Q1 2025 AGNC Investment Corp Earnings Call
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Speaker Change: Good morning and welcome to the AGNC Investment Corp. 1st quarter, 2025 Shareholder Call.
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Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Katie Turlington and investor relations. Please go ahead.
Speaker Change: Thank you all for joining AGNC Investment Corps' first quarter 2025 earnings call. Before we begin, I'd like to review the safe harbor statement.
Speaker Change: This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical facts, constitute for the statements within the meaning of the Private Security's 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 forecasts due to the impact of many factors beyond the control of agency. 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 AGNC's Periodic Reports, filed with the Securities and Exchange Commission. Copies are available on SCC's website at SCC.gov.
Speaker Change: We disclaimer any obligation to update our four-looking statements and less required by law.
Participants on the call include
Peter Federico: Peter Federico, President, Chief Executive Officer, and Chief Investment Officer, Bernie Bell, Executive Vice President and Chief Financial Officer, 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, and thank you all for joining our first quarter conference call.
Peter Federico: Government policy actions and their potentially adverse effects on economic growth and inflation caused investor sentiment to turn decidedly more cautious in the first quarter.
Peter Federico: This elevated macroeconomic and monetary policy uncertainty led investors to initially seek the safety of high-quality assets like U.S. Treasuries.
Peter Federico: Agency mortgage-backed securities and cash over higher risk assets like equities in corporate debt.
Peter Federico: Driven by our attractive monthly dividend, AGNC generated an economic return of 2.4% in the first quarter.
Peter Federico: The terror of policy announcement at the beginning of April , however, caused volatility to increase significantly across all financial markets.
Peter Federico: With the breadth and magnitude of the tariffs being greater than anticipated, recession fears increased materially.
Peter Federico: Equity prices in turn sell further February peak and into bear market territory.
Peter Federico: Interest rate volatility also increased substantially. Over the first nine trading days of April , the yield on the 10 year treasury moved initially sharply lower and then sharply higher.
Peter Federico: In total over the short period of time, the yield on the 10-year treasury fluctuated by more than 100 basis points.
Peter Federico: The AGNC MBS market was not immune to these adverse conditions, and also came under significant pressure in early April .
Peter Federico: In spread terms, the current coupon spread to a blend of 5 and 10-year treasury rates widened to 160 basis points, the top of the trading range over the last 5 quarters.
Peter Federico: The performance of AGNC MBS relative to swaps was substantially worse given the unprecedented narrowing of swaps' threads that occurred during the height of the market turmoil.
Thank you. Thank you. Thank you.
Peter Federico: As a result, the current coupon spread to a blend of swap rates reached an intraday peak of 230 basis points.
Peter Federico: For comparison, the widest level reached during the height of the COVID pandemic was 235 basis points for this measure.
Peter Federico: As of yesterday, this spread was about 220 basis points still very elevated but off the
Peter Federico: AGNC was well prepared for the recent market volatility and navigated it without issue.
Peter Federico: While AGNC's net asset value was negatively impacted by the mortgage spread widening, the expected return on our portfolio is also now higher as it reflects these wider spread levels.
Peter Federico: Moreover, at current valuation levels, we believe AGNC MBS provide investors with a compelling return opportunity on both a levered and unlevered basis.
Peter Federico: Recent trading history is supportive of this value proposition as well, as spreads historically have not remained at these levels for an extended period of time.
Peter Federico: agency MBS also offer investors an attractive fixed income alternative to corporate debt and other credit sensitive instruments, especially in light of the deteriorating economic outlook.
Peter Federico: With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail.
Thank you, Peter.
Bernie Bell: For the first quarter, AGNC reported total comprehensive income of 12 cents per common share.
Bernie Bell: Our economic return on tangible common equity was 2.4% consisting of 36 cents and dividends declared per common share and a 16 cent decline in tangible net book value per share due
Bernie Bell: Quarter and leverage increased to 7.5 times tangible equity, up from 7.2 times at year end driven by the decline in tangible net book value per share and the deployment of recently issued equity capital.
Bernie Bell: Average leverage was 7.3 times for Q1, up slightly from 7.2 times in the fourth quarter.
Bernie Bell: We ended the first quarter with a strong liquidity position, consisting of $6 billion in cash and unencumbered agency MBS, representing 63% of tangible equity.
Bernie Bell: During the quarter, we raised 509 million of common equity through our at-the-market offering program at a material premium detangible netbook value generating meaningful accretion for common stockholders.
Bernie Bell: Net spread and dollar roll income increased $0.7 to $0.44 per common share for the quarter, driven by a higher net interest rate spread and larger asset base.
Bernie Bell: Our treasury-based hedges generated additional net spread income of approximately two cents per share for the first quarter, which is not reflected in our reported net spread and dollar will income.
Bernie Bell: Lastly, the average projected life CPR on our portfolio increase to 8.3% at quarter end from 7.7% at year end, consistent with lower rates.
Bernie Bell: Actual CPR is averaged 7% for the quarter, down from 9.6% in the fourth quarter.
Peter Federico: and with that, I'll now turn the call back over to Peter.
Peter Federico: Thank you, Bernie. Before opening the call up to your questions, I want to provide a brief update on our portfolio, as of quarter-end, and discuss in greater detail our outlook for agency mortgage-backed securities.
Peter Federico: As I already mentioned, slower economic growth expectations pushed equity prices meaningfully lower during the quarter.
Peter Federico: In contrast, fixed income returns, as reflected by the major Bloomberg indices, were positive, with AGNC MBS being the best performing fixed income asset class in the first quarter, with a total return of 3.1%.
Peter Federico: followed by US Treasuries at 2.9% and corporate debt at 2.3%.
Peter Federico: On a hedge basis, however, the performance of AGNC MBS was more mixed with spreads to treasuries generally widening during the quarter, particularly in the low and middle coupon segments of the market.
Peter Federico: The current coupon spread to the blended five and ten-year treasury rate widened eight basis points during the quarter.
Peter Federico: All rash at Portfolio, total 79 billion at quarter end, up about 5 billion from the prior quarter.
Peter Federico: The mortgages that we added were largely high-quality, specified pools and pools with other favorable prepayment characteristics.
Peter Federico: As a result, the percentage of our assets with favorable pre-payment characteristics increased to 77%.
Peter Federico: The weighted average coupon of our portfolio, meanwhile, remains steady at just over 5%.
Peter Federico: Our aggregate TBA position was relatively stable during the quarter although the composition shifted to include a combination of Jenny May and conventional UMBS in response to changing implied financing levels and delivery profile characteristics.
Peter Federico: Consistent with the growth in our asset portfolio, the notional balance of our hedge portfolio increased to $64 billion a quarter-end.
Peter Federico: In duration dollar terms, our hedge portfolio composition was about 40% treasury-based hedges and 60% swap-based hedges at quarter-end.
Peter Federico: Despite the recent financial market volatility, our outlook for AGNC MBS remains positive.
Peter Federico: On the demand side of the equation, we continue to believe that regulatory relief will eventually lead to greater demand for AGNC MBS from banks.
Peter Federico: We also believe more favorable bank capital requirements are forthcoming which could benefit the treasury and swap markets.
Peter Federico: Another noteworthy development in the first quarter relates to the future of the GSEs.
Peter Federico: The rapid recapitalize and release narrative that garnered significant attention at the end of last year and that was a source of uncertainty for investors seems to have quieted somewhat.
Peter Federico: Importantly, many key decision-makers have expressed a desire for lower mortgage rates, improved housing affordability, and for the preservation of the many positive attributes that characterize today's housing finance system.
Peter Federico: There also appears to be a greater appreciation for the very complex and interconnected nature of our $14 trillion housing finance system.
The cornerstone of which is the GSE Conventional Mortgage Market.
Peter Federico: This most recent episode of financial market volatility is a good reminder that uncertainty related to the housing finance system can quickly lead to meaningfully higher mortgage rates.
Peter Federico: In our opinion, the best way to improve housing affordability is to clarify and importantly, make permanent the role of the government in the housing finance system as it exists today.
Peter Federico: If the government were to do so, the demand for agency mortgage-backed securities would increase.
Peter Federico: The capital requirement for these securities could be reduced to be consistent with Jenny May securities and lastly, mortgage rates and housing affordability would improve.
Peter Federico: Also note worthy, taking this action would not preclude the government from choosing a different capital structure for the GSEs at some point in the future.
Peter Federico: With that, we'll now open the call up to your questions.
We will now begin the question and answer session.
Peter Federico: to ask a question you may press star then one on your touchtone phone.
Peter Federico: If you were using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question, please press star then two.
Peter Federico: At this time, we will pause momentarily to assemble our roster.
Peter Federico: The first question comes from the line of Bose George with KBW. Please go ahead. Hey everyone, good morning. Actually, come on in and update on your book value. You gave the April 9th number with the pre-release, but how does it look since then?
Speaker Change: Yeah, thank you for the question, Bose. Yeah, Bernice did not include that end of preparatory marks, but more of a spread's did widen a little bit further from our previous list number. I would have put our book value down at the end of last week somewhere in the range of seven and a half to eight percent range.
Speaker Change: OK, great. And then, I mean, yesterday spread widening, you know, but that suggests it's a little bit lower since then as well.
Sort of back to the wise we saw
Speaker Change: But you know, it's going to be volatile. This is the kind of conditions we are. I would also point out yesterday that while mortgage spreads did underperform considerably. Again, it's not a lot of trading volume. I don't believe it's indicative of any force selling. I believe it's just indicative of really. [inaudible]
really bad investor sentiment and we also saw again yesterday.
Speaker Change: Weekness, if you will, or narrowing of swap spreads, which continues to be a challenge, and that's what's making mortgage performance relatively to swap so difficult. It's not so much what's happening with mortgages to an extent, but it's what's happening with the swap market and swap spreads narrowing like they have earth.
Speaker Change: really unprecedented kind of moves which I think are indicative of these currency flows and the balance she constraints and just lack of correlations that's going on right now.
Speaker Change: That's helpful, thanks. And then can you just talk about the comfort level, you know, with the dividends is given where the market market book value is if you can just sort of walk through the, you know, the RWE math that you guys have done in the past.
Speaker Change: Yeah, well, let me start with our, you know, the benchmark, if you will, as our total cost of capital, we talk about that all the time at the end of
Speaker Change: The first quarter, our total cost of capital and the way we're calculating our total cost of capital is the dividends that we pay both on our common and preferred stock plus all of our operating expenses divided by our total tangible capital.
Speaker Change: which at the end of the first quarter was about 9.5 billion and by that measure it would say that the break even return on our portfolio to sustain all of those costs was 16.7%. Now, given the update I just gave you.
Speaker Change: As you can do that calculation and that number obviously that total cost of capital and now based off last week's book values probably closer to 18%
Speaker Change: The question is how does that compare to the economic return on our portfolio, being a fully market-market portfolio?
Speaker Change: Our returns now on a go-forward basis reflect current market valuations, both relative mortgages, relative to the swaps and treasuries.
And when you look at it from that perspective...
These are really-
Speaker Change: particularly in mortgages versus swap, sort of unprecedented level. So I would say on a go-forward return basis.
at today's valuation levels mortgages versus swaps. [inaudible]
Speaker Change: Mortgages versus Treasuries, the way our portfolios constructed, I would say expected returns are somewhere between 19 and 20 or 22%. If you looked at mortgages relative to just swaps today.
Speaker Change: and I gave you a blend of mortgages versus this blended swap curve which I like to use just to give you a full picture of two-year, five-year, and ten-year swap. That spread, it closed yesterday with 220 basis points.
Speaker Change: So a portfolio of swaps levered the way we levered them would generate a return of low 20% returns, those are...
Historically High Level, so...
Speaker Change: But from, you know, going back to your question, the point of all that is that yes, our total cost of capital has increased with this mortgage spread widening decline in our book value, but they go forward returns.
Still aligned very well with that total cost to capital.
Great, that's helpful, thanks. Sure.
Speaker Change: Thank you. We have the next question from Crispin Love with Piper Sandler. Please go ahead.
Crispin Love: About 4% on April 4th to 450 plus over the course of the next few days. Just based on the book value updates seemed to have managed it pretty well but can you detail how you are able to just based on positioning going into as well as active management during the volatility. That way.
Crispin Love: Yeah, great question, and one of the reasons why I included a line of my pair of remarks that we were able to navigate that without issue, it really goes to having the discipline to go into the environment with a really strong position.
Crispin Love: 7.5, Therabouts Leverage, rounded to 7.5, so it was maybe two tenths of a turn higher than what we had been operating prior to the first quarter.
Crispin Love: Importantly, as Bernie mentioned, you know, we spend an extraordinary amount of time being as efficient as we can with our capital. So we have a really strong unencumbered cash and liquidity position at the end of the first quarter. It was
Crispin Love: $6 billion, but importantly, in percentage of equity terms, it was 63% of our equity. That's an extraordinary amount.
of
Crispin Love: Access Capacity, and we operate with that sort of efficiency and hold that capital unencumbered to be able to withstand these sorts of periods of volatility without having to importantly to your question.
Crispin Love: Change our asset composition or D-level of the poor, so we know exactly what we had going into it. We have plenty of capacity to withstand this sort of spread wide and when we shock our portfolio, we always think about
and that's exactly what we saw.
Crispin Love: This episode is one of the things that made it really challenging for all market participants.
Crispin Love: is we saw a breakdown in correlations at first we had a flight to quality rally which made sense that investors wanted to basically reduce equity positions given weaker gross outlook.
and Favored Fixed Income. .
Crispin Love: and AGNC, as an asset class, as I mentioned, really bend it fitted from that initial move in the first quarter, but those correlations broke down.
Crispin Love: because we had this sort of the sentiment shift away from all dollar denominated assets, but we were able to navigate that by basically just doing nothing.
Crispin Love: and allowing the market to sort of go through what it had to go through and yes, spread to wide and further.
Crispin Love: But markets have been orderly, generally speaking for the last two weeks and I take that as a positive sign. I have not seen importantly, you know, distressed selling per se. I think we saw.
Position Liquidations
Crispin Love: Importantly in the swap market, particularly early on that caused a lot of unwinding of swap positions versus treasury position.
Crispin Love: But subsequent, I think we've just seen the market sort of fall out of favor, but we haven't seen a lot of volume behind this repricing which maybe is a silver lining so I'll pause and let you ask follow.
Speaker Change: Thanks Peter, that's that's all helpful and you in the beginning of that answer you didn't mention.
Leverage, but-
Speaker Change: Can you just share your go forward outlook on leverage in the head ratio? You've said that you expect more of all utility and in recent years you've kept leverage pretty well contained. So are you comfortable with the recent levels you've had or could you take it down even further just given wider spread. So returns could be protected even if you bring it down a bit, but just leverage in the head ratio. Yeah.
Speaker Change: Give us the ability and all other, you know, things equal to be able to generate really attractive returns without taking, you know, excessive levels of leverage. So that is something obviously over time.
will evaluate.
Speaker Change: and it's one of the reasons why we went into this episode with lower leverage, shorter than our historical norms because we were able to operate with leverage in the low sevens and still generate really attractive returns. So that certainly could be the case going forward.
Speaker Change: All that said, I would not expect these spread levels to hold.
Speaker Change: So if they do going to go forward basis, certainly then we would evaluate that, but...
Speaker Change: From everything that we've seen so far, I don't believe that when you look at mortgages versus swaps in particular, that these are sustainable spread levels. I think when you look at take, for example, Kurt Koupon,
Speaker Change: Mortgage Today, backed by the support of the US government from a credit perspective.
Speaker Change: Against the backdrop of a worsening economic outlook and compare that to 10-year swap rates and have that spread be about 200 basis points. That's an extraordinary amount of excess return.
Speaker Change: at 165 basis points of excess return of mortgages versus take, for example, 10-year treasuries. That's a lot of excess marginal return.
Speaker Change: in a five or six percent world. I don't think those spreads are sustainable, but doesn't mean that we don't stay here for a little while. It doesn't mean that we might not go wide or given all of this macroeconomic uncertainty and government policy uncertainty, but we'll certainly evaluate that on a go-forward basis.
Thank you, Peter. Appreciate you taking my questions.
Speaker Change: Next question comes from Doug Harter with UBS. Please go ahead.
Doug Hodder: Thanks, Morning Peter. In the past you've talked about leverage levels and being confident in kind of ranges holding. I know you just mentioned that.
Doug Hodder: You know, spread their current levels aren't sustainable. You know, how do you think about the risk that, you know, you could spread levels could kind of gap out further given this uncertainty before they kind of normalize and kind of how you think about managing that potential scenario. [inaudible]
Speaker Change: Well, we certainly have to be prepared for it. And you know, that's that's what we do every day is we we come in and we evaluate those risks and reassess those risks and
Speaker Change: Again, it's important to look at the difference in mortgage performance, I think.
Speaker Change: This is particularly important in this environment, mortgages versus treasuries and mortgages versus
Speaker Change: In my preparatory remarks I mentioned, take for example mortgages versus treasuries, five and ten year treasuries at 165 basis points.
Speaker Change: Distressed, I talked about that being the upper end of this sort of narrow trading range.
Speaker Change: and now yesterday we sort of broke through that and got to 165 basis points.
Speaker Change: Just to put that in context, though, in September of 2023, when interest rates went to 5%, and there was a lot of uncertainty about government issuance, that spread was close to do 190, base of points, that was the old range, so mortgages versus treasuries.
Speaker Change: are wide to the more recent range, but still within the wider band, if you will.
Mortgage Versus Swaps,
Speaker Change: is telling a different story, and the story there is not driven by people concerned about mortgages per se. It's simply this technical that happened in the swap market where swap spreads move so dramatically.
Speaker Change: They take, for example, in the first quarter, at one point...
Speaker Change: The expectation was that swap spreads were going to widen as the government reduced regulation and particularly related to the supplemental leverage ratio, and a lot of people put trades on betting on that occurrence.
Speaker Change: at one point in the first quarter, I think 10-year swap spreads got to negative 35 or so basis points.
Speaker Change: Well, we had almost a 30 basis point move wider, narrower, excuse me, more negative.
Speaker Change: and that really is the driver of the mortgage performance. It's not for people particularly concerned about mortgages, they're not. There's nothing technically or fundamentally wrong with the agency mortgage market.
Speaker Change: and eventually people will look at that value from a fixed income perspective and say even on an unlevered basis, you can buy a Pura Coupon mortgage close to a 6% return, great credit profile.
Speaker Change: Great return relative to Treasuries, great return relative to Swaps. I think money will flow to this asset class particularly. Thank you very much.
Speaker Change: Out of corporates and into this asset class, so that's one of the reasons that I'm confident that eventually. Absolutely.
Speaker Change: People will look at this and say these valuation levels are unsustainable but you're right we have to we have to prepare for for it.
Speaker Change: More widening and more distressing and we do and we are and we'll just you know, wait it out. Part of the reason that we're able to navigate this most recent period is having
A really diversified portfolio. So, you know, different coupons.
Speaker Change: Different mix of assets, high payups, low payups, generic pools, TBA, you have to have all that in order to navigate that and you have to have a really strong rank, cash and unencumbered liquidity position and we have all that.
Speaker Change: I guess just following up on that, Peter, are you know given the move, the volatility in swap spreads, you know, have you or are you considering kind of changing some of the makeup of your hedge portfolio?
Over Time.
Speaker Change: that a sort of a base case may be that a 50-50 mix.
Speaker Change: may be the best mix on a go-forward basis as a starting point.
Speaker Change: and I say that because it's important we are seeing in the marketplace to have great diversification.
Speaker Change: and that also applies from the asset portfolio as well as the hedge portfolio.
because we see all these sorts of...
Speaker Change: Temporary dislocations that have occurred, and they happen from time to time, and they happen for reasons that nobody anticipated like the terrorists.
Speaker Change: The same applies for having great diversification in your hedge portfolio and I think that's the sort of the base case for us is that we want to have a mix on a go forward basis that gives us.
Speaker Change: The best diversification, so the starting point may be having hedges across the curve, for sure, but also having a mix of both Treasury and Swap based hedges so that we're able to withstand these periods.
Speaker Change: as best we can. That served us well this time. I think you're right to some extent that the mix may come down on a go-forward basis.
Great. Appreciate it, Peter. Thank you.
Speaker Change: The next question comes from the line of Trevor Cranston with Citizen's JMP. Please go ahead.
Speaker Change: Morning, Trevor. Thanks. Morning. Actually, a follow-up question on, you know, your choice of head
Speaker Change: You mentioned sort of the unwinding of trades betting on the widening of spreads in the earlier part of this year.
Speaker Change: Can you maybe just share your thoughts on kind of where you think we are in that process and kind of what your, you know, general outlook is for swaps roads going forward from here. Thanks.
Yeah, so... um...
I think for me, although yesterday's spread move.
Speaker Change: was substantial. It was about a three basis point narrowing in swap spreads in the 10-year part of the curve yesterday, which was a little surprising given that I felt like after the initial period, which is called at the April 6th through the 10th period, I felt
A lot of volume had been unwound on that on that on that trade.
Speaker Change: I think what we're seeing in the swap market right now is indicative of a couple things. I think it's indicative of
Just generally, they're being...
Speaker Change: Some balance sheet constraints at financial intermediaries that we have come to understand and listen to bank CEOs last week, they all point out that they have
Speaker Change: Balance sheet constraints, do it a regulatory requirements and they're asking for relief on that because they feel like they can do more. So I think that's that that's part of what's happening and I think also it's just indicative of. And I think that's what's happening.
Speaker Change: This pessimistic outlook for a US dollar denominated assets period, and it's causing people to...
Speaker Change: To not want to hold hard US dollar assets and prefer to hold
That asset in derivative form, and that's causing.
Swap Spreads to be as narrow as they are.
Speaker Change: What I would say is that it's also very clear to us, this is well telegraphed that I do expect
Speaker Change: Exchange from a regulatory perspective with respect to the supplemental leverage ratio. The Fed has talked about it. The Treasury Secretary has talked about it. I think everybody...
Speaker Change: agrees that they will ultimately get rid of that supplemental leverage ratio, which would benefit
Speaker Change: The Treasury Market, and I think that would drive Swap Spreads wider.
The Issue,
Speaker Change: with that is that it's taken longer than the market anticipated, and part of the reason why it's taken so long, just from the Fed's own words, is they did not want to make a regulatory change of significance without having the head of bank supervision Michelle Bowman confirmed in that position.
Speaker Change: As she just went through the nomination process a week ago, confirmation is expected in a couple of weeks. I expect that to be a catalyst at some point going forward for some normalization in the swap market.
Gallup, okay, that's our point.
Um, um,
Speaker Change: And then on the capital side of things, obviously you guys have been utilizing the ATM program over the last several quarters. Can you just give an update on how you guys are thinking about that after the sell-off over the last few weeks? Thanks.
Speaker Change: Sure, we certainly have used that as opportunistically as possible. First quarter is another good example of that. We're able to raise...
Speaker Change: Capital, very accretively, from a book value perspective, as I mentioned, that went to support the growth of our portfolio. It's why we grew $5 billion.
Speaker Change: and so from an existing shareholder, accretion perspective, I think that was a really good example of...
Speaker Change: Our existing shareholders benefit from a book value perspective and then also from a long run from an earnings perspective. I think at all that that same approach still holds.
Speaker Change: Today at these valuation levels, certainly, as I mentioned, good time to deploy capital. So we're going to continue to approach that very opportunistically.
Thank you. Thank you.
Okay. Thank you.
Thank you. Bye.
Speaker Change: The next question comes from the line of Matthew Erdner with Jones Trading. Please go ahead.
Matthew Erdner: Hey, good morning guys. Thanks for taking the question. Kind of up as a follow up to the ATM, could you talk about kind of the pace of deployment throughout the quarter? And it looks like you guys kind of invested in that five and a half coupon there. And as a follow up to that, you know, where do you guys think is the best opportunity in the coupon stack right now? Yeah.
Thank you.
Matthew Erdner: Yeah, if you go back to my comments on the fourth quarter call in January , I mentioned that we had been slow to deploy capital that we raised in the fourth quarter.
Matthew Erdner: because we were waiting for a better investment opportunity and that at that time I felt like the the opportunities were emerging and we had begun to deploy that capital sort of around that time of that earnings call which was January . So that gives you some perspective as to when we deploy that and you're you're right.
Matthew Erdner: You know our weighted average coupon on our portfolio did not change hardly at all maybe one basis point I think was 503 for the quarter which tells you that the mortgages that we added were all concentrated around that coupon So into five and five and a half area we'd like that part of the curve as I mentioned
Matthew Erdner: The pools that we bought had either high-quality characteristics or some form of prepayment characteristics that we viewed as favorable. About a billion of that growth came in the form of...
Matthew Erdner: TBAs. And on that point, this gets to sort of our view of value going forward. I would say that we are seeing improvement in the dollar roll carry implied financing levels.
Matthew Erdner: Particularly in conventionals today going forward relative to where conventionals were rolling last year really unattractive
Matthew Erdner: and the dollar roll market better to finance those positions on balance sheet. That has sort of gradually improved over the course of the first quarter. It's one of the reasons why we moved some of our TBA position from Jenny Mase to UMBS in the first quarter and on a go-forward basis.
Matthew Erdner: If that continues, I would expect us to hold perhaps more TBAs because of the pick-up and implied financing levels.
Matthew Erdner: from a pool perspective, we continue to like the intermediate part of the coupon stack because it gives us you know some prepayment protection naturally given mortgage rates now are back close to 7% and not there this morning but they're. [inaudible]
Matthew Erdner: 6.8, 6.9%, so we'd like that intermediate part of the curve, we still have good carry there, and to the extent that we buy higher coupons and we do still like higher coupons, we would look to buy those with some sort of prepayment protection.
Matthew Erdner: Got it. That's what I helpful. I appreciate all the color to them.
Shirt.
[inaudible]
Speaker Change: The next question comes from the line of Jason Stewart with Janie Montgomery, please go ahead.
Jason Stewart: Thanks for all the color and the comments. A couple of quick follow-ups. You've talked a lot about conceptually changing the swap portfolio, the hedge portfolio going forward. Were there any meaningful changes to date, post quarter ends that we can incorporate for our modeling purposes?
Jason Stewart: They're have not. We have not really had any substantial portfolio changes.
Speaker Change: Okay, thanks. And then just clarification, you're seven and a half to eight percent down on the book with Census 331, not the pre-release date, right?
Oh, yes. Yeah, yeah, yeah, yeah.
Gotcha. Okay. And then you mentioned a greater interpretation, by the way.
Speaker Change: Yeah, no problem. You mentioned greater appreciation for complexity of the housing finance system. Is that comment tied to the SLR change that you're expecting, or is there something more specific to housing that you see as a catalyst to kind of get some clarity in the market?
Speaker Change: Yeah, you know, I went into those that sort of explanation of the GSEs because I really do think that one of the things that is emerging, I think this is an important when you think about the outlook for AGNC MBS. I think this is.
Speaker Change: We're in an environment where spreads are really historically cheap. It's a great buy and opportunity, but there's a lot of uncertainty around that, a lot of volatility, and a lot of unknowns because of the macro back up. There's no doubt about that.
Speaker Change: But on the GSE front, I think it is important to recognize.
Lower Mortgage Rates,
and the importance of housing, improving housing affordability.
Speaker Change: Interestingly, he even mentioned early on after he got confirmed, he even mentioned where mortgage spreads were trading in a particular day, which I thought was indicative of his awareness and the importance of that issue to the administration.
Speaker Change: So while there may be ongoing debate about the GSEs and the ultimate capital structure
Speaker Change: My point was that the system, the housing finance system and the key part of it is the conventional mortgage market created by the GSEs. It is functioning extraordinarily well.
Speaker Change: and I think there's an appreciation that you can't simply just make a change on its face looks like it's not a complicated change but it does have far reaching implications. Take for example the TBA market.
Speaker Change: The TBA market is what it is today because it trades without credit risk.
Speaker Change: and $300 billion of TBA's trade in every single day. That's an incredibly liquid market.
Speaker Change: that is the underpinning of all of our housing finance system. It's critical to originations, it's critical to servicings, it's critical to homeowners being able to lock in a mortgage rate 30 or 60 or 90 days forward.
Speaker Change: I think there's a greater appreciation of all of that interconnectedness today. And so while we can debate about
Speaker Change: What ultimate structure the GSEs may take, I think it's also clear that the GSEs do an incredible amount of good for our
and that if we want housing affordability to improve,
Speaker Change: and I think we certainly do, given where mortgage rates are, then we have to approach this issue really thoughtfully, really cautiously, and I think that sentiment was expressed clearly by the Treasury Secretary.
Speaker Change: That's sort of our view is look at the end of the day, the PSPAs and the structure today with the GSEs operating with the strong capital position.
Speaker Change: The preferred stock agreement being outstanding given additional support to the GSEs, GSEs making a payment to the government, all that is working extraordinarily well. So you can still make changes going forward but you have to preserve that core. So you can still make changes going forward but you can still make changes going forward but you can still make changes going forward.
Opposite there.
No, that makes sense. Thanks, Peter.
Sure.
Speaker Change: Next question comes from the line of Eric Hagen with BTIG, please go ahead.
Eric Hagen: Hey, thanks. Good morning, guys. I want to take your temperature on the procurement environment.
Eric Hagen: and maybe how you characterize the level of convexity risk that you see in the market generally, and how you maybe compare the level of convexity risk that we're taking in the portfolio with spreads at these levels versus the nature of the level of pre-payment risk in the portfolio the last time spreads were near these levels.
Thank you. Thank you. All right.
Eric Hagen: Thank you for that. I'll get to that one second. I just want to go back to that last question about making sure people understand our book value update. That book value update obviously was through the end of last week from the 31st. It also includes our dividend accruals. I just want to make sure that.
Eric Hagen: People understood that. On the prepayment outlook, I'd add a couple things, Eric, and then we can talk about it in greater detail.
Eric Hagen: Obviously, one thing that has occurred is the Rocket Mr. Cooper merger, so although the things equal, that's going to make the universe a little bit more negatively convex given the speed in their refinance.
Efficiency, but just to put it in context, for example.
Eric Hagen: is maybe 10 to 20 percent faster than the universe in terms of refinance ability. So there was a little more convexity coming.
Eric Hagen: But overall, where the mortgage market is today, pre-payment risk is a risk and certainly our portfolio has more call risk than extension risk, you can see that in our sensitivity.
Eric Hagen: We're still a really long way away from having any significant amount of refinance risk in the system as a whole. For example, with the prevailing mortgage rate being at 6% and for context it's 680 or so this morning.
Eric Hagen: Only 15% of the universe would have a 50 basis point refinance incentive.
Eric Hagen: If the mortgage rate dropped to 5%, so almost 200 basis points lower than today,
Eric Hagen: The amount in the universe that would have a 50 basis point incentive is 25%. So we have a long way to go.
Eric Hagen: and if anything right now, given what's happened in the market and the way the yield curve is steepening,
Eric Hagen: 10-year rates, 20-year rates, 30-year rates. It's actually pushing the mortgage rate even higher. So,
Eric Hagen: There is a scenario where prepayments become an issue, but it would take a really significant rally. From our perspective,
Eric Hagen: This is one of the reasons why I mentioned this number. In our tables, we typically only have disclosed our high quality pool characteristics, which were 42% in the one table in our presentation.
Eric Hagen: But I often reference the other characteristics that we have in our portfolio that we value from a prepayment perspective, whether they be other geographies or other loan balances or other FICO or characteristics or LTVs.
Eric Hagen: And that number, as I mentioned, is up around 75, a little more than 75%. So from our perspective, particularly in our higher coupon holdings, and this is really important, whether our six percent holdings or a six and a half percent holdings.
Those positions in pool form.
Eric Hagen: have something in the neighborhood of around 95% of those positions have some sort of embedded prepayment protection that we value. It's not to say that.
Eric Hagen: They're never going to prepay, but there are characteristics that we really value. So the way we're managing that prepayment risk in this environment is really looking at those underlying characteristics.
Eric Hagen: and a much greater detail than just, for example, a high-quality loan-balanced perspective, and making sure that we have significant protection on our entire portfolio, so I'll pause there and let you ask a question.
Thank you. Thank you. Thank you.
That's great stuff. I appreciate the detail.
Speaker Change: I want to ask a maybe more general question related to the mortgage market and the sensitivity that you guys see to margin calls with respect to the levered investors like mortgage
Speaker Change: potentially being forced to sell assets or raise liquidity in certain shock scenarios and whether you think that could reverberate or contribute to wider mortgage spread and how meaningful you guys think that risk is in the market right now.
Speaker Change: Well, I don't think any of that had anything to do with the existing
Speaker Change: Repricing in the mortgage market. Absolutely did not. I did not see any of that, haven't heard about anything like that. What we did see, and this is often the case, and this is sort of the world that we live in.
We know that… [inaudible]
Speaker Change: The predominant flow in the mortgage market particularly is passive money.
Speaker Change: That's both good and bad in that when fixed income flows are increased, picking up, we're seeing demand for money managers to buy mortgages and conversely when all the markets, when I talk about all the markets, when I talk about the bond market and the equity markets.
Everybody moved.
Speaker Change: to cash or wanting to take risk off the table. What we saw early in April is confund redemptions.
Speaker Change: and so the predominant flow that we observed that did have an impact on mortgage valuations was money flowing out of bond funds where they're just simply raising liquidity for anticipated redemptions or actual redemptions.
that quieted down from what we've observed.
Speaker Change: The market, for example, last week came under a little bit of pressure on Thursday because we had a long holiday weekend and we had...
Speaker Change: Relatively high origination volume day ahead of the long weekend. So little things like that have pushed a market that's not unusual, but
Speaker Change: Overall, I have not seen anything about force delivery, particularly when you look at the re-community and you know you can look at all of the disclosures.
Speaker Change: All the reads are in really strong position. Now you look at their liquidity positions, you look at their leverage positions, you look at their portfolio, so I don't anticipate that being an issue.
Thank you. Thank you. We appreciate you guys.
Thank you.
Speaker Change: The next question comes from the line of Rick Shane with JP Morgan. Please go ahead.
Rick Shane: Hey Peter, thanks for taking my question. Good morning. Actually Jason asked the question I wanted to ask and he asked it, far more articulately than I would have so thank you. All right thank you.
END OF THE STATE
William, one more question with you.
Rick Shane: The next question is from the line of Harsh Hemnani from Greensteed, please go ahead.
Morning. Thank you.
Speaker Change: That's the treasury. And maybe on the flip side of that, if I heard you correctly, I think you mentioned that the swap based edges might come down or that's what you're planning to do.
Can you talk through that decision on how you're being?
Speaker Change: on the one hand sort of playing offense because these threats look yeah unsustainably high versus on the other hand being more diversified and more defensive so could you walk through to your thoughts on the decision making there?
Speaker Change: Yeah, you're right. I mentioned both those factors. And I also mentioned that we have not...
Speaker Change: made any change to our swap portfolio. So important from that perspective. It's up.
position between swaps and treasuries. [inaudible]
Speaker Change: But we'll have to wait and ultimately have the market settled volatility to come down and make that determination but in the short run you're 100% correct that there is much better carry on mortgages versus swast and we'll try to take advantage of that.
That's how it's done. Thank you. Sure.
Thank you.
We have now completed the question and answer session.
Peter Federico: I'd like to turn the call back over to Peter Federico for concluding remarks.
Peter Federico: Again, thank you everyone for participating on the call. Thank you for the questions.
Peter Federico: You know, although the market is volatile, as I mentioned, you know, our long run view continues to be very positive for agency MBS as an asset class and we look forward to talking to you again at the end of the second quarter.