Q1 2026 AGNC Investment Corp Earnings Call

April 21, 2026

Operator: Good morning, and welcome to the AGNC Investment Corp. Q1 2026 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 a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded.

Speaker #2: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone.

Speaker #2: 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, Investor Relations.

Operator: I would now like to turn the conference over to Katherine Turlington in Investor Relations. Please go ahead.

Speaker #2: Please go ahead. Thank you all for joining AGNC Investment Corp.'s first quarter 2026 earnings call. Before we begin, I'd like to review the Safe Harbor statement.

Katherine Turlington: Thank you all for joining AGNC Investment Corp.'s Q1 2026 Earnings Call. Before we begin, I'd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Speaker #2: This conference call and corresponding slide presentation contain 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.

Speaker #2: All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the reform act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC.

Katherine Turlington: Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov.

Speaker #2: All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission.

Katherine Turlington: Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer, and Chief Investment Officer, Bernice Bell, Executive Vice President and Chief Financial Officer, and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.

Speaker #2: Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer, and Chief Investment Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development.

Katherine Turlington: We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer, and Chief Investment Officer, Bernice Bell, Executive Vice President and Chief Financial Officer, and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.

Speaker #2: With that, I'll turn the call over to Peter Federico.

Speaker #3: Good morning, and thank you all for joining our first-quarter earnings conference call. AGNC MBS performance in the first quarter was driven by two very divergent investment themes.

Peter Federico: Good morning, and thank you all for joining our Q1 earnings conference call. Agency MBS performance in Q1 was driven by two very divergent investment themes. In January and February, the administration's focus on reducing interest rate volatility, maintaining mortgage spread stability, and improving housing affordability drove strong performance across the fixed income markets. Agency MBS performance was particularly strong during this period as President Trump's January 8th directive instructing the GSEs to purchase $200 billion of agency mortgage-backed securities pushed spreads through the lower end of the recent three-year trading range. In March, however, uncertainty associated with the war in Iran and the potential for a more widespread conflict in the Middle East caused interest rate volatility to increase, investor sentiment to turn negative, and agency MBS spreads to widen significantly. As a result, AGNC's economic return in Q1 was -1.6%.

Speaker #3: In January and February, the administration's focus on reducing interest rate volatility and maintaining mortgage spread stability and improving housing affordability drove strong performance across the fixed income markets.

Speaker #3: AGNC MBS performance was particularly strong during this period as Presidents Trump's January 8th directive instructing the GSEs to purchase 200 billion dollars of AGNC mortgage-backed securities pushed spreads through the lower end of the recent three-year trading range.

Peter Federico: Agency MBS performance was particularly strong during this period as President Trump's January 8th directive instructing the GSEs to purchase $200 billion of agency mortgage-backed securities pushed spreads through the lower end of the recent three-year trading range. In March, however, uncertainty associated with the war in Iran and the potential for a more widespread conflict in the Middle East caused interest rate volatility to increase, investor sentiment to turn negative, and agency MBS spreads to widen significantly.

Speaker #3: In March, however, uncertainty associated with the war in Iran and the potential for a more widespread conflict in the Middle East caused interest rate volatility to increase.

Speaker #3: Investor sentiment turned negative and AGNC MBS spreads widened significantly. As a result, AGNC's economic return in the first quarter was negative 1.6%.

Peter Federico: As a result, AGNC's economic return in Q1 was -1.6%. Despite the spread widening to swaps quarter-over-quarter, Agency MBS outperformed US Treasuries and investment-grade corporate bonds in Q1, again demonstrating the diversification benefits of this unique high credit quality fixed income asset class. At the beginning of the year, I discussed a number of factors that we believe would benefit Agency MBS performance in 2026. Among these were low interest rate volatility and an accommodative monetary policy stance.

Speaker #3: Despite the spread widening to swaps quarter over quarter, AGNC MBS outperformed U.S. Treasuries and investment-grade corporate bonds in the first quarter, again demonstrating the diversification benefits of this unique, high-credit-quality fixed income asset class.

Peter Federico: Despite the spread widening to swaps quarter-over-quarter, Agency MBS outperformed US Treasuries and investment-grade corporate bonds in Q1, again demonstrating the diversification benefits of this unique high credit quality fixed income asset class. At the beginning of the year, I discussed a number of factors that we believe would benefit Agency MBS performance in 2026. Among these were low interest rate volatility and an accommodative monetary policy stance. In Q1, however, the Middle East conflict caused interest rate volatility to increase and Fed rate cuts to become more uncertain. While the duration and economic implications of the conflict are still unknown, recent developments are encouraging, and these factors could once again be positive catalysts for Agency MBS performance. More importantly, many of the other factors that I discussed actually improved in Q1 and now further strengthen the outlook for Agency MBS.

Speaker #3: At the beginning of the year, I discussed a number of factors that we believe would benefit AGNC MBS performance in 2026. Among these were low interest rate volatility and an accommodative monetary policy stance.

Speaker #3: In the first quarter, however, the Middle East conflict caused interest rate volatility to increase and Fed rate cuts to become more uncertain. While the duration and economic implications of the conflict are still unknown, recent developments are encouraging, and these factors could once again be positive catalysts for AGNC MBS performance.

Peter Federico: In Q1, however, the Middle East conflict caused interest rate volatility to increase and Fed rate cuts to become more uncertain. While the duration and economic implications of the conflict are still unknown, recent developments are encouraging, and these factors could once again be positive catalysts for Agency MBS performance. More importantly, many of the other factors that I discussed actually improved in Q1 and now further strengthen the outlook for Agency MBS.

Speaker #3: More importantly, many of the other factors that I discussed actually improved in the first quarter and now further strengthen the outlook for AGNC MBS.

Speaker #3: Most notably, at current spread levels, the return profile on AGNC MBS is more attractive. At the time of our fourth quarter earnings conference call, the spread differential between current coupon MBS and a blend of swaps was 135 basis points.

Peter Federico: Most notably, at current spread levels, the return profile on agency MBS is more attractive. At the time of our Q4 earnings conference call, the spread differential between current coupon MBS and a blend of swaps was 135 basis points. Over the last two months, that spread has ranged between 150 and 175 basis points as a result of heightened geopolitical and macroeconomic risks. We believe agency MBS in this spread range represent compelling value on both an absolute and relative basis. The supply outlook for agency MBS also improved in the Q1. At the start of the year, the net new supply of agency MBS was expected to be approximately $250 billion, assuming a mortgage rate of just below 6%. With mortgage rates now about 50 basis points higher, MBS supply could be $50 to $70 billion lower this year.

Speaker #3: Over the last two months, that spread has ranged between 150 and 175 basis points as a result of heightened geopolitical and macroeconomic risks. We believe AGNC MBS in this spread range represents compelling value on both an absolute and relative basis.

Speaker #3: The supply outlook for AGNC MBS also improved in the first quarter. At the start of the year, the net new supply of AGNC MBS was expected to be approximately $250 billion, assuming a mortgage rate of just below 6%.

Peter Federico: The supply outlook for agency MBS also improved in the Q1. At the start of the year, the net new supply of agency MBS was expected to be approximately $250 billion, assuming a mortgage rate of just below 6%. With mortgage rates now about 50 basis points higher, MBS supply could be $50 to $70 billion lower this year. The demand outlook for Agency MBS improved in Q1 as well. Money manager demand for MBS increased materially in Q1 as bond fund inflows came in about double the pace of the previous two years.

Speaker #3: With mortgage rates now about 50 basis points higher, MBS supply could be 50 to 70 billion dollars lower this year. The demand outlook for AGNC MBS improved in the first quarter as well.

Peter Federico: The demand outlook for Agency MBS improved in Q1 as well. Money manager demand for MBS increased materially in Q1 as bond fund inflows came in about double the pace of the previous two years. US bank regulators also released their proposed bank regulatory capital framework for comment. As expected, the proposal includes lower capital requirements for high-quality mortgage credit. These favorable capital requirements could lead banks to retain a greater share of mortgage credit in whole loan form, or to utilize the private label securitization path to a greater extent, thereby reducing the GSE footprint over time. Finally, with mortgage spreads wider and the mortgage rate now in the low- to mid-6% range, the administration may take further actions to improve housing affordability. Such actions could include more aggressive GSE purchases or increases in GSE portfolio size limits.

Speaker #3: Money manager demand for MBS increased materially in the first quarter, as bond fund inflows came in at about double the pace of the previous two years.

Speaker #3: U.S. bank regulators also released their proposed bank regulatory capital framework for comment. As expected, the proposal includes lower capital requirements for high-quality mortgage credit.

Peter Federico: US bank regulators also released their proposed bank regulatory capital framework for comment. As expected, the proposal includes lower capital requirements for high-quality mortgage credit. These favorable capital requirements could lead banks to retain a greater share of mortgage credit in whole loan form, or to utilize the private label securitization path to a greater extent, thereby reducing the GSE footprint over time.

Speaker #3: These favorable capital requirements could lead banks to retain a greater share of mortgage credit in whole loan form or to utilize the private label securitization path to a greater extent, thereby reducing the GSE footprint over time.

Speaker #3: Finally, with mortgage spreads wider and the mortgage rate now in the low to mid-6% range, the administration may take further actions to improve housing affordability.

Peter Federico: Finally, with mortgage spreads wider and the mortgage rate now in the low- to mid-6% range, the administration may take further actions to improve housing affordability. Such actions could include more aggressive GSE purchases or increases in GSE portfolio size limits. Either or both of these actions would benefit mortgage performance.

Speaker #3: Such actions could include more aggressive GSE purchases or increases in GSE portfolio size limits. Either or both of these actions would benefit mortgage performance.

Peter Federico: Either or both of these actions would benefit mortgage performance. In addition, while the funding markets for Agency MBS are deep and liquid, further actions by the Fed to improve the functionality and accessibility of the Standing Repo Facility could also be catalysts for tighter mortgage spreads and lower mortgage rates. In summary, although the sharp increase in geopolitical and macroeconomic risk creates a more challenging investment environment over the near term, the return profile and technical backdrop for agency mortgage-backed securities improved in Q1. In addition, actions by the administration to improve housing affordability are more likely. As we are continually reminded, market conditions change quickly. A prompt resolution to the Middle East conflict, while at times difficult to predict, could lead to a substantial reduction in volatility and inflationary pressures. Collectively, these conditions support our favorable outlook for agency mortgage-backed securities.

Speaker #3: In addition, while the funding markets for AGNC MBS are deep and liquid, further actions by the Fed to improve the functionality and accessibility of the standing repo program could also be catalysts for tighter mortgage spreads and lower mortgage rates.

Peter Federico: In addition, while the funding markets for Agency MBS are deep and liquid, further actions by the Fed to improve the functionality and accessibility of the Standing Repo Facility could also be catalysts for tighter mortgage spreads and lower mortgage rates. In summary, although the sharp increase in geopolitical and macroeconomic risk creates a more challenging investment environment over the near term, the return profile and technical backdrop for agency mortgage-backed securities improved in Q1.

Speaker #3: In summary, although the sharp increase in geopolitical and macroeconomic risk creates a more challenging investment environment over the near term, the return profile and technical backdrop for AGNC mortgage-backed securities improved in the first quarter.

Speaker #3: In addition, actions by the administration to improve housing affordability are more likely. As we are continually reminded, market conditions change quickly. A prompt resolution to the Middle East conflict while at times difficult to predict could lead to a substantial reduction in volatility and inflationary pressures.

Peter Federico: In addition, actions by the administration to improve housing affordability are more likely. As we are continually reminded, market conditions change quickly. A prompt resolution to the Middle East conflict, while at times difficult to predict, could lead to a substantial reduction in volatility and inflationary pressures. Collectively, these conditions support our favorable outlook for agency mortgage-backed securities.

Speaker #3: Collectively, these conditions support our favorable outlook for AGNC mortgage-backed securities. Moreover, AGNC remains well-positioned to capitalize on these favorable conditions and build upon our lengthy track record of generating strong risk-adjusted returns for our stockholders over a wide range of market cycles.

Peter Federico: Moreover, AGNC remains well-positioned to capitalize on these favorable conditions and build upon our lengthy track record of generating strong risk-adjusted returns for our stockholders over a wide range of market cycles. With that, I'll now turn the call over to Bernice Bell to discuss our financial results in greater detail.

Speaker #3: With that, I'll now turn the call over to Bernice Bell to discuss our financial results in greater detail.

Speaker #1: Thank you, Peter. For the first quarter, AGNC reported a comprehensive loss of 18 cents per common share. Our economic return on tangible common equity was negative 1.6% for the quarter, consisting of 36 cents of dividends declared per common share and a 50-cent decrease in tangible net book value per share driven by wider mortgage spreads to benchmark rates.

Bernice Bell: Thank you, Peter. For Q1, AGNC reported a comprehensive loss of $0.18 per common share. Our economic return on tangible common equity was -1.6% for the quarter, consisting of $0.36 of dividends declared per common share and a $0.50 decrease in tangible net book value per share, driven by wider mortgage spreads to benchmark rates. As of late last week, our tangible net book value per common share was up approximately 6% for April or 5% net of our monthly dividend accrual. With the recovery in April through the end of last week, our tangible net book value has now largely reversed the Q1 decline. We ended Q1 with leverage of 7.4 times tangible equity, up slightly from 7.2 times as of Q4, while average leverage for the quarter was unchanged at 7.4 times.

Speaker #1: As of late last week, our tangible net book value per common share was up approximately 6% for April, or 5% net of our monthly dividend accrual.

Speaker #1: With the recovery in April through the end of last week, our tangible net book value has now largely reversed the first quarter decline. We ended the first quarter with leverage of 7.4 times tangible equity, up slightly from 7.2 times as of Q4, while average leverage for the quarter was unchanged at 7.4 times.

Bernice Bell: With the recovery in April through the end of last week, our tangible net book value has now largely reversed the Q1 decline. We ended Q1 with leverage of 7.4 times tangible equity, up slightly from 7.2 times as of Q4, while average leverage for the quarter was unchanged at 7.4 times. We also ended the quarter with a significant liquidity position of $7 billion of unencumbered cash and agency MBS, representing 60% of tangible equity.

Speaker #1: We also ended the quarter with a significant liquidity position of $7 billion of unencumbered cash, and AGNC MBS representing 60% of tangible equity. Net spread and dollar roll income was $0.42 per common share for the quarter, up $0.07 from the fourth quarter.

Bernice Bell: We also ended the quarter with a significant liquidity position of $7 billion of unencumbered cash and agency MBS, representing 60% of tangible equity. Net spread and dollar roll income was $0.42 per common share for the quarter, up $0.07 from Q4. The increase was largely due to a 25 basis point increase in our net interest spread, which was driven by a combination of a greater allocation of interest rate swaps in our hedge portfolio, lower repo funding cost, more favorable TBA implied financing levels, and a modest increase in the yield on our asset portfolio. Our quarter-over-quarter results also benefited from reduced compensation expense as our Q4 results included year-end incentive compensation accrual adjustments. The average projected life CPR of our portfolio increased 70 basis points to 10.3% at quarter end from 9.6% as of Q4.

Bernice Bell: Net spread and dollar roll income was $0.42 per common share for the quarter, up $0.07 from Q4. The increase was largely due to a 25 basis point increase in our net interest spread, which was driven by a combination of a greater allocation of interest rate swaps in our hedge portfolio, lower repo funding cost, more favorable TBA implied financing levels, and a modest increase in the yield on our asset portfolio.

Speaker #1: The increase was largely due to a 25-basis-point increase in our net interest spread, which was driven by a combination of a greater allocation of interest rate swaps in our hedge portfolio, lower repo funding cost, more favorable TBA implied financing levels, and a modest increase in the yield on our asset portfolio.

Speaker #1: Our quarter-over-quarter results also benefited from reduced compensation expense as our fourth quarter results included year-end incentive compensation accrual adjustments. The average projected life CPR of our portfolio increased 70 basis points to 10.3% at quarter-end, from 9.6% as of Q4.

Bernice Bell: Our quarter-over-quarter results also benefited from reduced compensation expense as our Q4 results included year-end incentive compensation accrual adjustments. The average projected life CPR of our portfolio increased 70 basis points to 10.3% at quarter end from 9.6% as of Q4. The increase was largely due to prepayment model updates implemented in Q1 and portfolio composition changes, partly offset by higher mortgage rates. Actual CPRs averaged 13.2% for the quarter compared to 9.7% in the prior quarter.

Speaker #1: The increase was largely due to prepayment model updates implemented in the first quarter and portfolio composition changes, partly offset by higher mortgage rates. Actual CPRs averaged 13.2% for the quarter compared to 9.7% in the prior quarter.

Bernice Bell: The increase was largely due to prepayment model updates implemented in Q1 and portfolio composition changes, partly offset by higher mortgage rates. Actual CPRs averaged 13.2% for the quarter compared to 9.7% in the prior quarter. Lastly, during Q1, we issued $401 million of common equity through our at-the-market offering program at a significant premium to tangible net book value per share, continuing our active capital management strategy and generating meaningful accretion for our common stockholders. With that, I will now turn the call back over to Peter to discuss our portfolio.

Speaker #1: Lastly, during the first quarter, we issued $401 million of common equity through our at-the-market offering program at a significant premium to tangible net book value per share, continuing our active capital management strategy and generating meaningful accretion for our common stockholders.

Bernice Bell: Lastly, during Q1, we issued $401 million of common equity through our at-the-market offering program at a significant premium to tangible net book value per share, continuing our active capital management strategy and generating meaningful accretion for our common stockholders. With that, I will now turn the call back over to Peter to discuss our portfolio.

Speaker #1: And with that, I will now turn the call back over to Peter to discuss our portfolio.

Speaker #2: Thank you, Bernie. AGNC MBS performance varied meaningfully by coupon and hedge type in the first quarter. Low coupon MBS meaningfully outperformed high coupon MBS due to heavy index buying from money managers in response to outsized bond fund inflows.

Peter Federico: Thank you, Bernie. Agency MBS performance varied meaningfully by coupon and hedge type in Q1. Low-coupon MBS meaningfully outperformed high-coupon MBS due to heavy index buying from money managers in response to outsized bond fund inflows. This variation in performance by coupon was significant, with lower-coupon MBS tightening about 10 basis points to Treasuries during the quarter, while higher-coupon MBS widened about five basis points on average. MBS performance also varied materially by hedge type as swap spreads tightened during the quarter. 10-year swap spreads, for example, tightened by almost 10 basis points. As a result, an MBS position hedged with a 10-year pay-fixed swap versus a 10-year Treasury experienced spread widening of about 10 basis points, all else equal. This tightening in swap spreads was directly related to Middle East uncertainty. The market value of our portfolio totaled $95 billion at Q1 end.

Speaker #2: This variation in performance by coupon was significant, with lower coupon MBS tightening about 10 basis points to Treasuries during the quarter, while higher coupon MBS widened about 5 basis points on average.

Speaker #2: MBS performance also varied materially by hedge type as swap spreads tightened during the quarter. 10-year swap spreads, for example, tightened by almost 10 basis points. As a result, MBS positions hedged with a 10-year pay fixed swap versus a 10-year Treasury experienced spread widening of about 10 basis points, all else equal.

Peter Federico: MBS performance also varied materially by hedge type as swap spreads tightened during the quarter. 10-year swap spreads, for example, tightened by almost 10 basis points. As a result, an MBS position hedged with a 10-year pay-fixed swap versus a 10-year Treasury experienced spread widening of about 10 basis points, all else equal. This tightening in swap spreads was directly related to Middle East uncertainty. The market value of our portfolio totaled $95 billion at Q1 end.

Speaker #2: This tightening in swap spreads was directly related to Middle East uncertainty. The market value of our portfolio totaled $95 billion at quarter-end. During the quarter, we purchased $1.7 billion of predominantly low coupon-specified pools.

Peter Federico: During the quarter, we purchased $1.7 billion of predominantly low coupon specified pools. In addition, we rotated a portion of our portfolio down in coupon. Consistent with these changes, the weighted average coupon on our portfolio declined to 4.95% from 5.12% the prior quarter. The percentage of our assets with favorable prepayment characteristics increased slightly to 77%. The notional balance of our hedge portfolio increased to $64 billion due to the addition of shorter term pay fixed swaps prior to the sharp sell-off in interest rates in March. We also reduced our exposure to treasury-based hedges during the quarter. As a result, in duration dollar terms, our swap hedge allocation increased to 78% from 70% the prior quarter. Lastly, in the current environment, we continue to favor operating with a positive duration gap, which we view as additional prepayment protection in a down rate scenario.

Speaker #2: In addition, we rotated a portion of our portfolio down in coupon. Consistent with these changes, the weighted average coupon on our portfolio declined to 4.95% from 5.12% to prior quarter.

Speaker #2: And the percentage of our assets with favorable prepayment characteristics increased slightly to 77%. The notional balance of our hedge portfolio increased to $64 billion due to the addition of shorter-term pay-fix swaps prior to the sharp sell-off in interest rates in March.

Peter Federico: The notional balance of our hedge portfolio increased to $64 billion due to the addition of shorter term pay fixed swaps prior to the sharp sell-off in interest rates in March. We also reduced our exposure to treasury-based hedges during the quarter. As a result, in duration dollar terms, our swap hedge allocation increased to 78% from 70% the prior quarter. Lastly, in the current environment, we continue to favor operating with a positive duration gap, which we view as additional prepayment protection in a down rate scenario.

Speaker #2: We also reduced our exposure to treasury-based hedges during the quarter. As a result, in duration dollar terms, our swap hedge allocation increased to 78% from 70% in the prior quarter.

Speaker #2: Lastly, in the current environment, we continue to favor operating with a positive duration gap, which we view as additional prepayment protection in a down rate scenario.

Speaker #2: With that, we'll now open the call up to your questions.

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

Speaker #3: We will now begin the question and answer session. To ask a question, you may press *1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

David Brown: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Bose George with KBW. Please go ahead.

Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Bose George with KBW. Please go ahead.

Speaker #3: To withdraw your question, please press *2. At this time, we will pause momentarily to assemble our roster. The first question comes from Bose George with KBW.

Speaker #3: Please go ahead.

Speaker #4: Hey, everyone. Good morning. Peter, you mentioned for spreads that you compared the spread level at the earnings call last time to where it is now.

Bose George: Hey, everyone. Good morning.

Peter Federico: Good morning, Bose.

Bose George: Peter, you mentioned for spreads that you compared the spread level at the earnings call last time where it is now. If you compare it from the end of Q4 to where it is now, are the returns pretty comparable? What does the ROE currently imply?

Speaker #4: But if you compare it from the end of the fourth quarter to where it is now, are the returns pretty comparable, and what does the ROE currently imply?

Speaker #2: Yeah, thanks for that question, Bose. Yeah, that's a good way of putting, in fact, Bernie mentioned at our year-to-date book value is almost unchanged from the end of the fourth quarter.

Peter Federico: Yeah, thanks for that question, Bose. Yeah, that's a good way of putting it. In fact, Bernie mentioned that our year-to-date book value is almost unchanged from the end of Q4. When you think back about where mortgage spreads were, again, I always kind of refer to them off the current coupon to the blend of the swap curve. They were right in that neighborhood of around 150 basis points. When we got the announcement on the purchases from the GSEs, it really pushed them, as you recall, about 15, maybe 16 basis points tighter. Got us down to the 135 level, and now we're right back to where we were this morning. They're at about 151 basis points. At that level, that's to swap curve.

Speaker #2: So, when you think back about where mortgage spreads were—again, I always kind of refer to them off the current coupon to the blend of the swap curve—but they were right in that neighborhood of around 150 basis points.

Speaker #2: And then, when we got the announcement on the purchases of the GS from the GSEs, it really pushed them, as you recall, about 15, maybe 16 basis points tighter—got us down to the 135 level.

Peter Federico: When we got the announcement on the purchases from the GSEs, it really pushed them, as you recall, about 15, maybe 16 basis points tighter. Got us down to the 135 level, and now we're right back to where we were this morning. They're at about 151 basis points. At that level, that's to swap curve. The current coupon to Treasuries is about 120 or so basis points to the curve, not to a specific point on the Treasury curve. You're looking at an average spread of somewhere between 140 and 150, depending on what amount of swaps we use.

Speaker #2: And now we're right back to where we were this morning, there at about 151 basis points. And at that level, that's the swap curve.

Peter Federico: The current coupon to Treasuries is about 120 or so basis points to the curve, not to a specific point on the Treasury curve. You're looking at an average spread of somewhere between 140 and 150, depending on what amount of swaps we use. At that level, I would say returns are kind of broadly in the 15% to 17% range, centered right around 16, which aligns pretty well with our total cost of capital.

Speaker #2: The current coupon to Treasuries is about 120 or so basis points to the curve, not to a specific point on the Treasury curve. But you're looking at an average spread of somewhere between 140 and 150, depending on what amount of swaps we use.

Speaker #2: And at that level, I would say returns are kind of broadly in the 15 to 17 percent range, centered right around 16, which aligns pretty well with our total cost of capital.

Peter Federico: At that level, I would say returns are kind of broadly in the 15% to 17% range, centered right around 16, which aligns pretty well with our total cost of capital.

Speaker #4: Okay, great. Thanks. And then, actually, it looks like specialness improved a little bit. Can you just talk about that and how much of a contribution that is now?

Bose George: Okay, great. Thanks. Actually it looks like specialness improved a little bit. Can you just talk about that and how much of a contribution that is now?

Speaker #2: Yeah, no, that's a very significant change. From what we've really observed over the last couple of years, the TBA position—we've talked about our TBA position—has not been very significant because the implied financing levels on TBA have really been unattractive.

Peter Federico: Yeah, no, that's a very significant change from what we've really observed over the last couple of years: the TBA position. We've talked about our TBA position has not been very significant because the implied financing levels on TBA have really been unattractive. In fact, for a lot of the last two years, TBA implied financing levels were well through, in some cases, the repo levels. That really dates back to the regional banking crisis in 2023, where it was the combination of the regional banking crisis. It was QT, it was regulation. It was just a lot of things putting a lot of pressure on balance sheets, and that really had an implication for TBA funding. What we've seen is a lot of that pressure easing, and we really got the benefit of it in Q4. Obviously, the Fed has stopped QT.

Speaker #2: And in fact, for a lot of the last two years, TBA implied financing levels were well through in some cases the repo levels. And that really dates back to the regional banking crisis in 2023, where it was the combination of the regional banking crisis.

Speaker #2: It was QT. It was regulation. It was just a lot of things put in a lot of pressure on balance sheets and that really had an implication for TBA funding.

Peter Federico: It was QT, it was regulation. It was just a lot of things putting a lot of pressure on balance sheets, and that really had an implication for TBA funding. What we've seen is a lot of that pressure easing, and we really got the benefit of it in Q4. Obviously, the Fed has stopped QT. Importantly, at the end of last year, they started reserve management purchases and growing their balance sheet, which really eased funding pressures. They rebranded the Standing Repo Facility to be the Standing Repo Program.

Speaker #2: What we've seen is a lot of that pressure easing, and we really got the benefit of it in the fourth quarter. Obviously, the Fed has stopped QT, importantly, at the end of last year.

Peter Federico: Importantly, at the end of last year, they started reserve management purchases and growing their balance sheet, which really eased funding pressures. They rebranded the Standing Repo Facility to be the Standing Repo Program. Of course, we now, as we expected, got reform to the original Basel III Endgame. All those things have been really positive for funding, reducing balance sheet constraints, and as a result, the TBA implied financing levels are generally back to through or equal to repo levels. In fact, for several coupons, they've actually been meaningfully better than TBA financing. We were able to take advantage of that in Q1 with our TBA position. We actually had both longs and shorts in our TBA position, which contributed to the uptick in our dollar roll income.

Speaker #2: They started reserve management purchases and growing their balance sheet, which really eased funding pressures. They rebranded the standing repo facility to be the Standing Repo Program.

Speaker #2: And then, of course, we now, as we expected, got reformed to the original Basel Endgame. All those things have been really positive for funding, reducing balance sheet constraints, and, as a result, the TBA implied financing levels are generally back to, through, or equal to repo levels.

Peter Federico: Of course, we now, as we expected, got reform to the original Basel III Endgame. All those things have been really positive for funding, reducing balance sheet constraints, and as a result, the TBA implied financing levels are generally back to through or equal to repo levels. In fact, for several coupons, they've actually been meaningfully better than TBA financing. We were able to take advantage of that in Q1 with our TBA position. We actually had both longs and shorts in our TBA position, which contributed to the uptick in our dollar roll income.

Speaker #2: And, in fact, for several coupons, they've actually been meaningfully better than TBA financing. So we were able to take advantage of that in the first quarter.

Speaker #2: With our TBA position, we actually had both longs and shorts in our TBA position, which contributed to the uptick in our dollar roll income.

Speaker #2: So, we expect these implied financing levels to sort of remain in this area. So, it's a new opportunity for us that we haven't had over the last couple of years.

Peter Federico: We expect these implied financing levels to sort of remain in this level, in this area. It's a new opportunity for us that we haven't had over the last couple of years.

Speaker #4: Okay, great. Thanks.

Bose George: Okay, great. Thanks.

Speaker #2: Sure.

Peter Federico: Sure.

Speaker #3: The next question comes from Crispin Love with Piper Sandler. Please go ahead.

David Brown: The next question comes from Crispin Love with Piper Sandler. Please go ahead.

Operator: The next question comes from Crispin Love with Piper Sandler. Please go ahead.

Peter Federico: Good morning, Crispin.

Speaker #4: Good morning, Crispin.

Speaker #5: Thanks, Peter. Good morning. Just on core earnings—net spread and dollar roll income—very strong in the first quarter. I think highest since a year ago.

Crispin Love: Thanks, Peter. Good morning. Just on core earnings, net spread dollar roll income, very strong in Q1. I think highest since a year ago. Can you just discuss some of the dynamics there, the sustainability?

Speaker #5: Can you just discuss some of the dynamics there—the sustainability, yields higher, cost of funds lower? And you just did mention some of those financing dynamics.

Peter Federico: Yeah.

Crispin Love: Yields higher, cost of funds lower. You just did mention some of those financing dynamics. I think that's even with you just going a little bit down in coupons. Just as you look forward, would you expect core earnings to compress a little bit closer to the dividend? Just any thoughts there.

Speaker #5: And I think that's even if you're just going a little bit down in coupon. So, just as you look forward, would you expect core earnings to compress a little bit closer to the dividend? Just any thoughts there?

Speaker #2: Yeah, no, great question. You're right. When you think about our net spread and dollar roll income and our margin, our margin as Bernie mentioned, it did increase 25 basis points to 206.

Peter Federico: Yeah. No, great question. You're right. When you think about our net spread and dollar roll income and our margin, our margin, as Bernie mentioned, it did increase 25 basis points to 206. If you think about that on a return on equity basis, that's really close to 20%. I would describe that as being above the long-run economics of the current environment. If you're looking for sort of a range, and we talked about this when our net spread and dollar roll income was down around $0.35, $0.36, we said generally that we thought it was going to move up. I would say that probably a good range of expectation over the relatively near term, meaning in several quarters, would be high 30s and low 40s.

Speaker #2: And if you think about that on a return on equity basis, that's really close to 20%. I would describe that as being above the long-run economics of the current environment.

Speaker #2: But if you're looking for sort of a range and we talked about this when our net spread and dollar roll income was down around 35, 36 cents, we said generally that we thought it was going to move up.

Peter Federico: If you're looking for sort of a range, and we talked about this when our net spread and dollar roll income was down around $0.35, $0.36, we said generally that we thought it was going to move up. I would say that probably a good range of expectation over the relatively near term, meaning in several quarters, would be high 30s and low 40s.

Speaker #2: So, I would say that probably a good range of expectation over the relatively near term, meaning several quarters, would be high 30s and low 40s.

Speaker #2: And some of the things that we talked about definitely showed up, particularly, as I just mentioned, the same benefits that we saw in the TBA implied financing levels.

Peter Federico: Some of the things that we talked about definitely showed up, particularly, as I just mentioned, the same benefits that we saw in the TBA implied financing levels. Obviously, that's a tailwind now. But just more broadly and more importantly, the easing of repo pressures thanks to the Fed and their activities really made a big difference. If you recall, we were seeing real significant month-end and quarter-end pricing pressure in the repo market. That has abated and repo is now trading right where the Fed wants it in the middle of the fed funds target. Obviously, the timing of capital raises and how we deploy that capital can have a little bit of period-to-period implications.

Speaker #2: Obviously, that's a tailwind now. But just more broadly, and more importantly, the easing of repo pressures that we thanks to the Fed and their activities really made a big difference.

Speaker #2: If you recall, we were seeing real significant month-end and quarter-end pricing pressure in the repo market. That has abated in repo is now trading right where the Fed wants it in the middle of the Fed funds target.

Peter Federico: That has abated and repo is now trading right where the Fed wants it in the middle of the fed funds target. Obviously, the timing of capital raises and how we deploy that capital can have a little bit of period-to-period implications. Generally speaking, I feel like the range that I talked about is probably the right range, somewhere in the high 30s, low 40s in terms of net spread and dollar roll income.

Speaker #2: Obviously, the timing of capital raises and how we deploy that capital can have a little bit of period to period implications. But generally speaking, I feel like the range that I talked about is probably the right range, somewhere in the high 30s, low 40s in terms of net spread and dollar roll income.

Peter Federico: Generally speaking, I feel like the range that I talked about is probably the right range, somewhere in the high 30s, low 40s in terms of net spread and dollar roll income.

Speaker #5: Okay, that makes sense. And then just on hedging, the hedge ratio ticked up a little bit, but it's still fairly low when you look at historical levels.

Crispin Love: Okay. That makes sense. Then just on hedging, hedge ratio, it ticked up a little bit, but still fairly low when you look at historical levels.

Speaker #5: So just in today's environment, the war, rainfall, the administration being supportive of the housing sector, just how comfortable are you with the current levels in that 65 to 75 percent range versus if you're going to go back a little bit, you were in that 90 percent plus in the past?

Peter Federico: Yeah.

Crispin Love: Just in today's environment, the war, rate fall, the administration being supportive of the housing sector, just how comfortable are you with the current levels in that 65% to 75% range versus if you, kind of going back a little bit, you were in that 90% plus in the past?

Speaker #2: Yeah. Well, it goes back to the what really what we talked about in the fourth quarter is we were positioned and we still are positioned.

Peter Federico: Yeah. Well, it goes back to really what we talked about in Q4 is we were positioned, and we still are positioned. You're right, our hedge ratio increased. The hedge ratio that I like to look at is the one net of our receiver swap options, which is about 83%. That tells you that we are still positioned to benefit from lower short-term rates, meaning that if short-term rates go down, we could ultimately close that hedge ratio. We did some of that in Q1 because there was a period of time in Q1 where, if you recall, the two-year rate and two-year swap spreads really got down into the. I think they dropped down to around 3.18 maybe when it was the lowest rate. Not that far off of where the Fed's neutral target is.

Speaker #2: You're right. Our hedge ratio increased. And the hedge ratio that I'd like to look at is the one net of our receiver swaptions, which is about 83%.

Speaker #2: And that tells you that we are still positioned to benefit from lower short-term rates, meaning that if short-term rates go down, we ultimately could close that hedge ratio.

Speaker #2: And we did some of that in the first quarter because there was a period of time in the first quarter where if you recall, the two-year rate and two-year swap spreads really got down into the I think they dropped down to around 318, maybe even it was the lowest, right?

Peter Federico: We did some of that in Q1 because there was a period of time in Q1 where, if you recall, the two-year rate and two-year swap spreads really got down into the. I think they dropped down to around 3.18 maybe when it was the lowest rate. Not that far off of where the Fed's neutral target is. Obviously, that's not known right now, but it's probably somewhere right around 3% is the fed funds neutral target.

Speaker #2: So not that far off of where the Fed's neutral target is. Obviously, that's not known right now, but it's probably somewhere in the right around 3% as the Fed's funds neutral target.

Peter Federico: Obviously, that's not known right now, but it's probably somewhere right around 3% is the fed funds neutral target. As short-term rates approach that long run neutral target, it would make sense for us to close our hedge ratio and move higher, essentially lock in that cheap funding. Obviously, there's a lot more uncertainty about the direction of short-term rates right now. In fact, during Q1, we went from pricing in 2 eases at least to, and in fact, at one point during the quarter when the war got really going, there was expectation of Fed tightening.

Speaker #2: So as short-term rates approach that long-run neutral target, it would make sense for us to close our hedge ratio and move higher essentially lock in that funding.

Peter Federico: As short-term rates approach that long run neutral target, it would make sense for us to close our hedge ratio and move higher, essentially lock in that cheap funding. Obviously, there's a lot more uncertainty about the direction of short-term rates right now. In fact, during Q1, we went from pricing in 2 eases at least to, and in fact, at one point during the quarter when the war got really going, there was expectation of Fed tightening.

Speaker #2: Obviously, there's a lot more uncertainty about the direction of short-term rates right now. In fact, during the first quarter, we went from pricing in two eases, at least, to, in fact, at one point during the quarter when the war got really going, there was expectation of Fed tightening.

Speaker #2: So we have more uncertainty on that, but still long run, we think that this ultimately will be resolved and that some of the underlying fundamentals will come back and that the Fed will ultimately adopt a more accommodative monetary policy stance later in the quarter.

Peter Federico: We have more uncertainty on that, but still long run, we think that this ultimately will be resolved, and that some of the underlying fundamentals will come back, and that the Fed will ultimately adopt a more accommodative monetary policy stance later in the quarter, and we should stand to benefit from that. I would describe us as sort of neutral right now in terms of changes to our hedge position. We did close it a little bit when we had the opportunity.

Speaker #2: And we should stand to benefit from that. So, I would describe us as sort of neutral right now in terms of changes to our hedge position, but we did close it a little bit when we had the opportunity.

Speaker #5: Great. Thank you, Peter. Appreciate you taking my questions.

Crispin Love: Great. Thank you, Peter. I appreciate you taking my questions.

Speaker #2: Yep.

Peter Federico: Yep.

Speaker #3: The next question comes from Marissa Lobo with UBS. Please go ahead.

David Brown: The next question comes from Marisa Lobo with UBS. Please go ahead.

Operator: The next question comes from Marisa Lobo with UBS. Please go ahead.

Speaker #4: Good morning, Marissa. Good morning, Marissa.

Peter Federico: Good morning, Marissa.

Speaker #6: Good morning. Thank you for taking my questions. So how do you think about optimal leverage in a policy-supportive environment, but where near-term volatility keeps remaining a recurring feature?

Marissa Lobo: Good morning. Thank you for taking the questions.

Peter Federico: Yeah.

Operator 1: How do you think about optimal leverage in a policy-supportive environment, but where near-term volatility keeps remaining a recurring feature?

Operator: How do you think about optimal leverage in a policy-supportive environment, but where near-term volatility keeps remaining a recurring feature?

Speaker #2: Yeah, certainly an important question in today's environment. I guess I would start by saying, from our perspective, when we think about our leverage, we obviously are thinking about our leverage and setting our leverage according to the spread range that we expect to be operating in.

Peter Federico: Yeah, certainly an important question in today's environment. I guess I would start by saying from our perspective, when we think about our leverage, we obviously are thinking about our leverage and setting our leverage according to the spread range that we expect to be operating in. We saw that really play out really well for us in terms of being well-positioned for the volatility and the spread volatility that we incurred in Q1. Obviously, you saw us grow our portfolio. The key as a levered investor is you want to make sure that you have sufficient excess liquidity to withstand all of the uncertainty and stressful environments that we ultimately encounter on a regular basis, and not have to change the asset composition, not have to delever your portfolio. We've been able to successfully do that because we sized our position accordingly.

Speaker #2: And we saw that really play out really well for us in terms of being well positioned for the volatility and the spread volatility that we incurred in the first quarter.

Speaker #2: Obviously, you saw us grow our portfolio and the key is a levered investor, is you want to make sure that you have sufficient excess liquidity to withstand all of the uncertainty and stressful environments that we ultimately encounter on a regular basis.

Peter Federico: The key as a levered investor is you want to make sure that you have sufficient excess liquidity to withstand all of the uncertainty and stressful environments that we ultimately encounter on a regular basis, and not have to change the asset composition, not have to delever your portfolio. We've been able to successfully do that because we sized our position accordingly.

Speaker #2: And not have to change the asset composition, not have to deliver your portfolio. And we've been able to successfully do that because we sized our position accordingly.

Speaker #2: And during the quarter, for example, our leverage sort of stayed right in this range, maybe got as low as 7 and maybe got as high as 7 and a half.

Peter Federico: During the quarter, for example, our leverage sort of stayed right in this range. Maybe got as low as 7 and maybe got as high as 7.5. We have to wait and see how the environment unfolds. Obviously, there's a lot that can change and a lot that will change over the next quarter or two, both with respect to the economic outlook, the monetary policy outlook, the geopolitical uncertainty that we face, and then the administration and what actions that they may take that will ultimately impact housing affordability. All those will go to inform us as to what the right leverage level is. Importantly, we are able to operate now in today's environment where spreads are, and particularly since spreads have widened, with a very reasonable leverage position and still generate excellent returns for shareholders. That gives us a lot of ability.

Speaker #2: And so we have to wait and see how the environment unfolds. Obviously, there's a lot that can change and a lot that will change over the next quarter or two, both with respect to the economic outlook, the monetary policy outlook, the geopolitical uncertainty that we face.

Speaker #2: And then the administration, and what actions they may take that will ultimately impact housing affordability—all those will go to inform us as to what the right leverage level is.

Peter Federico: All those will go to inform us as to what the right leverage level is. Importantly, we are able to operate now in today's environment where spreads are, and particularly since spreads have widened, with a very reasonable leverage position and still generate excellent returns for shareholders.

Speaker #2: But importantly, we are able to operate now in today's environment, where spreads are—and particularly since spreads have widened—with a very reasonable leverage position and still generate excellent returns for shareholders. That gives us a lot of ability.

Peter Federico: That gives us a lot of ability. What we're trying to do is we're trying to generate the best return we can while putting ourselves in a position to preserve book value across a wide range of market conditions. We're always trying to optimize that. We will be informed over time whether or not we have to take our leverage up or take our leverage down based on the market conditions and the stability of spreads.

Speaker #2: What we're trying to do is we're trying to generate the best return we can while putting ourselves in a position to preserve book value across a wide range of market conditions.

Peter Federico: What we're trying to do is we're trying to generate the best return we can while putting ourselves in a position to preserve book value across a wide range of market conditions. We're always trying to optimize that. We will be informed over time whether or not we have to take our leverage up or take our leverage down based on the market conditions and the stability of spreads. If we get the war resolved, if the inflation pressures come down, Fed's more accommodative, and importantly, the administration goes back to focusing as they were on interest rate volatility and reducing interest rate volatility, and importantly, reducing agency spread volatility, then ultimately it would be a favorable environment we could operate with potentially a different leverage profile. We certainly like the leverage profile that we're operating right now.

Speaker #2: So we're always trying to optimize that. We will be informed over time whether or not we have to take our leverage up or take our leverage down based on the market conditions and the stability of spreads.

Speaker #2: If we get the war resolved, if the inflation pressures come down, the Fed's more accommodative, and importantly, the administration goes back to focusing as they were on interest rate volatility, and reducing interest rate volatility—and, importantly, reducing agency spread volatility.

Peter Federico: If we get the war resolved, if the inflation pressures come down, Fed's more accommodative, and importantly, the administration goes back to focusing as they were on interest rate volatility and reducing interest rate volatility, and importantly, reducing agency spread volatility, then ultimately it would be a favorable environment we could operate with potentially a different leverage profile. We certainly like the leverage profile that we're operating right now.

Speaker #2: Then ultimately, it would be a favorable environment we could operate with, potentially with a different leverage profile. But we certainly like the leverage profile that we're operating right now.

Speaker #6: Got it. Thank you for that. And then, moving to GSC activity, it's been framed as more opportunistic than programmatic. How does that shape your trading strategy and your coupon selection relative value trading?

Marissa Lobo: Got it. Thank you for that.

Peter Federico: Sure.

Marissa Lobo: Moving to GSE activity. It's been framed as more opportunistic than programmatic.

Peter Federico: Yeah.

Marissa Lobo: How does that shape your trading strategy and your coupon selection in relative value trading?

Speaker #2: Yeah, yeah, that's a great question because it goes back to your previous point about leverage. One of the things that we did expect—and it's very difficult to tell.

Peter Federico: Yeah, that's a great question because it goes back to your previous point about leverage. One of the things that we did expect, and it's very difficult to tell what we kind of realized with the GSEs is while they put out their portfolio numbers to their monthly volume summaries about a month after the fact, I don't believe that those numbers capture their TBA position. So it's not quite clear exactly what the growth is of the GSEs quarter over quarter. But what I would say, and I would fully expect, and I believe that they would do this, is that they would approach this from a really economic perspective. When mortgage spreads widen, particularly like they did in March, I would expect the GSEs to take advantage of that.

Speaker #2: What we kind of realized with the GSCs is while they put out their portfolio numbers, through their monthly volume summaries, about a month after the fact, I don't believe that those numbers capture their TBA position.

Speaker #2: So it's not quite clear exactly what the growth is of the GSCs quarter over quarter. But what I would say—and I would fully expect, and I believe that they do this—is that they would approach this from a really economic perspective.

Peter Federico: But what I would say, and I would fully expect, and I believe that they would do this, is that they would approach this from a really economic perspective. When mortgage spreads widen, particularly like they did in March, I would expect the GSEs to take advantage of that. They're not only putting on more profitable book of business, but importantly, they're serving a very important role in the market, which is to reduce interest rate volatility, excuse me, not interest rate volatility, but mortgage spread volatility.

Speaker #2: And when did in March, I would expect the GSCs to take advantage of that. They're not only putting on more profitable book of business, but importantly, they're serving a very important role in the market, which is to reduce interest rate volatility.

Peter Federico: They're not only putting on more profitable book of business, but importantly, they're serving a very important role in the market, which is to reduce interest rate volatility, excuse me, not interest rate volatility, but mortgage spread volatility. That ultimately is beneficial to the mortgage rate. I do think that they would approach it that way from an opportunistic perspective. Ultimately, the more that they do that, the more other capital gets attracted to the system. One of the things that really will benefit mortgage rates and mortgage spreads is having a more diverse investor base. We're starting to see that now. We're seeing that on the bank side with the changes in bank capital. I do believe that banks will be a bigger buyer. We're seeing that with money managers. We're seeing foreign investors start to come back into the market.

Speaker #2: Excuse me. Not interest rate volatility, but mortgage spread volatility. And that ultimately is beneficial to the mortgage rate, so I do think that they would approach it that way.

Peter Federico: That ultimately is beneficial to the mortgage rate. I do think that they would approach it that way from an opportunistic perspective. Ultimately, the more that they do that, the more other capital gets attracted to the system. One of the things that really will benefit mortgage rates and mortgage spreads is having a more diverse investor base. We're starting to see that now. We're seeing that on the bank side with the changes in bank capital. I do believe that banks will be a bigger buyer.

Speaker #2: From an opportunistic perspective, and ultimately, the more that they do that, the more other capital gets attracted to the system. And one of the things that really will benefit mortgage rates and mortgage spreads is having a more diverse investor base.

Speaker #2: And we're starting to see that now. We're seeing that on the bank side, with the changes in bank capital. I do believe that banks will be a bigger buyer.

Speaker #2: We're seeing that with money managers. We're seeing foreign investors start to come back into the market. And obviously, to the extent that mortgage spread volatility comes down, in part due to the actions of the GSEs, that allows more levered money to come into the system.

Peter Federico: We're seeing that with money managers. We're seeing foreign investors start to come back into the market. Obviously to the extent that mortgage spread volatility comes down in part due to the actions of the GSEs, that allows more levered money to come into the system. That's a virtuous cycle that will ultimately lead to lower mortgage rates. I think that's a critical role that the GSEs do play and can continue to play.

Peter Federico: Obviously to the extent that mortgage spread volatility comes down in part due to the actions of the GSEs, that allows more levered money to come into the system. That's a virtuous cycle that will ultimately lead to lower mortgage rates. I think that's a critical role that the GSEs do play and can continue to play.

Speaker #2: That's a virtuous cycle that will ultimately lead to lower mortgage rates. So I think that's a critical role that the GSEs do play and can continue to play.

Speaker #6: I appreciate all the answers.

Marissa Lobo: Appreciate all the answers.

Speaker #2: Yeah.

Peter Federico: Yeah.

Speaker #3: The next question comes from Trevor Cranston with Citizens GMP. Please go ahead.

David Brown: The next question comes from Trevor Cranston with Citizens JMP. Please go ahead.

Operator: The next question comes from Trevor Cranston with Citizens JMP. Please go ahead.

Speaker #2: Good morning, Trevor.

Peter Federico: Good morning, Trevor.

Speaker #4: Hey, good morning, Peter. Following up on the question you were just talking about with leverage—it looks like you guys didn't really add much to the portfolio during the widening in March, at least based on the quarter-end numbers.

Trevor Cranston: Hey, good morning, Peter. Follow up on the question you were just talking about with leverage. It looks like you guys didn't really add much to the portfolio during the widening in March, at least based on the quarter end numbers.

Peter Federico: Yeah.

Speaker #4: Can you talk about what you would need to see in the future bouts of volatility in order to significantly add to the portfolio?

Trevor Cranston: Can you talk about kind of what you would need to see in future bouts of volatility in order to significantly add to the portfolio? If the GSEs sort of being there as a potential buyer and widening scenarios sort of gives you any added confidence in potentially adding if spreads are to widen again in the future? Thanks.

Speaker #4: And if the GSC is sort of being there as a potential buyer in widening scenarios, sort of gives you any added confidence in potentially adding if spreads are to widen again in the future?

Speaker #4: Thanks.

Speaker #2: Yeah, see, you're right. Our portfolio growth in the first quarter was, as I mentioned, $1.7 billion. And that was through, obviously, the end of the quarter.

Peter Federico: Yeah. You're right. Our portfolio growth in Q1 was, as I mentioned, $1.7 billion. That was through, obviously, the end of the quarter. Obviously, we have seen more stability in the market since quarter end, importantly, obviously, given the change in tone in what's happening in the conflict. To the extent, as I mentioned that in my prepared remarks, to the extent that we continue to see positive developments that will ultimately change the macroeconomic outlook, and particularly the inflationary implications, it would be positive from a growth perspective. As I mentioned, I do believe that mortgages in this 150 to 160 range where we've been trading are attractive long run, and I do expect mortgage spreads to tighten over time once we have more resolution and once the monetary policy outlook starts to become more clear.

Speaker #2: Obviously, we have seen more stability in the market since quarter-end. Importantly, obviously, given the change in tone and what's happening in the conflict. And so to the extent, as I mentioned, that my prepared remarks, to the extent that we continue to see positive developments, that will ultimately change the macroeconomic outlook.

Peter Federico: To the extent, as I mentioned that in my prepared remarks, to the extent that we continue to see positive developments that will ultimately change the macroeconomic outlook, and particularly the inflationary implications, it would be positive from a growth perspective. As I mentioned, I do believe that mortgages in this 150 to 160 range where we've been trading are attractive long run, and I do expect mortgage spreads to tighten over time once we have more resolution and once the monetary policy outlook starts to become more clear.

Speaker #2: And particularly the inflationary implications, it would be positive from a growth perspective. So we do, as I mentioned, I do believe that mortgages in this 150 to 160 range where we've been trading are attractive long run.

Speaker #2: And I do expect mortgage spreads to tighten over time once we have more resolution and once the monetary policy outlook starts to become more clear.

Speaker #2: So, over time, that can all happen. And I do—as I, again, I do think that the GSEs stepping in and buying mortgages when they're cheap, if in fact that's what they have done—I think that would ultimately be positive.

Peter Federico: Over time, that can all happen, and again, I do think that the GSEs stepping in and buying mortgages when they're cheap, if in fact that's what they have done, I think that would ultimately be positive.

Speaker #4: Yeah. Okay. That makes sense. And I think you said with the, for the purchases you guys made during the first quarter, they were in lower coupons.

Trevor Cranston: Yeah. Okay. That makes sense. I think you said for the purchases you guys made during the Q1, they were in lower coupons.

Peter Federico: Right.

Speaker #4: Can you just maybe add some detail around that, kind of where you guys are buying in the coupon stack and finding the best value right now?

Trevor Cranston: Can you just maybe add some detail around that, kind of where you guys are buying in the coupon stack?

Peter Federico: Yeah

Trevor Cranston: ... and finding the best value right now? Thanks.

Speaker #4: Thanks.

Speaker #2: Yeah. We did both. Our purchases, even though it was less than $2 billion, our purchases were concentrated in lower coupon-specified pools. And importantly, we also did rotate a portion of our portfolio into lower coupons.

Peter Federico: Yeah. Our purchases, even though it was less than $2 billion, our purchases were concentrated in lower coupon specified pools. Importantly, we also did rotate a portion of our portfolio into lower coupons. The reason why we did that is because we track on an almost daily basis bond fund inflows, and we did see that bond fund inflows were coming in materially faster in Q1 than the previous couple of years. We knew that that would ultimately translate to the outperformance of lower coupons. Now that has abated somewhat. We are always looking for opportunities to move up in coupon, move down in coupon, be opportunistic. We were able to do that in Q1 to some extent. We'll continue to look for opportunities. We have seen bond fund inflows starting to actually slow down quite a bit.

Speaker #2: And the reason why we did that is because we track on an almost a daily basis bond fund inflows. And we did see that bond fund inflows were the first quarter than the previous couple of years.

Speaker #2: So we knew that that would ultimately translate to the outperformance of lower coupons. And now that has abated somewhat. So we are always looking for opportunities to move up in coupon, move down in coupon, be opportunistic.

Peter Federico: Now that has abated somewhat. We are always looking for opportunities to move up in coupon, move down in coupon, be opportunistic. We were able to do that in Q1 to some extent. We'll continue to look for opportunities. We have seen bond fund inflows starting to actually slow down quite a bit. In fact, I think quarter to date, they're probably running slower than the pace of the previous two years in Q2. We'll watch that closely.

Speaker #2: We're able to do that in the first quarter to some extent. And we'll continue to look for opportunities. We have seen bond fund inflows starting to actually slow down quite a bit.

Speaker #2: In fact, I think quarter to date, they're probably running slower than the pace of the previous two years, in the second quarter of the year.

Peter Federico: In fact, I think quarter to date, they're probably running slower than the pace of the previous two years in Q2. We'll watch that closely. There was an opportunity in low coupons, so we took advantage of that, and we'll continue to be opportunistic. Any follow-up on that, Trevor?

Speaker #2: So we'll watch that closely. But there was an opportunity in low coupons, so we took advantage of that. And we'll continue to be opportunistic.

Peter Federico: There was an opportunity in low coupons, so we took advantage of that, and we'll continue to be opportunistic. Any follow-up on that, Trevor?

Speaker #2: Any follow-up on that, Trevor?

Speaker #4: No, that's very helpful. Thank you.

Trevor Cranston: No, that's very helpful. Thank you.

Speaker #2: Okay.

Peter Federico: Okay.

Speaker #3: And our last question comes from the line of Harsh Hamnani with Green Street. Please go ahead.

David Brown: Our last question comes from the line of Harsh Hemnani with Green Street. Please go ahead.

Operator: Our last question comes from the line of Harsh Hemnani with Green Street. Please go ahead.

Speaker #5: Thank you. Peter, maybe can you talk a little bit about the timing of the equity raises last quarter? On the prior earnings call, it sounded like it would be more opportunistic and given everything that happened with spreads.

Harsh Hemnani: Thank you. Peter, maybe can you talk a little bit about the timing of the equity raises last quarter? On the prior earnings call, it sounded like it would be more opportunistic, and given everything that happened with spreads this quarter. Could you share some color on timing of those equity raises? Then can we expect the rest of the year to be similarly opportunistic?

Speaker #5: This quarter, could you share some color on the timing of those equity raises? And then, can we expect the rest of the year to be similarly opportunistic?

Speaker #2: Yeah. Thank you for that, Harsh. Yeah, I think you characterized at least my expectation from the last call that I did, if I go back to the fourth quarter earnings call, I would say that my expectation for the capital issuance would have been a little slower than what we ultimately did as Bernie mentioned.

Peter Federico: Yeah. Thank you for that, Harsh. Yeah. I think you characterized at least my expectation from the last call that I did. If I go back to the Q4 earnings call, I would say that my expectation for the capital issuance would have been a little slower than what we ultimately did. As Bernie mentioned, it was about $400 million in Q1. The reason why that ended up being a little faster than the pace that I had anticipated was obviously I didn't anticipate all of the volatility that we saw. Having more capital certainly is beneficial from that perspective. Importantly, when you think about the economic benefit to our existing shareholders of that capital, it was significant in Q1.

Speaker #2: It was about $400 million in the first quarter. And the reason why that ended up being a little faster than the pace that I had anticipated was, obviously, I didn't anticipate all of the volatility that we saw.

Speaker #2: And so having more capital certainly is beneficial from that perspective. But importantly, when you think about the economic benefit to our existing shareholders of that capital, it was significant in the first quarter.

Peter Federico: Having more capital certainly is beneficial from that perspective. Importantly, when you think about the economic benefit to our existing shareholders of that capital, it was significant in Q1. Obviously, the capital that we raised was accretive from a book value perspective, given the fact that we were trading at a premium to book. Also it was significantly accretive from an earnings perspective because we're able to deploy those proceeds.

Speaker #2: Obviously, the capital that we raised was accretive from a book value perspective, given the fact that we were trading at a premium to book.

Peter Federico: Obviously, the capital that we raised was accretive from a book value perspective, given the fact that we were trading at a premium to book. Also it was significantly accretive from an earnings perspective because we're able to deploy those proceeds. We haven't deployed them all yet, by the way, but we have deployed most of them. We were able to deploy that at returns, call it, like as I mentioned, at around 16% or so. You can compare that to what the dividend yield on the stock is around 13.5%. It's accretive from an earnings perspective. It's accretive from a book value perspective. Having more capital in times of volatility is certainly beneficial, and it gives us the opportunity now to take advantage of that.

Speaker #2: But also, it was significantly accretive from an earnings perspective because we're able to deploy those proceeds and we haven't deployed them all yet, by the way, but we have deployed most of them.

Peter Federico: We haven't deployed them all yet, by the way, but we have deployed most of them. We were able to deploy that at returns, call it, like as I mentioned, at around 16% or so. You can compare that to what the dividend yield on the stock is around 13.5%. It's accretive from an earnings perspective. It's accretive from a book value perspective. Having more capital in times of volatility is certainly beneficial, and it gives us the opportunity now to take advantage of that.

Speaker #2: We were able to deploy that at returns, call it, like as I mentioned, at around 16 or so percent. And you can compare that to what the dividend yield on the stock is, around 13 and a half percent.

Speaker #2: So it's accretive from an earnings perspective. It's accretive from a book value perspective. And having more capital in times of volatility is certainly beneficial.

Speaker #2: And it gives us the opportunity now to take advantage of that. There are a lot of times when the issuance of the capital does not align perfectly from a timing perspective with the deployment of it.

Peter Federico: There's a lot of times when the issuance of the capital does not align perfectly from a timing perspective with the deployment of it. Part of it is our risk management strategy. Part of it is trying to be opportunistic, waiting for the right opportunity to deploy those proceeds and assets at really attractive return levels. That's the approach we took in Q1, and I feel like we're in a good position as we start Q2.

Speaker #2: Part of it is our risk management strategy. Part of it is trying to be opportunistic, waiting for the right opportunity to deploy those proceeds.

Speaker #2: And assets that really attractive return levels. And so that's the approach we took in the first quarter. And I feel like we're in a good position as we start the second quarter.

Speaker #5: Recorded. That's helpful. And then maybe you talked early in the call about role specialists, improving—and that could lead to more TBA in the portfolio.

Harsh Hemnani: Got it. That's helpful.

Peter Federico: Sure.

Harsh Hemnani: Maybe you talked early in the call about roll specialness improving.

Peter Federico: Yeah

Harsh Hemnani: That could lead to more TBA in the portfolio. I guess, how are you comparing those puts and takes versus maybe capitalizing on the better roll specialness versus still seeking some prepayment protection with specified pools?

Speaker #5: I guess, how are you comparing those percentages versus maybe capitalizing on the better role specialists versus still seeking some prepayment protection with specified pools?

Speaker #2: Yeah. So a couple of points there. One, it doesn't necessarily the role specialists may not necessarily translate into a net TBA position that's materially bigger.

Peter Federico: Yeah. A couple points there. One, the roll specialness may not necessarily translate into a net TBA position that's materially bigger. For example, our average TBA position in Q1 was, I think, $10.3 versus $9.6 the previous quarter. Yet our income was materially higher. That is because as I mentioned, we can't have offsetting positions there that will allow us to take advantage of the TBA specialness. In particular, also, not only did conventional TBA implied specialness levels improve, but we have, as has been the case for now several quarters, there's significant specialness in the GNMA market. We'll continue to do that. You may not necessarily see, though, an uptick in the aggregate size of our TBA position. To your point about specified pools, we obviously still are in this environment, very focused on managing prepayment exposure.

Speaker #2: For example, our average TBA position in the first quarter was, I think, 10.3 versus 9.6 the previous quarter. Yet our income was materially higher.

Speaker #2: And that is because, as I mentioned, we can't have offsetting positions there that will allow us to take advantage of the TBA specialness. In particular, also, not only did conventional TBA implied specialness levels improve, but we have, as has been the case for now several quarters, there's significant specialness in the Ginnie Mae market.

Peter Federico: In particular, also, not only did conventional TBA implied specialness levels improve, but we have, as has been the case for now several quarters, there's significant specialness in the GNMA market. We'll continue to do that. You may not necessarily see, though, an uptick in the aggregate size of our TBA position. To your point about specified pools, we obviously still are in this environment, very focused on managing prepayment exposure.

Speaker #2: So we'll continue to do that. You may not necessarily see, though, an uptick in the aggregate size of our TBA position. To your point about specified pools, we obviously still are, in this environment, very focused on managing prepayment exposure.

Speaker #2: We do believe that over time, once this uncertainty abates, that prepayment risk will be sort of our predominant risk. And as I mentioned, we are operating now with from a positive prepayment pool characteristic perspective, a significant portion of our portfolio, 77% of our portfolio, for example, has some prepayment characteristic that we deem to be that we deem to be valuable.

Peter Federico: We do believe that over time, once this uncertainty abates, that prepayment risk will be our predominant risk. As I mentioned, we are operating now with, from a positive prepayment pool characteristic perspective, a significant portion of our portfolio, 77% of our portfolio, for example, has some prepayment characteristic that we deem to be valuable, and we will continue to do that. What's important is, in this environment because TBA implied financing levels are where they are, we are able to now deploy capital quickly in TBA, not lose carry because of the funding levels. It gives us more time to then slowly over time rotate out of TBAs into specified pools when those opportunities exist. That has not been the case for the last couple of years.

Speaker #2: And we will continue to do that. What's important is, in this environment, because TBA implied financing levels are where they are, we are able to now deploy capital quickly in TBA and not lose carry because of the funding levels.

Peter Federico: What's important is, in this environment because TBA implied financing levels are where they are, we are able to now deploy capital quickly in TBA, not lose carry because of the funding levels. It gives us more time to then slowly over time rotate out of TBAs into specified pools when those opportunities exist. That has not been the case for the last couple of years. To have a TBA position, holding that while you wait for the opportunity to rotate into specified pools actually has cost us carry.

Speaker #2: It gives us more time to then slowly, over time, rotate out of TBAs into specified pools when those opportunities exist. That has not been the case for the last couple of years.

Speaker #2: To have a TBA position while you're holding that while you wait for the opportunity to rotate into specified pools actually has cost us carry today in this environment that's not the case.

Peter Federico: To have a TBA position, holding that while you wait for the opportunity to rotate into specified pools actually has cost us carry. Today, in this environment, that's not the case. It gives us a lot of flexibility to deploy capital and then ultimately rotate into specified pools. We will continue to operate with a high percent of specified pools in this environment. We also, as I mentioned in my prepared remarks, will likely continue to operate with a positive duration gap. In fact, our duration gap in Q1 was a little higher than what we've reported for the last couple quarters because we do want to position our portfolio to benefit from that in a lower rate scenario.

Peter Federico: Today, in this environment, that's not the case. It gives us a lot of flexibility to deploy capital and then ultimately rotate into specified pools. We will continue to operate with a high percent of specified pools in this environment. We also, as I mentioned in my prepared remarks, will likely continue to operate with a positive duration gap. In fact, our duration gap in Q1 was a little higher than what we've reported for the last couple quarters because we do want to position our portfolio to benefit from that in a lower rate scenario.

Speaker #2: So it gives us a lot of flexibility to deploy capital, and then ultimately rotate into specified pools. But we will continue to operate with a high percent of specified pools in this environment.

Speaker #2: We also, as I mentioned in my prepared remarks, will likely continue to operate with a positive duration gap. In fact, our duration gap in the first quarter was a little higher than what we've reported for the last couple of quarters because we do want to position our portfolio to benefit from that in a lower rate scenario.

Speaker #5: Recorded. That's helpful. Thank you.

Harsh Hemnani: Got it. That's helpful. Thank you.

Speaker #1: We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.

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

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

Speaker #2: Well, again, I appreciate everybody joining the call this morning. We look forward to talking to you again after our second quarter.

Peter Federico: Well, again, I appreciate everybody joining the call this morning. We look forward to talking to you again after our Q2.

David Brown: Thank you for joining the call. You may now disconnect.

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

Q1 2026 AGNC Investment Corp Earnings Call

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