial markets, particularly from the Fed and stability in the Treasury market.

Peter Federico: So, I'll pause there. Thank you, Peter. All very helpful there. And then, just kind of on your point on how cheap mortgages are, can you give an update on your outlook for spreads? They remain very cheap. But curious on your outlook, and if it's changed at all over the last kind of several weeks and months on spread being range bound in your expectations there. Yes, you know, there's a lot, there's a lot to like about the mortgage market.

As Chris mentioned mortgage spreads actually tightened for the first three weeks. So the market was on really good footing until the discussions from the fed started coming out about the term premium and then ultimately what really set the whole thing in motion was the move in treasury supply expectations about that so in August.

We're sort of illiquid and we were taking actions throughout that time to maintain the leverage that we were comfortable with our leverage really never got anything above what we just reported at eight point to our cash position throughout that time was in the in the high Fifty's.

At each month and just like it had been so we were never in a position where we were forced to do anything that we didn't want to on a day that we didnt want to but what I think you are getting that is the challenge that is starting to reveal itself in both the treasury market in the agency MBS market and in agency MBS market in particular and this is why.

Peter Federico: And in our preparatory marks, I talked about the fact that the current coupon is close to 7%. So, what I think is interesting about the mortgage right mortgage market right now from a return perspective is that it's highly appealing to a very large market. Very broad cross-section of investors from an unlevered perspective, agency, MBS, or offer extraordinarily value, you know, almost 200 basis points over the Treasury curve for security that has the guaranteed support of the US government.

I think agency MBS tend to underperform in the down trade like we just experienced is that the market is generally speaking very illiquid at times because the flows in the particularly in the agency MBS market and to an extent in the treasury market.

Peter Federico: So, and if you look at agency MBS relative to corporates, high grade corporates in particular, it's a significant yield and pick up. So, I think it's very attractive on an unlevered basis. And as I mentioned in my preparatory marks, I do think that the agency MBS market from a spread perspective is starting to establish a new range which I believe is somewhere, if you think about it versus the five and 10 year Treasury current coupon as our starting point.

Tend to be one way flows right now with the fed backing away.

And running off its balance sheet and given the constraints that have been potentially put on banks. It really leaves the money manager community as the key buyer or seller of securities and when you get into an environment like we got in in August and in September the <unk>.

Fixed income sentiment turned negative and bond fund flows turned to be outflows and when bond funds get outflow in redemptions. They just simply sell the most liquid securities that they can sell which or treasuries and agency MBS MBS and that's why as Aaron pointed out corporates didn't move very.

Peter Federico: I think that range is now in the 150 to 200 basis point range. And what's important about what just we just experienced in the third quarter is that for now over the course of the last call it 12 months, we've hit the upper end of that range on a number of occasions three or four occasions. We hit the upper end of that range about a week ago and mortgages have sort of bumped off the top of the range and it started to come back down over the course of the last week, finding their footing and that I think is a really positive signal, but I do think mortgages in the over the near term will remain sort of in the upper half of that range, maybe 160 to 180 basis points.

Much at all affect corporate spreads were relatively unchanged at look it looks like a great environment for corporates, yet the selling pressure from money managers was coming.

And sort of a one way flow that seems to have subsided that'll stop and the market can move very quickly the other direction. So.

For our for our portfolio. We tried to do is we try to take actions early on in these and sort of take smaller actions on time sort of delta hedge as we go and never be put in a position, where we're forced to delever and that certainly was not the case in the in the third quarter, we were operating with a position that we were comfortable operating with.

Peter Federico: It seems to be a comfortable level right now given the amount of uncertainty and the sort of broader fixed income market with respect to the Fed and with respect to the Treasury supply and given the elevated level of interest rate volatility. But over time, as those uncertainty subside and as interest rate volatility comes down, I think mortgages can move back, back sort of more comfortably in that range, but over the near term, I think there's still a lot of uncertainty, but I do, I do, I do take it as a positive sign that mortgages have bumped off the top of the range now in a number of occasions and have started to stable, of Life. Thanks, Peter. That's it for me. I appreciate you taking my questions. Sure. Thank you, Chris.

Throughout the quarter.

I guess the challenge of having permanent capital is that there are decisions that you have to make that someone who just is experiencing outflows doesn't have to.

No that's exactly right and that's the challenge and sometimes you have to make decisions. For example, we made decisions to sell some securities which.

Unfortunately, you don't like to do because they are cheap, but there'll also be come a time, when we're comfortable adding more securities and the outlook from a spread perspective will be a lot better than it was at times during the third quarter and maybe some of that improvement is starting to reveal itself right now.

Rick Shane: Our next question will come from Rick Shane with JP Morgan. You may now go ahead. Thanks, everybody, and nice to talk to you this morning.

Thank you I apologize ive taken too much time. Thank you guys no I appreciate the question Richard.

Peter Federico: I'd like to talk a little bit about the decisions, the tactical decisions to sell securities during the quarter and reposition yourself within the stack. Obviously, the market saw the substantial realized losses, and I guess to some extent, just by rotating within the stack, you're realizing losses, but as long as you're reinvesting further off the stack, you will benefit from spreads tightening ultimately. Can you talk about that decision, and can you also talk a little bit about the tax implications of that trade?

Our next question will come from Trevor Cranston with JMP Securities.

You May now go on a trip.

Hey, Peter good morning.

Question.

Talked about the sort of new trading range youre seeing for spreads.

Could you maybe talk about sort of how much conviction you have in that.

The upper upper range of spread.

Given the sort of weak demand picture in particular for MBS at the moment.

If we were to see for example, like another significant move higher in the 10 year.

Peter Federico: Yeah, I appreciate that. We don't really think about it from a realized or unrealized loss perspective. At the end of the day, our securities are all marked to market one way or the other through our income statement, whether they're marked to market, above the line or through our comprehensive income because we still have some securities that are available for sale. But that's a relatively small component. So we don't think about those decisions as whether or not to realize or unrealize what we're trying to do throughout the quarter, and we do this every day, is what is the right mix of securities that we believe is going to give us the best risk return trade off?

Who do you think the buyer could be that steps into sort of campaign or additional one thanks.

Yeah I appreciate the question.

You're right I do have growing conviction that the upper end of the range can hold but that doesn't mean that it's not going to be breached, but what we're seeing as you point out is that when particularly in the events of the third quarter were not a mortgage related event. It was a it was a follow on effect coming from.

All of the challenged it challenges at the Treasury market was facing when it came to supply when it came to run off when it came to bank constraints.

Peter Federico: And moving up in coupon has given us a lot of benefit, not the least of which is that the highest expected returns are in the higher coupon. We continue to do that during the quarter. We will likely continue to do that from a sales perspective. We're always looking to put ourselves in a position from a risk management perspective that gives us the best position for the current environment. So we don't really think about and make decisions based on the tax implications or on the financial statement appearance, if you will, of our decisions to buy our sell securities.

Government potential government shutdown there was a lot of challenges that the treasury market had to contend with.

And those can those can come back and we can have more of those challenges.

And that could lead to further weakness in agency MBS. So there are there's certainly the possibility that mortgage spreads could widen from here.

Lip side of that though is that I don't think even a widening would be sustainable meaning that when you think about the fact that the agency MBS security today post great financial crisis.

Peter Federico: Great. No, Peter, a helpful context. And again, look, we've had the experience of following you guys for a very, very long time. And when you were externally managed, there were different potential incentives associated with selling instruments at losses. And even then you guys were very, very thoughtful about where you wanted to own what you wanted to own in the stack. And I think the one question that sort of emerges and it's pretty clear, I think, in looking at the balance sheet, these were not for sales.

Has the full support of the U S government.

It just doesn't make sense to me why that credit quality security is trading 200 basis points over.

The U S Treasury and I think over time investors will rotate into that security, particularly on an unlevered basis and I think this gets to your question the marginal demand for agency MBS over the foreseeable future and particularly now with the 10 year being close to 5%.

Peter Federico: Can you talk a little bit about what you saw during the quarter where there are moments of distress where you felt like you needed to do things that you didn't want to do? That's a great question. And the first answer that is absolutely not. There wasn't a moment where we felt like there was any forced action. And what I would say is that if you think about our position over the course of the quarter, we actually started taking steps because the market actually sort of had a sort of a pronounced shift in sentiment that occurred late in July.

And.

Agency MBS being close to 7% the rotation in fixed income is going to come from Unlevered money coming out of other fixed income products like.

Like investment grade corporate debt.

That gives you a lower yield and more risk the rotation will come from corporates and the rotation will come from equities as we enter a period, where the economy is slowing and ultimately that's going to be the marginal demand for U S. Treasuries and agency MBS Securities and agency MBS Securities in particular will benefit that the.

Challenges that does take time to happen people have to physically move money from one security to another the agency MBS market is a little more difficult for investors to access.

Peter Federico: And as Chris mentioned in his preparatory marks, the footing for the bond market was actually really positive for the first three weeks of July, both in the treasury market where treasury rates below a 10 year treasury rate was July 19. And I think it was around 380 at that time. So, and as Chris mentioned, mortgage spreads actually tightened for the first three weeks. So the market was on really good footing until the discussions from the Fed started coming out about the term premium and then ultimately what really set the whole thing in motion was to move in treasury supply and expectations about that.

But ultimately that's why I think the upper end of the of the spread range will hold and ultimately I think I think a 200 basis points, that's excessive incremental return for agency MBS.

Got it okay that makes a lot of sense. Thank you.

I appreciate the question Truman.

Our next question will come from Bose, George with K B W.

You May now go ahead.

Peter Federico: So in August, things were sort of ill-liquid and we were taking actions throughout that time to maintain the leverage that we were comfortable with. Our leverage really never got anything above what we just reported at 8.2. Our cash position throughout that time was in the high 50s at each month and just like it had been. So we were never in a position where we were forced to do anything that we didn't want to on a day that we didn't want to.

Everyone. Good morning.

Peter did they come in thanks for the comments on the dividend in terms of the ROE that you noted there I mean is it in other way to kind of think about it is but I look for us to look at the leverage on the common so.

You can do the math of the 180 basis points or whatever that spread is.

Should be thinking really about not the 7.9 at risk leverage, but you know sort of adding the leverage that's given by a preferred and that kind of gets us to more like a higher high teens Roe.

Peter Federico: But what I think you are getting at is the challenge that is starting to reveal itself in both the treasury market and the agency MBS market and an agency MBS market in particular and this is why I think agency MBS tend to underperform in the down trade like we just experienced is that the market is generally speaking very ill-liquid at times because the flows in the particular in the agency MBS market to an extent in the treasury market tend to be one way flows right now with the fed backing way and running off its balance sheet. And given the constraints that are being potentially put on banks, it really leaves the money manager community as the key buyer or seller of securities.

On your end, but that.

Right that would be an apples to apples comparison.

Doing it from that perspective, Yeah, you did and what I was trying to point out with that with my prepared remarks on the on the dividend is that.

It's important to look at if you're going to look at what can you earn its what are you. What's the right comparison to that and for US. So you got to look at it what can we earn on our portfolio versus our entire cost to capital.

And that's why it's important to you know because our preferred stock does give us a meaningful benefit given the fixed dividend of around 7% on that capital and obviously over time that relationship will continue to change right now we're operating with about 23, 24% of our <unk>.

Peter Federico: And when you get in an environment like we got in in August and in September, the fixed income sentiment turned negative and bond fund flows turned to be outflows. And when bond funds get outflow and redemptions, they just simply sell the most liquid securities that they can sell, which are treasuries in AGNC MBS. And that's why, as Aaron pointed out, corporates didn't move very much at all. In fact, corporate spreads are relatively unchanged.

Capital and preferred stock so.

But you're right that you did that if you did that calculation like you. Just suggested you would get our wheels in the low 20% range, which would align again very very well with the 18% that I referenced at the end of the third quarter.

Peter Federico: Look, look like a great environment for corporates, yet the selling pressure for money managers was coming in sort of a one way flow. That seems to have subsided. That'll stop. And the market can move very quickly, the other direction. So for our portfolio, we try to do is we try to take actions early on in these and sort of take smaller actions on time, sort of dealt the hedge as we go and never be put in a position where we're forced to deliver. And that certainly was not the case in the third quarter. We were operating with a position that we were comfortable operating with throughout the quarter.

Yeah, Yeah, Yeah that makes a lot of sense. Thanks, and then just to confirm the 11% decline in book value. That's after accruing for the dividend right. So it's like a 725 mark to market.

We all sit with the 11% as opposed to giving you a point estimate, but yeah that yeah that that doesn't.

And the estimate that obviously, what you can tell is that when we gave our numbers out a week ago by the way, we released them because that's typically when we would have released them. This this this call happens to be about a week later than it normally is for schedule of reasons.

But the market was in fact weaker a week ago. Then it was just last week as I mentioned mortgages have found some footing and have begun to improve and 11% is a reasonable number for right now.

Peter Federico: I guess the challenge of having permanent capital is that there are decisions that you have to make that someone who just is experiencing outflows doesn't have to. Well, that's exactly right. And that's the challenge. And sometimes you have to make decisions. For example, we made decisions to sell some securities, which unfortunately you don't like to do because they are cheap, but there will also be come a time when we're comfortable adding more securities.

Okay, great. Thanks.

Yeah. Thank you for the question Bose.

Our final question will come from Eric Hagen with <unk> you May now go ahead.

Hey, Thanks, Good morning, maybe just a follow up actually on the the structural leverage on the the mix between preferred and common and really just help just kind of how you think about that leverage.

Peter Federico: And the outlook from a spread perspective will be a lot better than it was at times during the third quarter. And maybe some of that improvement is starting to reveal itself right now. Thank you. I apologize. I've taken too much time. Thank you guys. No, appreciate the question.

You're comfortable with over may be shorter and longer periods of time, and even how you think about leverage kind of.

Retraced isn't it affects the valuation of the common stock and what you guys might be willing.

Trevor Cranston: Our next question will come from Trevor, Cranston with JMP securities. You may now go. Hey Peter, good morning. Question, you know, you've talked about the sort of new trading range you're seeing for spreads. Can you maybe talk about sort of how much conviction you have in that upper, upper range of spreads, you know, given the sort of weak demand picture in particular for a moment. Yes, at the moment. And, you know, if we were to see, for example, like another significant move higher in the 10 year. You know, who do you think the buyer could be as ducks and just sort of contain additional widening. Thanks. Yeah, I appreciate the question. And you're right.

Tolerate right now and over again kind of longer periods from that respect.

Yes. Thank you.

Over the longer run.

We've operated with our preferred mix right now in the low 20 range for the last several quarters to spend 20% to 23% at the end of last quarter. It's ticked up as did as the book value has declined.

Peter Federico: I do have growing conviction that the upper end of the range can hold, but that doesn't mean that it's not going to be breached. But what we're seeing as you point out is that when particularly the events of the third quarter were not a mortgage related event, it was a it was a follow on effect coming from all of the challenges that challenges that the Treasury market was facing when it came to supply, when it came to run off, when it came to bank constraints.

Been absorbed by the but the common that percent has gone up to around 24% and we're comfortable operating in that range I don't expect it to change much.

It does give us the benefit that you're talking about with respect to our overall cost of capital, but also importantly, and I think this sort of gets to part of your question.

When you think about our sensitivities and from a risk management perspective, the sensitivities that we disclosed for example, our interest rate sensitivity in our spread sensitivity is based on the common component of that so from a risk management perspective, we are looking at that sensitivity, obviously as a driver of how we're making decisions about our over.

We're all leverage position, our overall interest rate position and our overall liquidity position I think it's appropriate to think about your.

Your tangible at risk leverage as being based on your total capital base, because our preferred is permanent capital.

Peter Federico: Government, potential government shutdown, there was a lot of challenges that the Treasury market had to contend with, with. And those can, those can come back and we can have more of those challenges. And that could lead to further weakness in AGNC MBS. So there are, there's certainly the possibility that mortgage spreads could, could widen from here. The flip side of that though, is that I don't think even a widening would be sustainable, meaning that when you think about the fact that the AGNC MBS security today, post great financial crisis, has the full support of the U.S, government.

That we can use but I think from a risk perspective, you want to look to the sensitivity on your comment only and that's why we break it out that way.

Yep Yep I my sense Okay.

Just a question on the hedging here and how how you envision the headrick ratio getting just given the shape of the yield curve and maybe even anything you're looking for this week and the fed meeting, but can maybe change your posture towards taking a duration gap.

Sure.

Yeah, Let me, let me start with the with the with the.

Peter Federico: It just doesn't make sense to me why that credit quality security is trading 200 basis points over the U.S. Treasury. And I think over time investors will rotate into that security, particularly on an unlevered basis. And I think this gets to your question. The marginal demand for AGNC MBS over the foreseeable future. And particularly now, with the 10 year being close to 5% and AGNC MBS being close to 7%. The rotation and fixed income is going to come from unlevered money coming out of other fixed income products like like investment grade corporate debt that gives you a lower yield and more risk.

The hedging question.

No no.

What we're trying to do with our hedge portfolio. So you think about it at a high level, we're trying to achieve two two purposes.

And the two purposes are one is that you want if you want the right mix of hedges that you think gives you the best opportunity to offset the value changes to market value of your asset portfolio.

That's the way most people think about it but there's also another objective of the.

Hedge portfolio and that is to give you the most stable cost of funds.

In order to in order to have a very stable cost of funds you have to have essentially a 100% hedge ratio, meaning all of your short term debt is hedged with the same notional amount of hedges. So we're trying to find a mix to sort of achieve both of those purposes, because both of those both of those objectives are really important.

Peter Federico: The rotation will come from corporates and the rotation will come from equities as we enter a period where the economy is slowing. And ultimately, that's going to be the marginal demand for U.S. Treasuries and AGNC MBS securities and AGNC MBS securities in particular will benefit that. The challenge is that does take time to happen. People have to physically move money from one security to another. The AGNC MBS market is a little more difficult for investors to access.

When we think about the hedging the portfolio in the third quarter is a good example, because as both Chris and I mentioned in our prepared remarks, there was a lot of variation in mortgage performance across the yield curve because the 10 year moved up so much in the five year didn't move as much in the tank and the two year hardly moved when you think about the market value exposure.

Of a mortgage.

Peter Federico: But ultimately, that's why I think the upper end of the of the spread range will hold. And ultimately, I think I think at 200 basis points, that's excessive incremental return for AGNC MBS. Got it. Okay, that makes a lot of sense. Thank you. Appreciate question, Trevor.

You can think about that duration being broken down our cost of key rates. If you will two year part of the curve to five year part of the curve and the 10 year part of the curve.

For our portfolio for example, if you took our mortgage portfolio duration and you broke it down across the curve it would be something like 20% of the sensitivity of the mortgage would be to the two year and less about 30% around the five year and around 50% to the to.

Bose George: Our next question will come from Bose George with KBW. You may now go ahead.

Bose George: Everyone, good morning. The comment, thanks for the comments on the dividend. In terms of the ROE that you noted there, I mean, it's another way to kind of think about it is by look for us to look at the leverage on the comments. So, you know, if you do the math of the 180 basis points, what if the spread is, you know, we should be thinking really about not the 7.9 at risk leverage, but, you know, sort of add in the leverage that's given by a preferred and that kind of gets us to, you know, more like a higher high teens ROE on your investment.

To the back end of the curve. If you look at our hedge portfolio, often I think people look at the notional and they say well you're a GNC has a lot of short term hedges, we do from a notional perspective, 44% of our hedges for example, our three years and in <unk>.

When you think about the did the census, the market value sensitivity of our hedge portfolio only about 18% of the duration.

Of our portfolio is coming from the two year part of our curve. So we don't have a lot of interest rate sensitivity from our short term hedges effect we have.

Bose George: That would be an apples comparison. Doing it from that perspective. Yeah. And what I was trying to point out with my prepared remarks on the dividend is that it's important to look at, if you're going to look at what can you earn? It's, what are you, what's the right comparison to that? And for us, you got to look at it, what can we earn on our portfolio versus our entire cost to capital?

From a model perspective, if you will just the right amount of two year hedges. So we have 44% notional hedges, but only 18% of our of our hedged sensitivity comes from our two year part of the curve. So I point that out because as we think as you asked about the hedge ratio.

We've operated with a really high hedge ratio and a mix of hedges across the curve to try to achieve both of those those purposes. We've talked about for several quarters now that we've moved more and more of our hedges to the longer end of the curve in fact, Chris mentioned in his prepared remarks that 70% of the duration exposure of our hedge portfolio.

Bose George: And that's why it's important to, you know, because our preferred stock does give us a meaningful benefit given the fixed dividend of around 7% on that capital. And obviously, over time, that relationship will continue to change. Right now, we're operating with about 23 to 24% of our capital and preferred stock. So if you did that calculation, like you just suggested, you would get our reason to low 20% range, which would align, again, very, very well with the 18% that I referenced at the end of the third quarter.

Is seven years or more.

And we will continue to likely move more of our of our duration to the longer an intermediate part of the curve as we expect the yield curve to steepen as we expect the fed to pause and I think at this next meeting the fed will in fact.

Stay stay constant again, I think they'll they'll talk about the fact that the economy and in the end the outlook is continuing to move in their direction. So I don't expect the fed to to make any move at this meeting and in fact, I don't expect the fed to tighten at all anymore. I expect the next move from the fed to be an ease ultimately down the road.

Bose George: Yeah, that makes a lot of sense. Thanks. And then just to confirm the 11% decline in book value that's after recurring for the dividend, right? So it's like a 725 mark to market. Yeah, I'll stick with the 11% as a post to giving you a point estimate, but yeah, that does. And the estimate that obviously what you can tell is that when we gave our numbers out a week ago, by the way, we released them because that's typically when we would have released them, this this call happens to be about a week later than it normally is for scheduled reasons, but the market was in fact weaker a week ago than it was this last week, as I mentioned, mortgages have found some footing and have begun to improve. And 11% is the as a reasonable number for right now. Okay, great. Thanks. Yeah, thank you for the question, goes.

But as as the fed does get in fact closer to the pause point and reflect that in the market. Then ultimately I think you would expect us to operate with a lower hedge ratio over time as we want to benefit the portfolio from a decline in short term rates, but that I think is further further out.

Obviously, you know that it'll be something in 'twenty 'twenty, four where the fed actually starts to ease. So for now we like having more of our hedges in the longer part of the curve will likely do more of that shift and over time, I think you'll see our hedge ratio come down, but I wanted to give you that now sort of explanation on the key rates because I think it's important for people.

Eric Hagin: Our final question will go from Eric Hagin with BTIG. You may now go ahead. Hey, thanks. Good morning. Maybe just to follow up actually on the structural leverage and the mix between preferred and common and really just how to kind of how you think about that leverage and what you're comfortable with over maybe shorter and longer periods of time, and even how you think that leverage kind of. You know, retraces and affects the evaluation of the common stock and what you guys might be, you know, willing to tolerate, you know, right now and over again, kind of longer periods from that respect.

To understand.

What the notional of our portfolio means and what the duration dollar means.

Posture.

That's really helpful. Thank you guys. We appreciate it.

I appreciate it.

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

Well, we appreciate everybody's time on the call today, and we look forward to speaking to you again at the end of the fourth quarter.

You for participating.

Eric Hagin: Yeah, over the, thank you. Over the longer run, you know, we've operated with our preferred mix right now in the low 20 range for the last several quarters has been 22 23% the end of last quarter to kick up as did as the book value has declined. It's been absorbed by the by the common that percent has gone up to around 24% and we're comfortable operating in that range. I don't expect it to change much.

The conference has now concluded thank you for joining the call you may now disconnect.

Eric Hagin: It does give us the benefit that you're talking about with respect to our overall cost of capital, but also importantly, and I think this sort of gets to part of your question. When you think about our sensitivities and from a risk management perspective, the sensitivities that we disclose, for example, our interest rate sensitivity and our spread sensitivity is based on the common component of that. So from a risk management perspective, we are looking at that sensitivity, obviously, as a driver of how we are making decisions about our overall leverage position, our overall interest rate position and our overall liquidity position.

Eric Hagin: I think it's appropriate to think about your tangible at risk leverage as being based on your total capital base because our preferred is permanent capital that we can use. But I think from a risk perspective, you want to look to the sensitivity on your common only and that's why we break it out that way. Yep. Yep, that makes sense. Okay.

Peter Federico: Yeah, just a question on the hedge in here and how high you envision the head ratio getting just given the shape of the yield curve and maybe even anything you're looking for this week in the Fed meeting that can maybe change your posture towards taking a duration gap. Yeah, let me start with the hedging question. What are we trying to do with our hedge portfolio? Think about it at a high level.

Peter Federico: We're trying to achieve two purposes. And the two purposes are one is that you want to you want the right mix of hedges that you think gives you the best opportunity to offset the value changes, the market value of your asset portfolio. That's the way most people think about it. But there's also another objective of the hedge portfolio. And that is to give you the most stable cost of funds in order to have a very stable cost to find you have to have essentially a hundred percent hedge ratio.

Peter Federico: I mean, in all of your short term debt is hedged with the same a notional amount of hedges. So we're trying to find a mix that sort of achieves both those purposes because both those both those objectives are really important. When we think about the hedging the portfolio on the third quarter as a good example, because as both Chris and I mentioned that not prepared remarks, there was a lot of variation in mortgage performance across the yield curve because the tenure moved up so much in the five year.

Peter Federico: It didn't move as much in the 10th and the two year hardly moved. If you think about the market value exposure of a mortgage, you can think about that duration being broken down across the key rates, if you will, two year part of the curve, the five year part of the curve and the 10 year part of the curve. For our portfolio, for example, if you took our mortgage portfolio duration and you broke it down across the curve, it would be something like 20% of the sensitivity of the mortgage would be to the two year and last.

Peter Federico: About 30% around the five year and around 50% to the to the back end of the curve. If you look at our hedge portfolio, often I think people look at the notional and they say, well, you agency has a lot of short term hedges. We do from a notional perspective, 44% of our hedges, for example, are three years and in. But when you think about the market value sensitivity of our hedge portfolio, only about 18% of the duration of our portfolio is coming from the two year part of the curve.

Peter Federico: So we don't have a lot of interest rate sensitivity from our short term hedges. In fact, we have from a model perspective, if you will, just the right amount of two year hedges. So we have 44% notional hedges, but only 18% of our hedge sensitivity comes from our two year part of the curve. So I point that out because as we think, as you ask about the hedge ratio, we've operated with a really high hedge ratio and a mix of hedges across the curve to try to achieve both those purposes.

Peter Federico: We've talked about for several quarters now that we've moved more and more of our hedges to the longer end of the curve. In fact, Chris mentioned in his prepared remarks that 70% of the duration exposure of our hedge portfolio is seven years or more. And we will continue to likely move more of our of our duration to the longer and intermediate part of the curve as we expect the yield curve to steepen as we expect the fed to pause.

Peter Federico: And I think at this next meeting, the Fed will, in fact, Stay constant. Again, I think they'll talk about the fact that the economy and the outlook is continuing to move in their direction. So I don't expect the Fed to make any move at this meeting. In fact, I don't expect the Fed to tighten it all anymore. I expect the next move from the Fed to be in ease ultimately down the road.

Peter Federico: But as the Fed does get in fact closer to the pause point and reflect that in the market, then ultimately, I think you would expect us to operate with a lower hedge ratio over time, as we want to benefit the portfolio from the decline in short-term rates. But that I think is further, further out. Obviously, you know, that'll be something in 2024 where the Fed actually starts to ease. So for now, we like having more of our hedges in the longer part of the curve.

Peter Federico: We'll likely do more of that shift. And over time, I think you'll see our hedge ratio come down. But I wanted to give you that, that sort of explanation on the key rates because I think it's important for people to understand what the notional of our portfolio means and what the duration dollar means possible. That's really helpful. Thank you guys.

Operator: We appreciate it.

Operator: We have now completed the question and intercession.

Peter Federico: I'd like to turn the call back over to Peter Federico for closing remarks. We appreciate everybody's time on the call today, and we look forward to speaking to you again at the end of the fourth quarter. Thank you for participating.

Operator: The conference has now concluded. Thank you for joining the call. You may not.