Q4 2024 AGNC Investment Corp Earnings Call
Speaker Change: Good morning, and welcome to the AGNC Investment Corp. 4th Quarter 2024 Shareholder Call. All participants will be in listen-only mode.
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Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. And to withdraw your question, please press star then two.
Please note, today's event is being recorded.
Speaker Change: I would now like to turn the conference over to Katie Turlington in Investment Relations. Please go ahead. Thank you all for joining AGMC Investment Corp's fourth quarter 2024 earnings call.
Speaker Change: Before we begin, I'd like to review the Safe Harbor Statement.
Speaker Change: This conference call and corresponding slide presentation contain 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.
Speaker Change: All such board-looking statements are intended to be subject to the safe harbor protection provided by their format.
Speaker Change: Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of agency.
Speaker Change: 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.
Speaker Change: Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGMC's periodic reports filed with the Securities and Exchange Commission.
Speaker Change: 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 this call include
Peter Federico, Director, President, and Chief Executive Officer.
Bernie Bell, Executive Vice President and Chief Financial Officer.
Speaker Change: Chris Kuehl, Executive Vice President and Chief Investment Officer, Aaron Pas, Senior Vice President, Non-Agency Portfolio Management, and Sean Reed, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.
Peter Federico: Good morning, everyone, and thank you for joining our call. The favorable investment themes that emerged in 2024 continue to support our positive outlook for agency mortgage-backed securities.
Peter Federico: Last year, the Fed shifted its restrictive monetary policy stance and began the process of returning short-term rates to a neutral level.
Peter Federico: Declining inflationary pressures and accommodative monetary policy caused interest rate volatility to ease and the yield curve to steepen after being inverted for more than two years.
Peter Federico: As we begin 2025, the supply and demand outlook for agency MBS appears to be well-balanced.
Speaker Change: Against this improved investment backdrop, AGNC generated a positive economic return of 13.2% in 2024, driven by our compelling monthly dividend.
Speaker Change: Our performance last year demonstrates AGNC's ability to generate strong investment returns in environments where spreads are wide and stable.
Speaker Change: Since September, the Fed lowered short-term rates by 100 basis points as it recalibrated monetary policy.
Speaker Change: While the path of monetary policy continues to move toward a neutral level,
Speaker Change: Strong economic data late in the quarter extended the timeline, as evidenced by the Fed's December summary of economic projections, which showed fewer rate cuts in 2025 and 2026 relative to the September release.
Speaker Change: The U.S. presidential election also raised concerns about fiscal policy, deficit spending, and the magnitude of future Treasury issuance.
Speaker Change: This elevated monetary and fiscal policy uncertainty overshadowed the positive investment sentiment that characterized the first three quarters of the year.
Speaker Change: Together, the sharp increase in interest rates and modestly wider agency spreads drove our slightly negative economic return for the fourth quarter.
Speaker Change: As we begin 2025, our outlook for agency mortgage-backed securities continues to be very favorable.
Speaker Change: Despite significant monetary policy easing, longer-term interest rates have increased meaningfully and the 30-year primary mortgage rate is once again close to 7 percent.
Speaker Change: At this rate level, the supply of agency MBS this year should be similar to what we experienced last year and reasonably well aligned with investor demand.
Speaker Change: Greater bank demand is also possible given the likelihood of less onerous regulation.
Speaker Change: Lastly, agency mortgage-backed securities offer investors unique diversification benefits and an attractive return profile, but are difficult for many investors to access.
Speaker Change: AGNC's common stock provides investors an easy way to invest in this unique fixed income asset class on a levered and hedged basis, which is otherwise only available to institutional investors with sophisticated trading desks.
Speaker Change: So, in summary, the current monetary policy stance of the Fed provides a positive underlying investment foundation for high-quality fixed-income instruments like agency mortgage-backed securities, particularly at current valuation levels.
Speaker Change: The supply and demand outlook for agency MBS appears to be well-balanced with upside demand possible. And finally, we expect agency spreads to remain in their current attractive trading range.
Speaker Change: Collectively, these positive dynamics create a favorable investment backdrop for AGNC in 2025.
Speaker Change: With that, I'll now turn the call over to Bernie Bell to discuss our financial results in greater detail.
Thank you, Peter.
Speaker Change: For the fourth quarter, AG&C had a comprehensive loss of $0.11 per common share.
Speaker Change: comprised of $0.36 of dividends declared per common share and a $0.41 decline in our tangible net book value per share resulting from higher interest rates and modestly wider spreads for the quarter.
Speaker Change: As Peter mentioned, our full year economic return was a positive 13.2%, driven by our monthly dividend totaling $1.44 per common share and a $0.29 decline in tangible net book value per share.
Speaker Change: As of late last week, our tangible net book value for common share was up about 1% for January, or largely unchanged after deducting our monthly dividend accrual.
Speaker Change: In the fourth quarter, we opportunistically raised $511 million of common stock through our at-the-market offering program at a considerable premium to tangible net book value.
Speaker Change: This brought our total issuance of accretive common equity for the year to approximately $2 billion, delivering meaningful book value accretion to our common stockholders.
Speaker Change: Our average and ending leverage for the fourth quarter was unchanged at 7.2 times tangible equity compared to the third quarter. Additionally, we concluded the quarter with unencumbered cash and agency MBS of $6.1 billion, or 66% of our tangible equity.
Speaker Change: The average projected life CPR for our portfolio at quarter end decreased to 7.7 percent from 13.2 percent at the end of the third quarter, consistent with higher interest rates. Actual CPRs for the quarter averaged 9.6 percent, up from 7.3 percent in the third quarter.
Speaker Change: Lastly, net spread and dollar roll income declined by 6 cents to 37 cents per common share in the fourth quarter due to a 30 basis point narrowing of our net interest rate spread to just above 190 basis points.
Speaker Change: The decline in our net spread income and net interest margin was driven by a slightly higher pay rate on our interest rate swap portfolio.
Speaker Change: Timing differences between the receive rate on our interest rate swaps and our repo cost. And lastly, our shift toward a greater proportion of treasury-based hedges, which are not included in our reported net interest spread or net spread income.
Speaker Change: To enhance transparency, we have included additional details on our treasury position and associated carry components in our investor presentation and earnings release. We estimate that the carry on our treasury hedges was $0.04 per share for the fourth quarter.
Speaker Change: And with that, I'll now turn the call over to Chris Kuehl to discuss the agency mortgage market.
Chris Kuehl: Thanks, Bernie. The fixed income investment landscape in 2024 was shaped by economic data and evolving Fed policy expectations.
Chris Kuehl: leading to significant interest rate volatility. The fourth quarter was no exception, with strong economic data leading to renewed hawkish rhetoric from the Fed and the paring back of future rate cuts for market pricing.
Chris Kuehl: This evolving monetary policy outlook, combined with the general risk-off sentiment ahead of the presidential election, caused agency MBS to underperform SWAP and Treasury hedges, particularly in the month of October.
Chris Kuehl: Following the election, however, MBS spreads recovered somewhat, with the 30-year PAR coupon spread to a blend of 5- and 10-year Treasury hedges, ending the quarter 6 basis points wider.
Chris Kuehl: Performance across the coupon stack was mixed with higher coupon MBS performing the best while four-and-a-halves and lower coupons generally experienced the greatest under performance.
Chris Kuehl: During the fourth quarter, we added approximately $2 billion in agency MBS, and as a result, our investment portfolio totaled $73.3 billion as of December 31st. Our asset growth was concentrated later in the quarter at attractive spreads, and we've continued to add to the investment portfolio in the month of January.
Chris Kuehl: In terms of portfolio composition, we continued to move up in coupon, reducing holdings in four-and-a-halfs and lower coupons.
Chris Kuehl: by roughly $6 billion, while adding approximately $8 billion in 5% and higher coupons.
Chris Kuehl: As has been the case for several quarters now, our TBA position consisted primarily of Ginnie Mae TBAs, as valuations and role-implied financing levels remained attractive.
Chris Kuehl: Our non-agency securities portfolio ended the quarter at $884 million, down slightly from the previous quarter, with the composition of our holdings mostly unchanged.
Chris Kuehl: Given the meaningful backup in interest rates, associated asset duration extension, and portfolio growth, we added close to $12 billion in longer-term, mostly Treasury-based hedges during the quarter.
Chris Kuehl: As a result, our hedge ratio to funding liabilities increased materially to 91% and Treasury-based hedges as a percentage of our hedge portfolio represented 53%
Chris Kuehl: on a dollar duration basis as of quarter end. However, with longer-term treasury rates and swap spreads beginning to show signs of stabilization, our allocation to swap-based hedges will likely increase over the coming quarters. I'll now turn the call back over to Peter.
Peter Federico: Thanks Chris. Before opening the call up to your questions, I want to take a moment to discuss the US Housing Finance System and the status of the GSEs.
Peter Federico: The outcome of the presidential election has clearly reignited the market's interest in the GSE conservatorships and the nature of the government's involvement in the housing finance system.
Peter Federico: A number of proposals and opinion pieces recently have advocated for various outcomes ranging from ending the GSE conservatorships to maintaining status quo.
and ensures housing affordability does not decline further.
Peter Federico: To that end, some key policy makers have already signaled a desire to pursue any change in a careful, deliberate, and transparent way.
Peter Federico: The $7.5 trillion agency mortgage-backed security market is the cornerstone of this country's $14 trillion housing finance system.
Peter Federico: A system that is the envy of the world by providing the uninterrupted availability of the 30-year prepayable mortgage at uniform rates across the nation and throughout market cycles.
Peter Federico: The size of the agency market, the liquidity and financeability of these instruments.
their use as a monetary policy tool.
Peter Federico: and the existence of the TVA market and the important role it plays for mortgage originators and servicers all exist today because of the government's ongoing involvement and because of the actions that the government and the Fed have taken during times of stress.
Peter Federico: Moreover, the agency mortgage-backed security market is critical to facilitating home ownership, achieving the many societal benefits that accompany it, and doing so in a manner that is fair and equitable.
Peter Federico: Preserving these attributes and avoiding a disruptive outcome for the housing finance system, we believe, requires the ongoing involvement of the U.S. government.
Peter Federico: Changing the structure of the GSE hastily and without thoughtful consideration of the many complexities and interconnectedness of the current system would be unnecessarily disruptive and very harmful to housing affordability.
Peter Federico: That said, change done in a way that preserves the many highly desirable aspects of the current system.
Peter Federico: provides clarity regarding the form of the government's ongoing involvement and which is done in a way that protects taxpayer interests could be a very positive development for the agency mortgage-backed security market. With that, we'll now open the call up to your questions.
Peter Federico: Thank you. We will now begin the question and answer session.
Peter Federico: To ask a question, you may press star then 1 on your touch-tone phone.
Peter Federico: If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys.
To withdraw your question, please press star then 2.
Peter Federico: At this time, we will pause momentarily to assemble our roster.
Speaker Change: And today's first question comes from Boze George with KBW. Please go ahead.
Hey, everyone. Good morning.
Boze George: Actually, I wanted to ask first about equity issuance. Can you just talk about the potential magnitude of equity issuance this year, if spreads are similar, your book value premium remains the way it is, and just thoughts on is there a level, a balance sheet where it gets too big, or just conceptually how you're thinking about that?
Sure. I appreciate the call and the question, Boaz.
Boze George: As you know, we were active using our ATM this last quarter, and I'll start with talking about the approach this last quarter and how it was a little bit different than some of our previous quarters. I think it's informative to your question.
In this last quarter, for example,
The opportunity, the attractiveness of the equity issuance was...
Boze George: was more pronounced early in the quarter, whereas mortgages were more attractive later in the quarter. I point that out because...
Boze George: It differs a little bit from the previous quarters where we were very active in raising capital and deploying those proceeds almost simultaneously. This quarter, we took a more opportunistic approach in that the capital raises were done early in the quarter. And as Chris mentioned, some of our capital deployment was
Boze George: at a more gradual pace later in the quarter. It was one of the reasons why there was a little bit of a negative impact from a net spread and dollar roll income.
Boze George: Obviously, we'll look at the accretion benefit and book value benefit. You look back over the course of the year, it was
Boze George: ranging from 150 to 170 basis points depending on hedge mix and so forth. They're talking about attractive ROEs, particularly now that we've gone through some of the uncertainty of the fourth quarter.
The last point I'll make is that
Boze George: shareholders, great opportunity to enter our space in a very liquid, easy way.
So, there's no need...
Boze George: of our existing shareholders and approach that activity throughout this year just like we do every other year and do so very opportunistically.
Speaker Change: I'll pause there. Great, that's helpful. Thanks, Peter. And then, should we just help walk through the ROE map when you fund with treasury futures versus versus swaps because the obviously nominal nominal spreads are lower. So, you know, kind of the variables that go through, you know, one versus the other.
Speaker Change: Yeah, and that's a good point and I'll touch on a lot of points. In fact, one of the issues that I think, you know, our earnings measures have just generally, our net spread and dollar roll income, one of the reasons why we
Speaker Change: from a dividend perspective, it's a reflection of current period earnings, not the long-run earnings of our portfolio. So we look at the alignment of the mark-to-market, if you will, of our portfolio versus that.
Speaker Change: And then, of course, net spread and dollar roll income, as we define it, and I think most define it, only includes your swap-based hedges.
Speaker Change: We tried to add some disclosure to our presentation this quarter to give investors a little bit of a better understanding of the same sort of similar carry characteristics that occur with treasuries that occur with swaps.
Speaker Change: And the treasury market, when you use a treasury hedge, you're shorting a treasury. And then there's a receive, if you will.
Speaker Change: on your repo transaction. So it has the same concept as a pay and a receive. We added some disclosure to give investors a better understanding of that carry.
Speaker Change: So that's one point, the point number two is that to the extent that we use more treasury-based hedges
Speaker Change: There is less carry, less spread, if you will, between treasury-based hedges and mortgages.
Speaker Change: because of where swap spreads are today. And Chris talked about the fact our treasury-based hedges...
Speaker Change: are at really a high point. I think that 55% of our hedges were treasury-based hedges in the fourth quarter.
Speaker Change: our asset portfolio because swap spreads have tightened so dramatically over the last year. Ten-year swap spreads, for example, in the fourth quarter got to more than negative 50 basis points.
Speaker Change: So at a historical low. So treasury-based hedges were better from a market value perspective. To the extent that swap spreads begin to stabilize, and Chris mentioned that word that we're starting to see that stabilization, it will make sense for us to rotate into
Speaker Change: Swap-based hedges back to maybe toward our normal level which might be in the 70 to 80 percent range and in doing that We'll end up picking up additional carry as long as swap spreads stay stable. So
Speaker Change: I think that's the way to think about it when I talk about...
Speaker Change: spreads today on average, and I look at treasury, current coupon, for example, to treasury hedges, I would say they're likely in the 130 to 150 range, and current coupons to swap-based hedges, I would likely say that they will remain in sort of the 160, 180 range.
Speaker Change: So as we shift, that'll change that weight between those two and drive what our expected ROE is on a go-forward basis. So gave you a long-winded answer there, but I thought those points were important. Great, that's helpful, thank you.
Okay.
Speaker Change: Thank you. And our next question today comes from Doug Harder with UBS. Please go ahead. Morning, Doug.
Doug Harder: Good morning, Peter. I was hoping you could talk about your dividend outlook. I know you just mentioned that you don't view EAD as representative.
Doug Harder: but kind of how you're seeing the economics of the mark-to-market returns and how that compares to kind of the current dividend level.
Doug Harder: Sure, well the first thing we look at from a dividend perspective is what is the total cost to capital hurdle rate, if you will?
Doug Harder: versus our expected return at current valuation levels of the portfolio.
Doug Harder: When you think about the total cost of capital, I think that's really critical if you think about what is the cost to run our business, to pay our common dividends, to pay our preferred stock dividends, and our operating expenses.
Doug Harder: As the numerator in that equation, the denominator is our total capital base, which is about $9.2 billion. If you look at our actual expenses in the fourth quarter and annualize those versus our capital base, it would tell you that our hurdle rate is around 16.5%, maybe 16.7% to be precise.
Doug Harder: And the question is, what do we compare that to? And the relevant comparison...
Doug Harder: is what is our expected, if you will, gross ROE at current valuation levels? Using a combination of spreads, because they're obviously always changing as a single point instead, but I use a blended spread that is a blend between treasury-based hedges and swap-based hedges.
Doug Harder: I'll give you three points in time. 150 basis points, 160 basis points, and 170 basis points. They sort of have the range of those are spreads that I think are indicative of today's valuations.
Doug Harder: And those would translate to gross ROEs of somewhere between 17%, 18.5%.
Doug Harder: So said another way, if we were to deploy deploy capital today
Doug Harder: We would expect to earn spreads in that range, or ROEs, on a go-forward basis of somewhere between 17 and 18 and a half percent. And that aligns very well with our total cost of capital. That's one of the reasons why, in looking at it that way, we've been able to maintain our our current dividends. I think we're going on about 58 months, so.
Doug Harder: That's the way we look at it, and I think it's still well-aligned at today's valuations.
Doug Harder: I appreciate that and I'm just curious how you think about volatility and the cost of
Speaker Change: a volatility in that equation that you just walked through? Yeah, there's no doubt. And that's a point, that's for sure.
Speaker Change: Obviously interest rate volatility is a big driver of how your ex-ante returns will convert to ex-post returns. So will we have to spend a lot of money rebalancing or will we have to spend less money? It's one of the key
Speaker Change: The key drivers of, for example, our outlook for this year, I think interest rate volatility now that the tenure has backed up, and this is important, that the tenure has gotten back into a new trading range of, let's say, between 4.25% and 5%.
Speaker Change: It appears that interest rate volatility should remain relatively low going forward, given we've gotten through all of the quantitative tightening.
Speaker Change: and the dramatic shifts from the Fed. We have stabilization. We have a more accommodative Fed. We have a path for short-term rates that seems to be.
Speaker Change: fairly well telegraphed, those things should contribute to lower volatility going forward.
Speaker Change: At least that's our outlook right now, which should then translate to lower hedge costs on a go forward. But market conditions, market conditions obviously change. One other point that I would make there is that
Speaker Change: Our ability to raise capital, this is kind of a good...
Speaker Change: Tie back to the first question, our ability to raise capital at a creative level is also a potential driver of exposed returns.
Speaker Change: which could offset some of that incremental hedge cost that we would occur over time with hedging. But you're 100% right. It's going to be a drag. It's just an order of magnitude. And right now the outlook is, I think, pretty favorable for that.
Great. I appreciate all those answers, Peter. Thank you. Sure.
Speaker Change: Thank you. And our next question today comes from Crispin Love with Piper Sandler. Please go ahead.
Crispin Love: Thank you, good morning everyone. Just first on the hedge ratio and hedges, continuing the recent conversation, but you decreased the hedge ratio.
kind of continuing through 2025.
Also with your view of lower vol expected. Thanks.
Crispin Love: Yeah, thank you for the question. We did, we did increase it obviously fairly significantly back to 91% from 72%, but it goes back to the question that I just answered as a starting point, which is that we obviously expected more interest rate volatility as we went into the presidential election.
Crispin Love: And clearly, there was a lot of uncertainty, and still is, about fiscal policy and tariffs and what that might mean for monetary policy and what that might mean for Treasury issuance. But we had an 80 basis point move higher in the 10-year Treasury in the fourth quarter.
Crispin Love: And the reason why we were so active in rebalancing and kept our duration gap essentially unchanged
Crispin Love: quarter over quarter you know 0.2 to 0.3 and that's not that's not always the case with respect to our Delta hedging and our rebound but we were so active in doing so this quarter it's because we didn't expect rates to whipsaw back the other way
From our perspective right now, the backup in rates.
Crispin Love: and particularly in the 10-year moving up to the four and a half to four and three-quarter range appears to be sort of a better valuation for that part of the curve given all of the uncertainty about the strength of the economy and potential sources of inflation or deflation as it may be but
Crispin Love: We felt like being active in Delta hedging was really important because we don't expect rates to drop materially from here. We expect long-term rates to remain stable.
Crispin Love: So, therefore, we did add a lot of hedges, and we did so particularly by adding mostly, in fact, almost exclusively, treasury-based hedges because of our uncertainty about what swap spreads would do during the quarter. So over time, we may rotate out of those.
Crispin Love: As Chris indicated, that likely be the case, but that's why we were so active in rebalancing and keeping our duration gap low, because we didn't want, we didn't expect rates to whipsaw back.
Speaker Change: Great. Thank you, Peter. Appreciate that. And then just one last question for me. Just an update on agency MBS demand as you see it today, banks, money managers, just thoughts on demand in this environment. Thank you. Yeah.
Speaker Change: Yeah, I mentioned in my prepared remarks the outlook for supply, and I think this is really a positive for the mortgage market. And when you think about the outlook and why...
Speaker Change: We're so positive. It starts with the with the technicals for mortgages and the technical is that the supply.
Speaker Change: of mortgages in 2025 should be very similar, I'd expect, to 2024. In 2024, the total supply was just a touch over $210 billion, which came in lower, or certainly at the low end of everybody's expectations.
Speaker Change: And this goes back to the point about the tenure being at four and a half or higher.
Speaker Change: of mortgages. And I think if you look at most dealers it's in the $200-$250 billion range, which is a positive development. And then you look at what are the sources of demand. Last year, I think money managers, I think that was total inflows in the bond fund of around $450 billion.
Speaker Change: of which that maybe 20% or so goes into the mortgage market.
Speaker Change: It appears that that could be again the case in 2025. So I would expect money managers, if bond fund flows stay high,
Speaker Change: The uncertainty or the unknown in the equation is bank demand.
and Banks Man has been stable.
Speaker Change: And slowly growing, certainly total bank holdings of mortgages have increased steadily off the low point of September 23, and now have sort of grown steadily in 2024.
There is a possibility.
Speaker Change: with bank regulation being perhaps less onerous that they may come in and be a bigger buyer in 2025 versus 2024. We don't obviously know that yet but that's something we'll keep an eye on. So I think in the end when you put that together I think the supply and demand seems to be fairly fairly well balanced and that's that's an important driver of our outlook.
Any follow-up there?
Sure.
Speaker Change: I'll move on to our next question. Our next question comes from Trevor Cranston with Citizens JMP. Please go ahead.
All right. Thanks. Good morning.
Trevor Cranston: You guys mentioned that, you know, you've been adding towards the end of the quarter and have continued into January. You know, assuming that the portfolio additions are increasing leverage, can you talk a little bit about kind of what your current leverage target would be, what the investment opportunities, where they are today?
Trevor Cranston: And part of that also as you're adding, if you can maybe talk a little bit about if you've seen any sort of changes in your relative value views of TBAs versus spec goals. Thanks.
Trevor Cranston: Sure, I'll start with the first part and then Chris can talk about TBA versus
and other relative value.
Trevor Cranston: So, first, when you look at our leverage, it's been fairly consistent, in fact, very consistent over the last 12 months.
Trevor Cranston: 7.2, 7.3 range, and the good news there is we were able to generate really attractive returns with that sort of leverage level.
Trevor Cranston: And with leverage at that level, we obviously still have a huge amount of our capital unencumbered. As Bernie mentioned, 66% of our capital is unencumbered.
a really strong position from a risk management perspective.
Bernie Bell: And when we think about leverage, obviously, there's a lot of drivers. One, we want, obviously, mortgage spreads to be attractive, which they are. We want interest rate volatility to be stable or declining, which we think it may be, which is a positive.
Thank you.
Bernie Bell: And then, you know, then we'll just make that decision sort of on a case-by-case basis, but I think one of the key points is when you think about spreads, not only do they need to be attractive, we want them to be stable.
Bernie Bell: and one of the things that I think materialized in 2024 is the fact that mortgage spreads stayed very traded in really a relatively tight range, particularly if you look at like current coupon to five and 10 year treasuries, they traded in an exceedingly tight range.
Bernie Bell: 80% of the year last year, mortgages traded in a 20 basis point range between 135 and 155 basis points.
Bernie Bell: That's great for our business. We want spread volatility to be low. We want spreads to be attractive. If those conditions continue, it would make us positively inclined about the market and our risk position.
Bernie Bell: Again, I'm not going to give a forecast on that, but those are the conditions that we look at for taking risk a little higher. Chris can talk about where we've been deploying proceeds. As he mentioned, we started to add some mortgages in January.
Bernie Bell: During the quarter, we continued to shift our holdings to higher coupons. As I mentioned, we reduced holdings in 4.5% in lower coupons by about $6 billion, added just under $8 billion and 5% in higher coupons.
Bernie Bell: You know, production coupon valuations still offer some of the best longer-run risk-adjusted returns.
Bernie Bell: You know, while higher coupons performed very well last year, the vast majority of that return was carry, not spread tightening. And so spreads are still very attractive, and so, you know, that's where we've been allocating marginal capital.
Bernie Bell: you know, where mortgage rates currently are. But again, given current spread relationships with respect to the coupon stack, marginal capital is gonna mostly be deployed in higher coupons. You know, with respect to TBAs versus specified pool specs,
Bernie Bell: You know generally have performed very well, they did in the fourth quarter and while we did have some opportunities to add higher quality pools at good levels.
Bernie Bell: you know there are some newer production categories that are trading at relatively full valuations and so you know we're content to be patient there and carry a bit higher TBA position with prepayment risk low and enrolls starting to trade better.
Got it. Okay, that's helpful. Thank you.
Thank you.
Speaker Change: And our next question today comes from Eric Hagan of BTIG. Please go ahead.
Eric Hagan: Hey, thanks, good morning guys. If we tease apart the projection for prepayment speeds, can you maybe share roughly what mortgage rate you were assuming in that projection and how you might, and how it's maybe changed, you know, in the start of the year? And then how you might compare or, you know, characterize the reinvestment risk.
Thank you.
Eric Hagan: Yeah, so the our CPR projections are simply based off of, you know, the spot that's the forward curve as of the end of the year.
Eric Hagan: You know, just more generally speaking with, you know, with respect to prepayment risk.
Eric Hagan: You know, I'd say, you know, the fourth quarter was probably the most interesting set of reports that we've had since COVID, October and November in particular.
Eric Hagan: Mortgage rates approach basically hit 6% in September. We had a pretty sizable portion of the float and higher coupons that had an incentive to refinance. And speeds were very fast in October and exceeded most model expectations.
Eric Hagan: But with the sharp sell-off in rates, November speeds then came in materially slower, you know, under most model expectations. And so, you know, it's likely October speeds were impacted by, you know, very high pull-through rates.
Eric Hagan: But I'd say even still, you know, net-net, when you look at the two months together, the response was the steepest we've had, you know, really since COVID. And so, you know, into a sustained rally, we're certainly, you know, not betting on a benign prepayment response. It's clear lenders are going to be very aggressive, soliciting, you know, easy-to-refi borrowers.
You know, but again...
Eric Hagan: You know, prepayment risk is very manageable through asset selection and diversification.
Eric Hagan: And asset selection doesn't mean just owning the highest quality pools with the most repayment protection. In fact, it often doesn't, depending on where pay-ups are valued.
Eric Hagan: you know, it's very impactful to just avoid the worst pools or the fastest collateral. And so, you know, again, active management, you know, is key across, you know, various rate scenarios.
Great color there, I appreciate that.
Speaker Change: All right, so maybe building off the outlook from the question around banks, I mean, how do you see the impact of bank regulation maybe driving, you know, bank appetite as repo counterparties both to AGNC and to the market, you know, more broadly? I mean, do you have any perspectives on the supply of repo going forward and really just any impact that, you know, could transmit onto, you know, mortgage spreads at the same time?
Yeah, so...
Speaker Change: First, on the bank side, again, bank balances have been growing.
Speaker Change: which is an important fact. Two, it appears that banks, when they do add, they appear to be adding in an available-for-sale capacity as opposed to hedging more.
Speaker Change: And that's just anecdotal versus the health and maturity, so that's obviously, I think, a good sign for their ability to add mortgages and do so on a hedge basis and manage their interest rate risk.
Speaker Change: And then clearly, from where we were, let's say, I guess it was probably in the middle of the year, when the Basel endgame was so uncertain, and there was lots of unintended consequences in some of those.
earlier versions of that regulation to where we are now.
Speaker Change: It appears that bank regulation is going to be certainly less onerous and maybe even quiet for a period of time, which I think bodes well for bank demand. So obviously we don't have any other insight into it than that, but it does seem from a directional perspective that it could be larger as opposed to smaller.
with respect to the repo market.
As the Fed drains balances...
Speaker Change: There is a bank reserve balance out of the system, which they are doing now, there will come a time, and I expect it to be this year where they are going to stop because I think when you look at where bank reserves are now at about 3.2 trillion,
Speaker Change: I think they're getting into the range of where bank reserves from a target perspective relative to GDP somewhere in the 10 to 11 percent range is some of the guidance that the Fed has talked about.
Speaker Change: Not that they are managing to that, but it's certainly an indication. It appears that bank reserves are getting into the target range where they've moved from abundant to ample.
when bank reserves get to that less abundant level.
Speaker Change: we saw the repo spreads to SOFR over year-end be in the 50 to 100 basis point range. We saw it in the third quarter, we saw it prior to that.
Speaker Change: So, reporting periods will have some volatility, it'll be a little bit higher cost, it's one of the things that contributed to our higher cost relative to our swap book going forward. The Fed is clearly watching this very closely, willing to, and has already made changes, which is important.
changes to the way they run their programs to
Speaker Change: to manage this carefully. The Fed does not want the funding markets to be disrupted, and I don't expect any limitation from a repo perspective to get to the specific answer that you're talking about. There's plenty of repo capacity.
Speaker Change: for Agency Mortgage-Backed Securities. Yes, it may be a few basis points, more costs, particularly over reporting periods, but it is a cost question, not a capacity question.
Speaker Change: So I don't expect that to be a limiting factor for demand at all.
Great stuff, I appreciate the answer. Thanks guys.
Speaker Change: Thank you. And our next question today comes from Jason Stewart and Janie. Please go ahead.
Speaker Change: Good morning, Peter. Thanks for the call around earnings. That does a good walkthrough. Bernice, I missed the point on futures and what that would have added if it was in that spread in dollar roll income on a comparable basis to the quarter.
Speaker Change: Yes, Bernie mentioned that, I think your question was about treasuries?
Speaker Change: Bernie mentioned that this last quarter, and we added a page and some disclosure in the back of our presentation, I forget what page it is exactly. It's on page 24. It's on page 24.
Speaker Change: that shows you the sort of the pay side of the equation, what we're paying and where our repo rates were. And if you look at that, we concluded that it was probably around $0.04 of earnings that if we had...
Speaker Change: If net spread and dollar roll income included that, it would be something like about $0.04. Obviously, because...
Speaker Change: One of the challenges with that measure is, because we use futures,
Speaker Change: That carry component has to be sort of imputed, if you will. So we had to come up with a methodology. It's one of the shortcomings of it. But nonetheless, it gives you an order of magnitude. We think it's in that range of around four cents this last quarter.
Speaker Change: Got it. Thank you for that. And then were you able to quantify the impact of the ATM timing, so issuing early and deploying later in the quarter?
Speaker Change: Well, what I would say is when you look at the impact of the
The issuance.
Speaker Change: I think you can you can do it a number of different ways. You can look at our average price and the average price meaning five hundred million dollars worth of
Speaker Change: worth of stock versus $53 million would give you an average price of $9.60 just on that calculation.
Speaker Change: And you look at that relative to our beginning and ending book value, you could conclude that it was a substantial amount of accretion. You could also look at our comprehensive income and our dividend.
Speaker Change: and conclude, based on our book value, that it probably contributed something in the neighborhood of six or so cents of book value, maybe a little bit more.
And then, as Chris mentioned,
Speaker Change: There was obviously a lot of volatility and uncertainty early in the quarter, so raising capital at an accretive level.
Speaker Change: And then deploying it more gradually later in the quarter, we obviously saw mortgage spreads widen during the quarter. They peaked around mid-quarter and now are still, still ended the quarter wider than they were at the beginning. So by deploying those proceeds,
Speaker Change: at a slower pace gave us the capacity to invest, as Chris mentioned, at attractive levels late in the quarter and still at attractive levels this quarter.
Speaker Change: Okay. All right, we'll make some assumptions on how that impacted earnings. I appreciate it, Peter.
Sure.
Speaker Change: Thank you. And our final question today comes from Harsh Himnani with Green Street. Please go ahead.
Harsh Himnani: Thank you. Good morning. You've mentioned that your base case for spreads is that they remain within the trading range that they have been in for some time. What in your mind are the risks to that base case that could drive spreads either higher from your outside the trading range or lower?
Harsh Himnani: Well, yeah, you're right. They have been remarkably stable, and I think we're going on about...
Harsh Himnani: seven quarters, maybe, of this trading range, which I find to be really encouraging.
Harsh Himnani: I think mortgages are, given the given a little bit of a backup, mortgages in the middle of the range obviously feels a little bit better to us than than being at the tight end of the range.
Harsh Himnani: But I would say that there's probably two primary risks. One relates to monetary policy.
Harsh Himnani: in interest rates in general. If the interest rates become extremely volatile, meaning if interest rates were to move materially higher than we anticipate,
Chris Kuehl: or materially lower than we anticipate. Chris mentioned it could trigger refinance.
Chris Kuehl: activity if they were to rally for some unforeseen reason, or we could have interest rates back up because of, for example, concerns about deficit spending and Treasury issuance.
Chris Kuehl: and they could put pressure on mortgage spread. So that would be one. And then, obviously, all of the discussion, that's why I included the, in my prepared remarks, the extra discussion about housing policy, if you will. Obviously, there is more interest in the GSEs and the GSEs conservatorship today than there was.
prior to the Trump administration.
Chris Kuehl: and so there is some uncertainty about that outcome. We believe in the end that all of the great attributes of the current system, I think people will come together and agree that they need to be preserved.
Chris Kuehl: I don't think from a political perspective, from a home ownership perspective, from an economic perspective, from a Fed perspective that anybody would conclude that they don't want all of these features that we have today.
Chris Kuehl: And that means also then, if you want to preserve those features, given the size of the market, it's likely that the government is going to have to remain involved.
Chris Kuehl: how that's structured to be determined, what they get compensated for that to be determined.
Chris Kuehl: But there could be some uncertainty as people have opinions and ideological differences about that. That could create some spread volatility. So spreads may be a little higher than they would otherwise be. They may be a little wider than they otherwise would be.
Chris Kuehl: Could move us in that range to your question, but in the end, I think they will come back into the range. And at this spread range, I think mortgages offer a lot of value.
Chris Kuehl: They offer value if you're investing in treasury securities, and they offer value if you're investing in investment-grade corporate debt, which is not always the case. So mortgages to us look like a great asset class and cheap at this valuation level.
Speaker Change: I'll just add I think Peter covered the what could surprise to the wider side you know the other side of the equation you know I think
you know, looser regulatory outlook going forward.
Speaker Change: I mean, overseas activity could also surprise to the extent that...
Speaker Change: you know, the Fed and BOJ policy continues to move in opposite directions that reduces FX hedging costs for banks in Japan. And so, you know, look, there's a lot of things that are unknowns and, you know, could surprise to the tighter side as well.
Speaker Change: But again, our base case is pretty firmly rooted and unchanged to maybe modestly tighter spreads for this year.
Got it. Thank you. I'll leave it there. Thank you.
Speaker Change: Thank you. And this concludes our question and answer session. I'd like to turn the call back over to Peter Federico for closing remarks.
Peter Federico: We're going to appreciate everybody participating on the call today and again we're encouraged by the outlook for our underlying asset class and for our business in 2025 and we look forward to speaking to you again at the end of next quarter.
Peter Federico: Thank you. This concludes today's conference call and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.