Q2 2025 AGNC Investment Corp Earnings Call
Good morning and welcome to the agnc investment Corp. Second quarter, 2025 shareholder call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions to ask you a question. You may press star then 1 on your touchtone phone to withdraw your question. Please press star then 2. Please note. This event is being recorded. I would now like to turn the conference over to Katie Turlington an investor relations. Please go ahead.
Katie Turlington: Thank you all for joining agnc investment. Corp second quarter 2025 earnings call. Before we begin, I'd like to review the Safe Harbor statement.
Katie Turlington: 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.
Katie Turlington: actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AT&T,
Katie Turlington: All 4 looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.
Katie Turlington: Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in agency and C's. Periodic reports filed with the Securities and Exchange Commission.
Katie Turlington: Copies are available on the fcc's website. At sec.gov
Katie Turlington: We just claim any obligation to update our forward-looking statements unless required by law.
Katie Turlington: Participants on the call include.
Speaker Change: 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 second quarter earnings call.
Speaker Change: Following the administration's tariff announcement in early April, elevated governmental policy risk caused investor sentiment to turn sharply negative, and financial markets to reassess the macroeconomic and monetary policy Outlook.
Speaker Change: After a sharp repricing, in April, most markets, retrace the early period, losses and ended, the quarter at better valuation levels.
The performance of agency mortgage back Securities relative to Benchmark interest rates. However,
Speaker Change: Was notably weaker quarter over quarter.
Speaker Change: As a result of this underperformance, agency's economic return for the second quarter was negative - 1%.
During the first 3 weeks of April, when the financial Market stress was most pronounced, the yield on the 10-year, treasury fluctuated by more than 100 basis points.
Speaker Change: And the S&P 500, stock index declined by 12%.
Speaker Change: This volatility and macroeconomic uncertainty, adversely impacted agency, mortgage back securities.
Speaker Change: With spreads to Treasury and swap rates, widening meaningfully.
Speaker Change: My primary focus of agencies, risk management framework is maintaining sufficient, liquidity to withstand episodes of significant financial markets.
Speaker Change: 1 important measure of this capacity, is the percentage of equity that we hold in unencumbered cash and agency mortgage backed Securities, which are available to meet margin calls in the normal course of business.
Speaker Change: This Focus enabled us to begin the second quarter with a strong liquidity position.
Speaker Change: And to navigate the financial Market volatility without issue and importantly, without selling assets.
Speaker Change: Moreover, we were able to take advantage of the wider MBS spread environment by raising a creative Capital during the quarter and opportunistically deploying. A portion of that capital in attractively priced assets,
Speaker Change: Over the last 2 months of the quarter, most financial markets, retrace the April losses. And in some cases set new record highs,
Speaker Change: for example, the S&P 500 Index rallied 25% from the April low and ended the quarter about 10% higher
Speaker Change: Investment grade and high yield debt. Also performed well with spreads tightening 10 and 50 basis points respectively.
Speaker Change: The 1 notables agency mortgage back securities.
Speaker Change: As the current coupon spread to a blend of Treasury and swap benchmarks ended, the quarter 7 and 14 basis points wider respectively.
Speaker Change: Although the fed and treasury have indicated that beneficial regulatory reforms are forthcoming.
Speaker Change: Bank demand for MBS still appears to be constrained.
Speaker Change: Similarly, foreign investor demand, may be hindered by US dollar weakness and geopolitical risk.
Speaker Change: Looking ahead. We expect banks in foreign demand for agency MBS to grow.
Speaker Change: in addition, as we enter the third quarter,
Speaker Change: the seasonal Supply pattern for MBS issuance should improve.
Speaker Change: We expect the net supply of new MBS will be about 200 billion dollars this year. The low end of most forecasts.
Speaker Change: Since quarter end MBS spreads have tightened slightly and are showing signs of stabilization.
Speaker Change: As a levered and hedged investor in agency, mortgage back, Securities agencies, return. Profile is most favorable in environments in which mortgage spreads are wide and stable.
Speaker Change: Our favorable outlook for agency MBS was further improved in the second quarter by the very positive. Message from Key decision makers related to the potential recapitalization and release from conservatorship of the gsc's.
Speaker Change: Government's commitment to maintaining the implicit guarantee for agency MBS and also indicated that they are taking a Do. No harm approach to GSC reform.
Speaker Change: Specifically, president Trump made an unprecedented statement in late May regarding the gsc's and the ongoing role of the government in the Housing Finance system. He said our great mortgage agencies, Fannie Mae and Freddy Mack provide a vital service to our nation helping hard-working Americans reach. The American dream of home ownership
Speaker Change: I am working on taking these amazing companies public.
Speaker Change: But I want to be clear.
Speaker Change: The US government will keep its implicit guarantees with the word guarantees emphasized in all capital letters.
Speaker Change: Treasury secretary besan also, made several important statements regarding the gsc's during the quarter.
Speaker Change: the 1 that stood out the most to us was when he said
Speaker Change: The 1 requirements.
Is that they are privatized in such a way that mortgage spreads do not widen.
Speaker Change: and in fact, is there a way that we can make the spread between the risk-free rate, and mortgages tighten as Freddy Mack and Fannie Mae are privatized
Speaker Change: Finally.
Director Pi: Director Pi weighed in with similar positive statements saying.
Speaker Change: Our number 1 thing is to do no harm.
Speaker Change: And keep the implicit guarantees intact.
Speaker Change: We cannot have any disruption to the mortgage Market.
There cannot be any upward pressure on the mortgage rate.
Speaker Change: And I am very confident.
Speaker Change: That the mortgage Market will be safer and Sounder as a result of any option that the president takes.
Speaker Change: These statements individually and collectively.
Speaker Change: Clarify the administration's approach and more importantly.
Should provide investors greater confidence that the credit quality of the 8 billion dollars of outstanding agency mortgage back securities.
As it is understood to be today, will not be impaired by actions associated with privatization.
In fact, given the explicit statement of credit support made by the president of the United States.
Speaker Change: That the implicit guarantee of agency MBS will be preserved.
Speaker Change: Investors could reasonably conclude that the credit quality of the outstanding stock of agency mortgage back Securities has never been stronger.
These statements also make it clear that maintaining stability in the mortgage Market.
Speaker Change: And lowering mortgage costs.
Speaker Change: Are 2 important. Guiding principles of gsc's reform.
This is a very positive development that should lead to tighter, mortgage spreads over time.
Speaker Change: With that. I'll now turn the call over to our Chief Financial Officer. Bernie Bell to discuss our financial results in Greater detail.
Bernie Bell: Thank you, Peter.
Speaker Change: For the second quarter, agnc reported a comprehensive loss of 13 cents per common share.
Our economic return on tangible, common Equity was negative 1%. Consisting of 36 Cents of dividends declared for common share and a 44 Cent decline in tangible Netbook. Value per share as mortgage spreads ended the quarter moderately wider,
Speaker Change: As of late last week, our tangible Netbook value for common. Share was up about 1% for July. After deducting, our monthly dividend approval
Speaker Change: Quarter and leverage increased slightly to 7.6 times tangible Equity compared to 7.5 times. At the end of q1.
Speaker Change: Average, leverage for the quarter rows to 7.5 times, from 7.3 times in the prior quarter.
Speaker Change: As of quarter end our liquidity position totaled 6.4 billion dollars in cash and unencumbered agency. MBS representing 65% of tangible Equity up from 63% as of the prior quarter.
Speaker Change: As Peter noted, we were able to navigate the substantial Financial Market volatility in April, with our portfolio intact as a result of our risk management positioning and ample liquidity entering that period.
Speaker Change: Quarter. We opportunistically raised just under million dollars of common Equity through our at the market offering program at a significant premium to tangible, Netbook value.
Speaker Change: As of quarter end, we had deployed slightly less than half of the proceeds and we have continued to deploy. The remaining Capital post quarter end in utilizing the ATM. We attempt to maximize both the accretion benefit associated with the stock issuance premium and the investment Returns on aquired assets.
Speaker Change: However the optimal timing for stock issuances and capital deployment may not fully aligned. As a result, our investment of the new capital May lag, the issuance as it did this quarter.
Speaker Change: As we evaluate market conditions and wait for favorable entry points.
Speaker Change: Net spread and dollar roll income declined, 6 cents to 38 cents per common, share for the quarter primarily due to the timing of deployment of the new capital raised over the quarter.
Speaker Change: With moderately higher swap costs. Also contributing to the decline.
Our net interest rates spread decreased 11 basis points to 2011. Basis points for the quarter largely due to higher swap cost.
Speaker Change: Our treasury based Hedges, contributed additional net, spread income of approximately a penny per share for the quarter, which is not reflected in our reported net spread and dollar roll income.
Speaker Change: Lastly, the average projected life, CPR of our portfolio declined to 7.8% at quarter end from 8.3% as of q1 consistent with higher mortgage rates.
Speaker Change: Actual cpr's, averaged, 8.7% for the quarter up from 7% in the prior quarter.
Peter Federico: And with that, I'll now turn the call back over to Peter for his concluding remarks.
Thank you. Bernie.
Speaker Change: I'll provide a brief review of our portfolio before taking your questions.
Trade fiscal and monetary policy uncertainty caused agency. MBS spreads to widen across the coupon stack.
With higher coupon MBS performing slightly better than lower coupon MBS.
Speaker Change: MBS performance also varied considerably by hedge type and maturity as the yield curve. Steepen significantly, during the quarter and swap spreads tightened 5 to 10 basis points.
Speaker Change: As a result MBS hedged with longer dated treasury based. Hedges performed materially better than MBS hedge, with short and intermediate term. Swap-based hedges,
Speaker Change: Our asset portfolio totaled. 82 billion dollars. At quarter end up about 3 and a half billion from the prior quarter.
Speaker Change: The mortgages that we added were largely higher coupon specified pools with favorable prepayment characteristics.
As a result, the percentage of our assets with some form of positive, prepayment attribute increased to 81%
Our aggregate TBA position remained relatively stable at about 8 billion dollars, consistent with our preference for specified pools in the current environment.
Speaker Change: With both our pool and TBA activity. Concentrated in higher coupons, the weighted average coupon of our asset portfolio increased to 5.13% during the quarter.
The notional balance of our hedge portfolio increased to 65.5 billion dollars at quarter end.
Speaker Change: In duration, dollar terms are hedge portfolio. Consisted of 46% Treasury based Hedges and 54% swap-based hedges.
In summary, despite the second quarter volatility.
And elevated geopolitical and government policy risk that Still Remains.
Speaker Change: We continue to have a very positive outlook for agency mortgage back securities.
Speaker Change: In fact, we believe
Speaker Change: the Outlook actually improved in the second quarter due to 4 factors.
Speaker Change: First MBS Supply appears to be manageable as seasonality factors. Turn more favorable and the mortgage rate remains High
Speaker Change: Second, the demand for MBS appears poised to grow as a result of anticipated regulatory changes and relative value attractiveness.
Speaker Change: Third.
Speaker Change: Agency spreads appear to be stabilizing at historically cheap levels.
Speaker Change: Approach to GSC reform. While reaffirming the government's ongoing role in the Housing Finance system.
Speaker Change: Collectively. We believe these positive developments. Create a very favorable investment outlook for agency mortgage back Securities as a fixed income asset class.
Speaker Change: With that, we'll now open the call up to your questions.
Speaker Change: We will now begin the question and answer session to ask a question. You may press star then 1 on your touchtone phone, if you are using a speaker-phone please pick up your handset before pressing the keys to withdraw your question. Please press star. Then 2 at this time we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from. Doug Harter with UBS. Please go ahead.
Speaker Change: Uh, thanks and good morning. Good morning. Uh,
Speaker Change: Um, you know, just, you know, kind of digging into the the last comments you made about the attractive environment, you know. A as you look at that environment and and you look to continue to take advantage of that. Do you think that that comes in the form of looking to raise, uh, additional capital or, you know, is increasing, uh, leverage, you know, from from kind of this
Speaker Change: This area where you've been for the past couple of quarters, um, a consideration as well.
Speaker Change: Sure. Well, appreciate that question. And as you mentioned, you know, our Outlook really is favorable as we sort of start the second half of the Year, given some of the developments
Speaker Change: Of the second quarter, particularly related to the gsc's. I think it sets up a, a strong backdrop for agency mortgage back Securities, but what we're seeing now is really some stabilization, and I, I do expect spreads to move sort of gradually tighter.
Speaker Change: But it doesn't seem to be a big Catalyst for them to move sharply lower over the near-term.
Speaker Change: And I say that because that's important as Bernie mentioned, we haven't we've sort of taken a a patient measured approach to the deployment of capital that we raised in the second quarter. She mentioned that we deployed a little less than half of that. So from that perspective, we still have capacity to deploy those proceeds at what are still very attractive levels today, you know, it's agency mortgage back Securities current coupon to
Speaker Change: To a blend of swap rates is at about 200 basis points. That's about the upper end of the range over the last 4 years.
Speaker Change: And then, of course, to the extent that we have capacity at some point during the quarter, to raise a creative capital and deploy. Those proceeds, we would certainly look to do that as well as a way of generating incremental value for our shareholders. But we can, we feel like we're in a good position now to deploy Capital at a, at a sort of a patient measured pace.
Speaker Change: And I think these opportunities are going to be with us for a little while, um, but we could certainly also have the capacity to operate with slightly higher leverage. Bernie mentioned that our unencumbered cash position at the end of the quarter was at 6.4 billion dollars or 65%, that's 2% higher actually than it was at the end of the first quarter. So dep, despite all the volatility, despite growing our portfolio by 3 and a half billion dollars, we still have actually more unencumbered cash as a percentage of our Equity at the end of the second quarter. So we're in a good position, Doug essentially to do everything that you just described. We'll let the market dictate.
The pace of that. And then the levers that we pull, as we see mortgage spreads develop. And we see that backdrop of some of this still ongoing political uncertainty, get resolved, which hopefully will get resolved over the next couple weeks with respect to government policy and tariffs. And then, of course, we have a little bit of uncertainty still ongoing with monetary policy, but those should be resolved really over the next month or 2. So,
Speaker Change: We have a lot of capacity and a lot of flexibility to be opportunistic in this environment.
Great. Thank you.
Crispen Love: The next question comes from Crispen. Love with Piper Sandler. Please go ahead.
Crispen Love: Hi, good morning. Um, Peter can you speak to your views on the Court earnings trajectory and what that means for the dividend level Court returns are high. Spreads are pretty wide swaps continue to roll off. But curious what you view to be the Run rate for earnings and Court returns over the near the intermediate term.
yeah, yeah, we've talked about our net spread in dollar roll, roll income for
Crispen Love: When you're looking at net spread and dollar roll income, in terms of the way accounting works for asset yields and for hedge costs.
Crispen Love: And it doesn't reflect the essentially, the long-term ongoing economic earnings power of your portfolio. It's a current period earnings measure so you have to look at it in that context but that said, it has come down more in line with the economics of our portfolio today and I'll share with you a couple points 1. If you look at that, 38 cents that 38 cents in terms of a return on Equity as I think in the 19 and a half type range. Uh, I don't know exactly what that number but something in the 1899 and a half percent range
Crispen Love: I point that out because if you look at where mortgage valuations are today that ref that number I just talked about with current coupon.
To a blend of Treasury rates and a current coupon to a blend of swap rates, current coupon to treasury rates. Right now, at about 160 basis points, a blend of rates across the curve, from 3 years, to 10 years and 200 basis points to swap. So you're looking at about 180 basis point return, spread in the current environment, leveraged the way we leverage our portfolio that translates again to about a 19 or so percent. Uh, Roe for marginal Investments. So I would say that the the environment that we're in right now given where spreads are, I would call it in the high.
Crispen Love: Teams, you know, somewhere between 18 to 20% returns that aligns with our net spread and dollar roll income.
Bernie Bell: But there's going to be period to period volatility in that number. Bernie mentioned it came down this last quarter because of the slow pace of deployment primarily
Bernie Bell: Uh, of the proceeds of the capital that we raised and obviously, as we deploy that that'll sort of, uh, eliminate that drag that we were, we saw in the second quarter. But also there will be a continued drag from our swap Hedges rolling off. We had about 5 billion roll off in the second quarter, we replaced 2 point, uh 2.3 billion of those. So over time, our swap cost will go up. I expect our repo costs to come down over time, particularly as the FED eventually gets back into easing. Um, and I expect our asset yields to gradually rise. They're still below market, so there's a bunch of different factors, but I would say our net spread and dollar roll income should stay generally in the kind of range that we're seeing maybe High mid to high 30s to load a mid 40s cents range.
I gave you a lot there. That hope that answers your question. Absolutely know that was very helpful. Peter and then just following up on Doug's issuance question and comments you've made about deployment you raised the creative Capital deployed about 50% of that. Um, in the second quarter, I believe that was the comment or it might be 50% today. But can you just share
Bernie Bell: Where you stand today? How much more have you deployed since quarter end? And then, just where are the best opportunities? Coupons, Investments, Etc. And then just given the outsized issuance in the in the second quarter. Would you expect uh, issuance in the third to come down versus historical levels?
Bernie Bell: Say that last part again?
Bernie Bell: But the issuance yeah just given the issuance that you did in the second quarter um more elevated. And just with what you have to still deploy, would you expect lower issuance compared to historical levels? Yeah.
Bernie Bell: But with that 1 first. Now we'll go back. You you give me a lot there. Um, I I again it's going to be opportunistic and um I think we're in a good position to be patient with respect to our raising of capital. We we really like the opportunity in the second quarter particularly because there was so much volatility and we were able to raise it, a creatively, it gave us a lot of additional liquidity if you will to withstand further disruption, should they have occurred and then also allowed us to deploy that those proceeds. So I wouldn't I wouldn't say that the second quarter is indicative of future quarters. Uh we'll we'll have to just take those as as they come. Tell me the RE repeat the first part of your question for me.
Bernie Bell: Pools with, you know, higher coupons, call it into 5 and 5 to 6% range, uh, specified pools, with some form of favorable. Prepayment characteristic. We'd like the yield profile there and we'd like to prepayment protection. We can buy with certain characteristics.
Great. Thank you. Peter. I know there was a lot there. Appreciate you taking my questions. Yep. Yep. Appreciate it.
Trevor Cranston: The next question comes from Trevor Cranston, with citizens JMP. Please go ahead.
Trevor Cranston: Hey, thanks. Good morning Peter. Um, another question on, uh, the capital raising um,
Trevor Cranston: You know, obviously for the last several quarters, you guys have been able to do a decent amount at pretty accretive levels.
Um,
Trevor Cranston: And obviously there's a lot of benefits to being able to, to, you know, issue so creatively, but I guess big picture. Can you kind of give us an update on your thoughts as to how you think about kind of the optimal size of the, of the company. And um, you know, particularly if you're continue to be able to to issue agreeably, for the foreseeable future. Thanks.
Trevor Cranston: Yeah, that that's a great question. And it's, uh, it's 1 that we've talked about periodically. Um, I would start by saying it it we're not growing for the sake of growing. Um, we're growing because we can raise this Capital creatively, to the benefit of our existing shareholders, and deploy those proceeds, in a way to supportive of our dividend and to the extent that we can continue to do that. We would certainly look.
Trevor Cranston: To continue to take advantage of that opportunity. Um, and, and
Trevor Cranston: Further, I would say that there are significant benefits.
Trevor Cranston: Of the scale that we operate. So first if you look at our at our operating costs this last quarter was 111 basis points so I think we're the lowest operating costs in the industry. But that's certainly very compelling.
Trevor Cranston: Um so that's 1 Point. The other is that I think you're also seeing tremendous liquidity in our stock, which is also really valuable for shareholders.
We are obviously now concentrated our portfolio in agency or agency, like security. So investors, who want to get this exposure, have a way now to buy our stock in a very liquid form, our market cap, our our, um, our common Equity is over 8 billion dollars. So we have a lot of liquidity in our stock. It's very easy for investors. Who want this fixed income exposure in their portfolio, to buy our stock in a very liquid way. So that's also very beneficial and and then the last point with respect to size from a positive perspective is that clearly as we grow in size on our outstanding.
Market cap. If you will grows in size, it does make us more accessible for other. Indexes to add us as as we grow inside. So there's, you know, that sort of virtuous benefit of growing in size and having more liquidity and being added to more indices and so forth. So those are the positives that we look at on the negative. I would say the that there there are Market, uh, capacity constraints, if you will, that we're very cognizant of in terms of size to liquidity and the fixed income Market as I've talked about a lot in the past, is not as good today, as it was
Trevor Cranston: 1015 years ago. Pretty great financial crisis. So we are very cognizant of the size of our asset portfolio. The ability to transact both in the Hedge market and in the asset market and those are considerations on the other side of that equation. So we're trying to find that perfect efficient Frontier. If you will between all of those various points, but there's a lot of benefits to, and I think investors now are seeing it in size and scale and liquidity, but we're also cognizant that there's a limit to how big we will be.
Peter Federico: Yeah. Okay, that's helpful. Thanks Peter
George: The next question comes from Bose. George with KBW. Please go ahead.
George Bose: Yes, good morning. Um morning first just give me the level of of swap spreads you know how do you see the appropriate balance between you know, swap Hedges and treasury Futures? And then you know when you give they give the Roe number that 19 plus is that kind of reflect the mix that you guys currently have in the portfolio?
George Bose: It does when I did that calculation on our way.
George Bose: I came to 180 basis points because I used a 50/50 blend and that's probably the right blend for us. We think long term meaning that there's a lot of diversification benefits that we like about having sort of an equal mix of treasuries and swaps.
George Bose: On Aggregate. And if you look at the way we hedged our purchases in the second quarter about 2/3 of the hedges were in swap-based Hedges. So we're a little little more overweight as we go forward. In the current environment I would say at the margin we would probably favor a little bit higher percent of swaps than the long-term 50/50 average because I do expect
George Bose: Stability in swap spreads to sort of develop over time. And I do expect some downward pressure or I would should say upward pressure. Meaning swap spread should widen
George Bose: Which would be beneficial to us as the supplemental. Leverage ratio reform actually takes place likely
By the fourth quarter. But maybe even in the third quarter,
George Bose: Um, and you really look at what what happened in the swap Market in the second quarter, that was really 1 of the, the sort of the most important points about mortgage performance. I mean, the the move we saw in swap spreads with longer term swap. Spreads moving. Almost 10 basis points narrower was really dramatic, and it's indicative of sort of the balance sheet constraints that still exist in the market. Today, swaps versus treasuries. We do expect that balance sheet.
George Bose: Pressure to ease as Bank regulation is implemented in particularly the, uh, supplemental. Leverage ratio is changed. So over time, I think we'll, we'll benefit from having this this overweight right now and swaps, but 5050 is probably the right long-term. Mix, um, going forward. Okay, great, thanks. And then in terms of your CPR, so it looks like the lifetime, CPR declined. Um, is that just reflect the, um, you know, the market expectation on rates?
George Bose: It it exactly right and particularly you look at what happened in the in the second quarter with respect to the yield curve steepen. And there was
George Bose: When you look at, when you look at what happened to 10 year, 10 year was almost unchanged over the quarter. I mean, I think it was up 2, or 3 basis points. We had a big rally 17 basis, point rally in 2 years, but the back end of the yield curve was really the story and that was a particularly sort of negative event for mortgage portfolio. I tried to point that out in my prepared remarks, because the 20 and 30 year, parts of the curve, moved higher, the 30-year moved Higher by 21 basis points in mortgages, do have key rate duration out there and the propagation of mortgages is affect mortgage rate. Propagation of mortgage rate is affected by that 30-year move. So in in a sense, forward mortgage rates were pushed higher in the second quarter by that movement in the 20 and 30 year, part of the curve. And so that that's what led to the
The lifetime CPR change. So that's something to watch because most portfolios, ourselves included.
George Bose: Don't typically hedge the very long cash flows in a mortgage. We hedge really as you well know, predominantly
George Bose: Uh in the intermediate part of the curve, maybe out to about 15 years. The back end is so idiosyncratic. It's and and it's difficult to hedge from a mortgage perspective. So most of our hedging is concentrated in the 10-year part of the curve to cover that long duration. So, to the extent that that 10s 30s curve, moves significantly, that could be a driver of mortgage performance.
Speaker Change: Okay, helpful. Thanks Peter.
George Bose: Sure.
Speaker Change: Next question, comes from Jason, Weaver with Jones trading. Please go ahead.
George Bose: Hey, good morning everyone. Thanks for taking my question.
Speaker Change: Uh, hey Peter uh, despite the relevant value implications we mentioned. I, I know we've been talking about the level of MBA threads for quite a while. Now, just giving the the wideness. Would you say this? That would it be fair to say that spreads have entered? Just a a bigger secular Trend over time just giving that the level of all has come down but we're still here at you know, 200 over on swaps.
Speaker Change: yeah, uh yes and no clearly we have
Speaker Change: I believe established a new trading range and certainly over. When you look back at mortgage spreads, I looked over the last 4 years. Um, so taking out the actual Co event. But since Co, if you will, we are at the sort of high end of the range.
And we we we sort of broke out barely in this last episode of that range and we got the 220 basis points.
Speaker Change: On the on as a closing Mark versus swaps but we are that range is still intact.
Speaker Change: So, I would, I would say that range for mortgages versus swaps is probably in the 160 to 100 to 200 basis. Point range.
Speaker Change: Treasuries is in the call that, um, 160 to maybe 100 120 basis, point range.
Speaker Change: I think that's the new norm and I think in the current environment, we're going to stay, maybe in the upper half of that range because of the geopolitical and, uh, and the fiscal policy and the monetary policy uncertainty. But I don't see a lot of catalyst for us breaking out of that range and that I think is the important development.
Speaker Change: Over the second quarter, clearly there was significant.
Jason: Tariff, related Market, stress that we got through that's important. But also the 1 other big Catalyst that could have sort of redefined the trading range, Jason was GSC reform because there was so much uncertainty as to how that may play out. I think the key policy makers did a really, really good job of explaining their thought process and their approach and what was meaningful to them in terms of preserving.
Jason: The very special attributes that the market has today, and I think that takes some of that upward.
Spread pressure out of the equation.
Jason: Um so I think I think you're right, we're in a new range but I think we're at the top of the range and I don't expect it to continue up. I expect it to stay in this range and move lower.
Speaker Change: Got it. That's that's helpful. And then, um, just another 1 on the capital deployment progress, uh, into q. And, and even currently, how are you looking at relative value within the specified pool product? Uh, just among the different sort of, you know, warehouses there.
Speaker Change: Yeah, well, I gave you. I gave a measure um and my Preparatory marks that that about 81% of our portfolio.
Speaker Change: Has what I call some form of positive, prepayment attribute and in 1 of our tables. I think at the beginning of our presentation on the, on the asset portfolio, we have another called high quality
Speaker Change: specified pools at about 41%, I believe, the number was
the point is that we believe there's lots of attributes out there Beyond just the typical high-quality attributes, like low loan balance,
Speaker Change: Is that?
Speaker Change: You know can translate to really good mortgage performance and more stable, cash flows. They they include characteristics like FICO and LTV and other geographies where taxes are recording or LTV characteristics or house price of characteristics, a loan type. Whether it's a
Primary residence or a second or an investor. So we think there's a whole bunch of other characteristics. So that's why we like adding specified pools.
Particularly the higher coupons as I mentioned where there's a significant yield pickup.
Speaker Change: But also we know we're taking a more, there's more convexity risk there, but by buying some of these characteristics, particularly in the current environment where house prices are sort of stabilizing and maybe moving lower in particular areas. We think there's a lot of value to adding those specified pools, uh, or pools with those kind of characteristics. The other thing I would say is in the current environment and we saw this in the second quarter,
Speaker Change: there is some specialness.
Some benefit to TBA position in terms of the role implied role or implied financing levels, particularly for certain coupons, and Jenny Mae Securities with that make up most of our long position.
But there isn't a lot of benefit for conventional TBA T positions right now. There's no, there's no real funding Advantage there. So given that we prefer to have these higher coupon specified pools rather than a TBA position in the current environment.
Got it. That's helpful. Thank you very much.
Speaker Change: Sure.
Speaker Change: The next question comes from. Jason Stewart with Janie. Please go ahead.
Hey, good morning, thanks. Thanks Peter. Um, so it, it's appears to us like the curve seener. Trade is pretty crowded trade, and we've talked about Hedges, but could you go through a little bit more on the asset side? I think you started in response to Jason's question. Um, you know, in a post steepener trade, you know, how do you position the and is there enough flexibility? How do you position the asset side of the balance sheet in terms of coupon Etc to to optimize returns going forward?
Speaker Change: Um the characteristics that we talked about change our our profile so there's lots of ways on the asset side for us to do that. Particularly if we have a TPA position we could do that. We can move from TPA to pools and different coupons. So, as the yield curve changes, we can certainly change the asset side of our equation. And as you point out, it's really it's really going to be driven by hedge location. That's really critical. And we have a lot of capacity to do that but most of our Hedges are concentrated in the call it 7 to 12 year range. I think about 83% of our hedge duration is greater than 7 years. And what that tells you is that when you think about our asset key rate, duration, profile, and then you overlay our hedge profile given that concentration 1 could conclude that we have positioned our aggregate portfolio to benefit when the yield curve steepens 2 years to 10 years.
Speaker Change: And so we we are we have benefited and will continue to benefit if 2 year rates come down and 10 year rate to either stay the same or go higher.
Our aggregate portfolio, given our asset composition, and our hedge composition would benefit in that scenario. And we do expect that steepening debt curve steepening to continue particularly in light of all of this uh, pressure that we're seeing with respect to the Fed.
Speaker Change: The 2 year to 10 year part of the curve right now today I think is at about 52 basis points and that's about 50 or 60 basis points flatter than the 25 year average. So I expect the 2-year to 10 year part of the curve to to steepen over time and I expect our portfolio to benefit from that.
Speaker Change: Got it. Okay so perhaps too early to think about post steepen or trades um and then I apologize if I missed this in the in the comments or the questions, did you give an updated estimate for Book value quarter today in 3Q?
Speaker Change: Yes, Bernie mentioned at the end of at the end of last week, it was up about 1%.
Speaker Change: Nothing. Since then end of last. Oh yeah. Okay. Got it. Okay, thank you.
Sure.
Speaker Change: The next question comes from Eric Haugen with btig. Please go ahead.
Eric Haugen: Hey thanks. Good morning guys. I hope you're well uh just 1 from me and the repo Market. I mean, do you, do you see the government budget deficit being a risk to the repo Market? Assuming it means the government's going to be issuing a bunch of longer term debt. How do you think that might trickle down to driving spreads for, you know, wholesale funding and other repo venues that you guys are active in.
Eric Haugen: and then I mean, maybe most importantly, if we assume the FED has the tools to control repo, volatility all else equal I mean does that support
Eric Haugen: A higher range for your leverage, uh, versus where you've operated historically.
Eric Haugen: yeah, there's a lot there um so you might have to react some of those questions but first I would say that I don't expect
Eric Haugen: the treasury issuance or the deficit.
Eric Haugen: Certainly over the near term to have any impact on the repo market and and and the treasury secretary has been really clear. And I think it's been really beneficial to the market for them to really give stability in the refunding announcement, and it's not going to change. I think they continue to say for several quarters, but I do expect the composition of their issuance to change. I do expect them to issue.
Eric Haugen: More shorter term and less long term. I, they're very focused on the 10% of that rate and so there could be a little bit of crowding out of those bills. Get issued and some of that money comes out of the repo Market. But I don't expect that to have any material really impact on pricing. There's plenty of liquidity in the markets. There are 7 trillion dollars of money and money market funds. There's plenty of liquidity there. The other thing that I would point out and this is really important with respect to the FED, they continue to make really positive changes to the repo Market.
Eric Haugen: Uh and I I expect 1, I expect quantitative tightening to um essentially end relatively soon. Although like May likely go through the end of the year but it's clearly a topic of discussion. It was in the minutes last meeting so I expect it to be ongoing and I expect them to stop the run off of their balance sheet.
Eric Haugen: Our transactions on its understanding repo facility. And if they do that, that would eliminate the balance sheet, constraints that currently exist, and make that program less effective. So, if they join the ficc and they've written about this widely and I think they are considering it takes time, that would really enhance the liquidity associated with the standing repo facility. So that would be a really positive development and I suspect they'll be doing that in conjunction with the changing of the bill issuance.
Eric Haugen: So, I don't know if I covered all your questions, you can ask me again.
Eric Haugen: Yeah, that was really helpful. I mean, the second half of the question was just whether it
Eric Haugen: That whole dynamic. A lot allows you guys to take more leverage or how you how you feel about your leverage, um, just giving the support the FED has for the repo Market in general.
Eric Haugen: It's a consideration that doesn't make us feel like we got to take our leverage lower, I'll put it that way.
Speaker Change: Um, yeah, I I think that's what's unique about our asset class it is. I think it's the, the only fixed income asset class that lends itself to a levered investment strategy because of the liquidity and pricing transparency of of our security. But most importantly, as you point out,
Speaker Change: We're the repo Market is today versus where it was pre. 2019 is so dramatically different this asset class from a funding perspective.
Speaker Change: Clearly, the, the treasury. And the FED in particular is focused every day on the liquidity, in the repo market for treasury Securities and for mortgage back Securities. And when they talk about balance sheet and ending their quantitative tightening, they are looking at that market every single day to determine whether or not reserves have hit the ample level or not. And so they, they are keenly aware of any repo pressure and they will adjust. As soon as they see that repo pressure, which makes us very confident in our funding, in addition, we, of course, have our captive broker dealer and almost 30 individual counterparties. So we love that diversification as well.
Great perspectives. I appreciate that. Um, actually a follow-up here, I mean some some changes to the credit scoring at the gsc's FICO Vantage score.
Speaker Change: I'm sure you guys are up on that. Um, do you see that, you know, driving or changing the prepayment environment in any way? Like does it support lower mortgage rates for some borrowers who may have not have you know had access under the prior scoring regime. Yeah you know um it's funny from from our perspective this seems to be getting more attention than it's really worth from an investor perspective. Um we obviously this has been discussed the Vantage alternative the name of that's the name of the alternative.
Speaker Change: Uh, has been discussed, I think, for 10 plus years.
Speaker Change: um, from our perspective, yes, it will likely lead to
Speaker Change: Borrowers, having the capacity for a better higher credit score, which ultimately could increase their capacity and lead to higher.
Speaker Change: Uh, slightly higher prepayments if you will. Um, but from our perspective as an investor perspective, it's not that. Not that significant and not that complicated. What we would need to know as an investor is 1. We not we need to know the source of the data as a GSC is giving us FICO or Vantage
Speaker Change: And then 2, we need to have sufficient time to implement so that we can then quantify the impact and we'll all adjust it for. Um, well, I'll adjust for the, you know, differences speeds. Once we have sufficient data between the 2 Data data sources,
Speaker Change: very helpful for me, guys. Thank you.
Speaker Change: It's also worth pointing out on on that 1. You know, the the Vantage score I think has some benefit over FICO in that it includes um rent payment history whereas FICO did not. So I think it it could it could provide investors sort of a more comprehensive picture on credit.
Speaker Change: The next question comes from Rick, Shane with JP Morgan. Please go ahead.
Hey guys, thanks for taking my questions. This morning. Look, historically historically the the bare case in the space is always higher rates but as you know, well the existential risk is actually sharply lower rates and rapid rapid repayments
Speaker Change: The mortgage industry is evolving strategically. It's evolving from a technology perspective. It's evolving. You have borrowers. I think there's a a evolving cohort of borrowers with a lot of pent-up demand for refi.
Speaker Change: That there's been enough of a change in terms of the underlying factors that speeds in a. And we saw this in December, where speeds picked up, very quickly, based on a, a brief movement rates that the
Speaker Change: Thesis behind the prepayment protection doesn't actually provide as much protection as as your assuming.
Speaker Change: Um, sure there is a risk of that and again, there's a lot there. So, I think what you're describing is, in a sense, the market is becoming much more efficient to technology all the access. All those things are happening. In a sense, it's making the prepayment curve if you will more steep DS. Curve is is more steep today than it was 5 plus years ago, pre-covid. Certainly
Speaker Change: And you're right, we have seen episodes where the mortgage rate has dropped very briefly in a, in the windows down around 6%. And we had little bits of spike in prepayments, but it's also important to think about where the market is, in aggregate today with the mortgage rate at 675.
There's only about 5% of the universe that has a 50 basis point incentive.
And from our portfolios perspective, as I mentioned, our average, weighted average coupon is 5 point. Call 1 13%.
That's 60 basis points out of the money.
Speaker Change: Still, so you need a significant move in the mortgage rate to get a significant amount of prepayments. Another Point here, the mortgage rate would have to drop from 675 down to 5%. So you're talking about a dramatic movement in interest rates.
In order for the market to have. I think, at that point we would have about 27% of the universe would be refinancing
Speaker Change: So it's sort of bookends the issue for you, you're right as we move down in mortgage rate and if we get down to 6, there is a a population of pools. Particularly the post 2022, pools will prepay the high. You know, the 7 700, those will
Speaker Change: Will prepay very fast.
Speaker Change: But in order for you to have a really significant sort of, uh, Market wide refinance event, you're looking at a dramatically lower mortgage rate, which is hard to Envision, it's not impossible, but hard to Envision in the context of all the other questions we had this morning where you're talking about deficit spending and and pressure on.
Speaker Change: Interest rates. And If the Fed were to ease and the chairman Powell were to change and the yield curve steep into all those things should keep the mortgage rate maybe higher than it otherwise would be. But you're right there there are certain and
Speaker Change: You know, and you're also right that there are characteristics.
Speaker Change: That we believe are going to give us protection. That may not give us protection.
But um, you know, you have to wait and see. And you also have to wait and see what happens with the gsc's. This is the other important point over time.
Speaker Change: Um, the GSC.
Speaker Change: Sort of, um, footprint. If you will, may may change, they may change the the, their their um,
Speaker Change: Their, their mortgage.
Um, the mortgage capacity to various borrowers, they may they may they may curtail some of the some of the business that they can do today may get curtailed over time as they shift toward more toward a sort of a profitable profitability. You know objective and so that may limit borrowers capacity to refinance that have a capacity today. Those loans may not be GSC eligible in a future State, we don't know that but we do know that there is some attention toward shrinking that capacity. And also, it's also important to point out that house prices seem to be topped topping a certainly
Speaker Change: Blowing nationally, but at the regional level, there are, there's real variation. And that again is going to translate into a change in the refinance capacity for borrowers. So there's a lot that you'll have to consider as we go to lower rates.
Speaker Change: Hey Peter thank you so much for quantifying that it's it's really helpful and look we've both done this long enough you know it's it's not the punch you're looking for that hurts. You it's the wool net. You're not looking for that. Uh that does the damage. Mhm.
Speaker Change: Agreed appreciate it. Thanks guys.
Speaker Change: Green Street. Please go ahead.
Thank you morning.
Speaker Change: Hey, just thinking through 1 more on Leverage. Uh, as we think back to maybe early, April, leverage sort of drifted up just by virtue of market, price changes uh, to call it high 779. Uh, and then perhaps rebalanced throughout the quarter to end basically, where, you know, that q1 levels. Uh, how would you thinking about leverage right? Is, are there certain sort of rebalancing triggers that you're looking at, in shock scenarios is, is it preserving that unencumbered assets that you talked about? And then maybe if we look ahead in the call it new to intermediate term, given you have more certainty in spread, uh spread volatility given all the positives on GSC reform Etc. Uh, could you, would you be more comfortable with letting leverage drift up today than maybe a quarter ago?
Speaker Change: Yeah. Yeah, well a lot there. So first I would say when you, when you refer to rebalancing in the quarter, you're right. The biggest driver of the leverage. Obviously is to change in our book value in the second quarter. And that's going to put upward pressure on our Leverage.
And what's important though and I pointed this out in my prepared remarks and this is key for a levered investment strategy.
Speaker Change: That's why I mentioned that we were able to navigate the quarter and not having to sell assets. So we rebalanced if you will, our risk position by raising capital, A creatively and deploying that at a slow pace and over time, as conditions change and we become more confident in the macroeconomic Outlook. We can have more confidence in deploy, all of those processes. But importantly, what we didn't have to do is you didn't have to sell assets. You didn't have to rebalance the asset side of our balance sheet if you will, by selling assets when spreads were really wide in doing that. You crystallize. Those losses, if you hold all of those assets and our existing shareholders will get the benefit of the recovery over time whenever that may happen. So that's really important from a from a risk management perspective and from a levered Investment Portfolio perspective that's why I pointed it out in my prepared remarks. This time is that
Speaker Change: Making sure that we have capacity to withstand. Those spread moves gives us the ability to gain back that value by not having to sell assets.
Speaker Change: And you're right over time as the markets, sort of evolved, when you look at today's environment and where we stand today, and what I was trying to communicate is that I'm more confident about the Outlook today than I was, you know, than I than I was in April and that's important because we're at widespread, I don't think spreads while they could certainly widen. I don't think that they will stay wider if they do move wider for some macroeconomic reason and over time, I think they can go lower and that does inform us about our leverage and it does give us more confidence to the extent that we get more and more confident that mortgages are going to stay in a range or not break out to the upside of the range gives us more and more confidence that we could operate with higher Leverage.
Speaker Change: but all that being said, all that being said,
Speaker Change: if you look at our portfolio today, let's just say at about 7 and a half times. Leverage, we are able to generate
really attractive returns that are consistent with our dividend.
Speaker Change: And give us a lot of unencumbered liquidity and risk management capacity. And that's sort of the perfect combination of the 2. And we look to optimize those 2 things.
Got it. Thank you.
Sure.
Speaker Change: We have now completed the question and answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.
Peter Federico: Again, I appreciate everybody's time and participation on our call today and we look forward to speaking to you all again, at the end of the third quarter.
Peter Federico: Thank you for joining the call. You may now disconnect