Prepared remarks
Good morning, and welcome to the AGNC Investment Corp. First Quarter 2025 Shareholder Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Katie Turlington in Investor Relations. Please go ahead.
Thank you all for joining AGNC Investment Corp. first quarter 2025 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. 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.
Good morning, and thank you all for joining our first quarter conference call. Government policy actions and their potentially adverse effects on economic growth and inflation caused investor sentiment to turn decidedly more cautious in the first quarter. This elevated macroeconomic and monetary policy uncertainty led investors to initially seek the safety of high-quality mortgage-backed securities and cash over higher risk assets like equities and corporate debt. Driven by our attractive monthly dividend, AGNC generated an economic return of 2.4% in the first quarter. AGNC's total stock return with dividends reinvested for the quarter was positive 7.8%. The tariff policy announcement at the beginning of April, however, caused volatility to increase significantly across all financial markets. With the breadth and magnitude of the tariffs being greater than anticipated, recession fears increased materially.
Equity prices in turn fell further from their February peak and into bear market territory. Interest rate volatility also increased substantially; over the first nine trading days of April, the yield on the 10-year treasury moved initially sharply lower and then sharply higher. In total, over the short period of time, the yield on the 10-year treasury fluctuated by more than 100 basis points. This interest rate volatility and broad macroeconomic uncertainty caused normal financial market correlations to break down liquidity to become constrained and investor sentiment to turn negative. The agency MBS market was not immune to these adverse conditions and also came under significant pressure in early April. In spread terms, the current coupon spread to a blend of 5- and 10-year treasury rates widened to 160 basis points, the top of the trading range over the last five quarters. The performance of Agency MBS relative to swaps was substantially worse given the unprecedented narrowing of swap spreads that occurred during the height of the market turmoil.
As a result, the current coupon spread to a blend of swap rates reached an intraday peak of 230 basis points. For comparison, the widest level reached during the height of the COVID pandemic was 235 basis points for this measure. As of yesterday, this spread was about 220 basis points still very elevated, but off the wides. AGNC was well prepared for the recent market volatility and navigated it without issue. While AGNC's net asset value was negatively impacted by the mortgage spread widening, the expected return on our portfolio is also now higher as it reflects these wider spread levels. Moreover, at current valuation levels, we believe Agency MBS provide investors with a compelling return opportunity on both a levered and unlevered basis. Recent trading history is supportive of this value proposition, as well as spreads historically have not remained at these levels for an extended period of time.
Agency MBS also offer investors an attractive fixed income alternative to corporate debt and other credit-sensitive instruments, especially in light of the deteriorating economic outlook. For these reasons, and despite the fact that the macroeconomic uncertainty is likely to remain elevated over the near-term, our outlook for agency MBS continues to be very favorable. With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail.
Thank you, Peter. For the first quarter, AGNC reported total comprehensive income of $0.12 per common share. Our economic return on tangible common equity was 2.4%, consisting of $0.36 in dividends declared per common share and a $0.16 decline in tangible net book value per share due to modest spread widening during the quarter. Quarter-end leverage increased to 7.5 times tangible equity, up from 7.2 times at year-end, driven by the decline in tangible net book value per share and the deployment of recently issued equity capital. Average leverage was 7.3 times for Q1, up slightly from 7.2 times in the fourth quarter. We ended the first quarter with a strong liquidity position consisting of $6 billion in cash and unencumbered Agency MBS, representing 63% of tangible equity. During the quarter, we raised $509 million of common equity through our at-the-market offering program at a material premium to tangible net book value, generating meaningful accretion for common stockholders.
Net spread and dollar roll income increased $0.07 to $0.44 per common share for the quarter, driven by a higher net interest rate spread and larger asset base. Our net interest rate spread rose 21 basis points to 2.12%. This improvement was driven by higher asset yields, a greater proportion of swap-based hedges and lower funding costs as our repo positions fully reset to prevailing short-term rate levels during the first quarter. Our treasury-based hedges generated additional net spread income of approximately $0.02 per share for the first quarter, which is not reflected in our reported net spread and dollar roll income. Lastly, the average projected life CPR in our portfolio increased to 8.3% at quarter-end from 7.7% at year-end, consistent with lower rates. Actual CPRs averaged 7% for the quarter, down from 9.6% in the fourth quarter. And with that, I'll now turn the call back over to Peter.
Thank you, Bernie. Before opening the call up to your questions, I want to provide a brief update on our portfolio as of quarter-end and discuss in greater detail our outlook for agency mortgage-backed securities. As I already mentioned, slower economic growth expectations pushed equity prices meaningfully lower during the quarter. In contrast, fixed income returns as reflected by the major Bloomberg indices were positive with Agency MBS being the best performing fixed income asset class in the first quarter with a total return of 3.1%, followed by U.S. treasuries at 2.9% and corporate debt at 2.3%. On a hedge basis, however, the performance of Agency MBS was more mixed with spreads to treasuries generally widening during the quarter, particularly in the low and middle coupon segments of the market. The current coupon spread to the blended 5-year and 10-year treasury rate widened 8 basis points during the quarter.
Our asset portfolio totaled $79 billion at quarter-end, up about $5 billion from the prior quarter. The mortgages that we added were largely high-quality specified pools and pools with other favorable prepayment characteristics. As a result, the percentage of our assets with favorable prepayment characteristics increased to 77%. The weighted average coupon of our portfolio, meanwhile, remained steady at just over 5%. Our aggregate TBA position was relatively stable during the quarter, although the composition shifted to include a combination of Ginnie Mae and conventional MBS in response to changing implied financing levels and delivery profile characteristics. Consistent with the growth in our asset portfolio, the notional balance of our hedge portfolio increased to $64 billion at quarter-end. In duration dollar terms, our hedge portfolio composition was about 40% treasury-based hedges and 60% swap-based hedges at quarter-end.
Despite the recent financial market volatility, our outlook for agency MBS remains positive. On the demand side of the equation, we continue to believe that regulatory relief will eventually lead to greater demand for Agency MBS from banks. We also believe more favorable bank capital requirements are forthcoming which could benefit the treasury and swap markets. Another noteworthy development in the first quarter relates to the future of the GSEs. The rapid recapitalization and release narrative that garnered significant attention at the end of last year, and that was a source of uncertainty for investors seems to have quieted somewhat. Importantly, many key decision-makers have expressed the desire for lower mortgage rates, improved housing affordability and for the preservation of the many positive attributes that characterize today's housing finance system. There also appears to be a greater appreciation for the very complex and interconnected nature of our $14 trillion housing finance system, the cornerstone of which is the GSE conventional mortgage market.
This most recent episode of financial market volatility is a good reminder that uncertainty related to the housing finance system can quickly translate to significantly higher mortgage rates. In our opinion, the best way to improve housing affordability is to clarify and importantly, make permanent the role of the government in the housing finance system as it exists today. If the government were to do so, the demand for agency mortgage-backed securities would increase, the capital requirement for these securities could be reduced to be consistent with Ginnie Mae securities and lastly, mortgage rates and housing affordability would improve. Also noteworthy, taking this action would not preclude the government from choosing a different capital structure for the GSEs at some point in the future. With that, we'll now open the call up to your questions.
Questions and answers
We will now begin the question-and-answer session. The first question comes from the line of Bose George with KBW. Please go ahead.
Hi, everyone. Good morning. Actually, I wanted an update on your book value. You gave the April 9 number with the pre-release, but how does it look since then?
Yes. Thank you for the question, Bose. Yes, Bernie did not include that in the prepared remarks. But mortgage spreads did widen a little bit further from our pre-release number. I would have put our book value down at the end of last week, somewhere in the range of 7.5% to 8% range.
Okay. Great. And then, I mean yesterday, spread widening suggested a little bit lower since then as well?
Yes. Yesterday was a difficult day in all the markets. Mortgage spreads widened both relative to swaps and relative to treasuries; the number I quoted was 220 basis points was sort of back to the wides we saw. But it's going to be volatile. This is the condition we are in. I would also point out yesterday that while mortgage spreads did underperform considerably, again, there's not a lot of trading volume. I don't believe it's indicative of any forced selling. I believe it's just indicative of really bad investor sentiment. And we also saw, again yesterday, weakness, if you will, or narrowing of swap spreads, which continues to be a challenge, and that's what's making mortgage performance relative to swaps so difficult. It's not so much what's happening with mortgages to an extent, but it's what's happening with the swap market and swap spreads narrowing like they have really been unprecedented kind of moves, which I think are indicative of the currency flows and the balance sheet constraints and just lack of correlations that are going on right now.
Great. That's helpful. Thanks. And then can you just talk about the comfort level with the dividend, just given where the mark-to-market book value is, if you can just sort of walk through the ROE math that you guys have done in the past?
Yes. Let me begin with our total cost of capital, which we discuss frequently. At the end of the first quarter, we calculated our total cost of capital by adding the dividends from both our common and preferred stock to all of our operating expenses, then dividing that by our total tangible capital, which was around $9.5 billion at that time. Based on this calculation, the breakeven return required on our portfolio to cover these costs was 16.7%. However, after the recent update, based on last week's book value, that total cost of capital is likely closer to 18%. The question then becomes how this compares to the economic return on our portfolio, which is fully mark-to-market. Our future returns reflect current market valuations in relation to mortgages, swaps, and treasuries. From this viewpoint, particularly regarding mortgages compared to swaps, we are observing unprecedented levels. Therefore, based on today's valuation levels, expected returns on mortgages versus swaps are estimated to be between 19% and 22%.
If we consider mortgages just relative to swaps at this moment, the spread that closed yesterday was 220 basis points. A portfolio of swaps, leveraged in our typical manner, would yield returns in the low 20% range, which are historically high levels. To return to your question, it is important to note that while our total cost of capital has risen due to the widening mortgage spread and a decline in our book value, the future returns are still in strong alignment with that total cost of capital.
Great. That’s helpful. Thanks.
Thank you. We have the next question from Crispin Love with Piper Sandler. Please go ahead.
Thank you, and good morning, everyone. Just going back to a few weeks ago, can you discuss how you were able to manage the extreme rate volatility where 10-year yields went from about 4% on April 4 to 450-plus over the course of the next few days. Just based on the book value update, it seemed you managed it pretty well, but can you detail how you were able to just based on positioning going into it and active management during the volatility?
Yes, that's a great question. One of the reasons we were able to handle that situation without any issues is due to our strong position going into it. We ended the quarter with a leverage of approximately 7.5, which was about 0.2 of a turn higher than our previous operating level. Importantly, as Bernie pointed out, we dedicate a significant amount of effort to maximizing our capital efficiency. At the end of the first quarter, we had $6 billion in unencumbered cash and liquidity, which represented 63% of our equity. This gives us substantial excess capacity. We maintain this level of efficiency and keep our capital unencumbered to weather periods of volatility without needing to change our asset composition or reduce leverage. We clearly understood our position going into this situation and had sufficient capacity to manage the widening spreads. When we assess our portfolio, we consider how adverse effects might impact our unencumbered liquidity and leverage, especially in response to interest rate shocks.
We never assume positive correlations in those scenarios, which is exactly what we encountered this time. A significant challenge for all market participants was the breakdown of correlations. Initially, there was a flight-to-quality rally, with investors pulling back from equities due to a weaker growth outlook and favoring fixed income and Agency MBS, benefiting from the early market moves in the quarter. However, those correlations fell apart as sentiment shifted away from all dollar-denominated assets. We managed to navigate through this by essentially doing nothing and letting the market adjust as necessary. While spreads have indeed widened further, the markets have remained generally orderly over the last two weeks, which I view as a positive indication. I haven't observed any significant distressed selling. There were some position liquidations, especially in the swap market, early on, leading to a lot of unwinding of swap positions against treasury positions. However, we've since seen the market fall out of favor without significant volume behind the repricing, which may be a silver lining. I’ll stop there and you can ask a follow-up if you'd like.
Peter. That's all helpful. And in the beginning of that answer, you did mention leverage. But can you just share your go-forward outlook on leverage and the hedge ratio? You said that you expect more volatility. And in recent years, you've kept leverage pretty well contained. So are you comfortable with the recent levels you've had? Or could you take it down even further, just given wider spreads, so returns could be protected even if you bring it down a bit, but just leveraging the hedge ratio?
That's exactly right. Spreads at the current level allow us to generate attractive returns without relying heavily on leverage. This is one of the reasons we entered this phase with lower leverage compared to our historical averages, enabling us to operate with leverage in the low 7s while still achieving good returns. This could continue moving forward, but I don't anticipate these spread levels will remain stable. If they do persist, we would reassess our strategy. However, based on our observations, I don't think the current spreads between mortgages and swaps are sustainable. For instance, today's current coupon mortgages, supported by U.S. government credit amidst a deteriorating economic outlook, show a spread of about 200 basis points compared to 10-year swap rates. This indicates a significant excess return, with 165 basis points of excess return from mortgages against 10-year treasuries, particularly in a 5% or 6% interest environment. I doubt these spreads can last, but that doesn't mean we won't stay at these levels for a time or that we might not widen due to ongoing macroeconomic and government policy uncertainties. We'll evaluate our position as we move forward.
Thank you Peter, appreciate taking my questions.
Our next question comes from Doug Harter with UBS. Please go ahead.
Thanks. Good morning, Peter. In the past, you've talked about leverage levels and being confident in ranges holding; I know you just mentioned that spreads at current levels aren't sustainable. How do you think about the risk of spreads kind of gapping out further given this uncertainty before they kind of normalize and how you think about managing that potential scenario?
We certainly need to be ready for that. It's something we address daily as we assess and manage those risks, and devise plans for various scenarios. There’s no doubt that spreads may widen. It’s crucial to examine the differences in mortgage performance, especially in the context of current conditions, comparing mortgages to treasuries and swaps. For instance, I've noted that the spread between mortgages and 5- and 10-year treasuries reached 165 basis points, a level we've encountered several times over the past five quarters, which isn’t alarming. I mentioned this as the upper limit of a narrow trading range. However, we recently exceeded that threshold. To provide some context, in September 2023, when interest rates rose to 5% amid uncertainties regarding government issuance, that spread was closer to 190 basis points. While mortgages versus treasuries are wider than the recent range, they remain within a broader band.
The mortgage performance relative to swaps tells a different story, influenced not by worries about mortgages themselves but by significant changes in the swap market. In the first quarter, expectations were that swap spreads would widen due to government regulatory reductions, particularly concerning the supplemental leverage ratio, prompting many to bet on that outcome. At one point, 10-year swap spreads dropped to around negative 35 basis points, representing a substantial move. This shift largely dictated mortgage performance. There isn't any fundamental or technical problem with the agency mortgage market; eventually, investors will recognize its value from a fixed income standpoint. Even with an unlevered basis or a coupon mortgage near a 6% return, it presents an excellent credit profile and returns compared to treasuries and swaps. I believe capital will flow into this asset class, particularly from corporate sectors.
This is why I’m confident that eventually, the current valuation levels will be recognized as unsustainable. Nevertheless, we must prepare for further widening and potential stress; we are doing just that and will patiently wait it out. Our ability to navigate this recent period stems from our diversified portfolio, which includes various coupons, asset types, high pay-ups, low pay-ups, generic pools, and TBA securities. It’s essential to have all these elements, along with a strong cash position and unencumbered liquidity, which we have maintained.
And I guess just following up on that, Peter, given the move, the volatility in swap spreads, have you or are you considering changing some of the makeup of your hedge portfolio?
Yes, that's a great question. And I put in my prepared remarks, it's about 60% from a duration dollar perspective. So when you think about it from a market value perspective, it is important to think about the mix of your hedges on a duration dollar basis. And yes, we have a little bit higher weight now to swaps. I do think that over time, the sort of a base case may be that a 50-50 mix may be the best mix on a go-forward basis as a starting point. And I say that because it's important we are seeing in the marketplace to have great diversification, and that also applies from the asset portfolio, as well as the hedge portfolio because we see all these sorts of temporary dislocations that have occurred, and they happen from time to time, and they happen for reasons that nobody anticipated like the tariffs. The same applies for having great diversification in your hedge portfolio, and I think that's sort of the base case for us is that we want to have a mix on a go-forward basis that gives us the best diversification, so the starting point may be having hedges across the curve for sure, but also having a mix of both treasury and swap-based hedges so that we're able to withstand these periods as best we can. And that served us well this time. So I think you're right to some extent that the mix may come down on a go-forward basis.
Great. I appreciate it Peter. Thank you.
The next question comes from the line of Trevor Cranston with Citizens JMP. Please go ahead.
Hi, thanks, good morning. Actually, a follow-up question on your choice of hedge instruments and swap spreads. You mentioned sort of the unwinding of trades betting on a widening of spreads in the earlier part of this year. Can you maybe just share your thoughts on kind of where you think we are in that process and kind of what your general outlook is for swap spreads going forward from here? Thanks.
Yes. I think the recent significant movement in swap spreads, particularly the narrowing of about 3 basis points in the 10-year part of the curve, was surprising. After the initial period from April 6 to the 10th, it seemed like a lot of activity had been unwound on that trade. The current state of the swap market reflects a couple of factors. Firstly, there are balance sheet constraints at financial intermediaries, as noted by several bank CEOs last week who indicated they are facing these challenges due to regulatory requirements and are seeking relief to enable them to do more. Secondly, there is a generally pessimistic outlook for U.S. dollar-denominated assets, leading people to prefer holding derivatives over hard U.S. dollar assets, which is contributing to the narrow spreads. I also believe it’s well understood that a regulatory change regarding the supplemental leverage ratio is expected.
The Federal Reserve and the Treasury Secretary have mentioned this, and there seems to be a consensus that eventually, the supplemental leverage ratio will be eliminated, which would benefit the treasury market and widen swap spreads. However, the change has taken longer than the market anticipated, primarily because the Fed wanted to ensure that the Head of Bank Supervision, Michelle Bowman, was confirmed in her position before making significant regulatory adjustments. She just went through the nomination process recently, and her confirmation is expected soon, which I believe will catalyze some normalization in the swap market moving forward.
Got it. Okay. That's helpful. And then on the capital side of things, obviously, you guys have been utilizing the ATM program over the last several quarters. Can you just give an update on kind of how you guys are thinking about that after the selloff over the last few weeks? Thanks.
We have certainly taken advantage of opportunities as they arise. The first quarter is a good example of this, as we successfully raised capital in a way that positively impacted our book value. This capital was used to support the growth of our portfolio, which is why we saw an increase of $5 billion. From the perspective of our existing shareholders, this was a strong example of benefiting from both book value and long-term earnings. I believe this approach is still valid at current valuation levels, and as I mentioned, it's an appropriate time to deploy capital, so we will continue to take an opportunistic approach.
Okay, got it. Thank you.
The next question comes from the line of Matthew Erdner with JonesTrading. Please go ahead.
Hi, good morning guys. Thanks for taking the questions. Kind of as a follow-up to the ATM, could you talk about the pace of deployment throughout the quarter? And it looks like you guys kind of invested in that 5.5 coupon there? And as a follow-up to that, where do you guys think is the best opportunity in the coupon stack right now? Thank you.
Yes. Referring back to my comments from the fourth quarter call in January, I noted that we had been slow to deploy the capital we raised in the fourth quarter as we were waiting for better investment opportunities. At that time, I sensed that opportunities were starting to arise, and we had begun to deploy that capital around the time of the earnings call in January. This context offers clarity on our deployment timing. Additionally, our weighted average coupon on the portfolio remained largely unchanged, with only a slight adjustment of about one basis point, sitting around 5.03 for the quarter. This indicates that the mortgages we added were primarily clustered around the 5.5 area, which we favor. The pools we purchased displayed high-quality characteristics or favorable prepayment features, with around $1 billion of our growth coming from TBAs. Looking ahead, we are observing improvements in the dollar roll carry and implied financing levels, especially in conventionals, compared to the unattractive rolling conditions seen in the previous year.
This shift has led us to move some TBA positions from Ginnie Mae's to UMBS during the first quarter. If this trend continues, I expect we might increase our TBA holdings due to the enhancements in implied financing levels. From the pool perspective, we remain positive on the intermediate part of the coupon stack, as it provides natural prepayment protection, especially now that mortgage rates are nearing 7%, currently around 6.8% to 6.9%. We appreciate the carry in that segment, and if we pursue higher coupons, we will seek those with some level of prepayment protection.
Got it. That’s very helpful. I appreciate all the color to that.
Sure.
The next question comes from the line of Jason Stewart with Janney Montgomery. Please go ahead.
Good morning, Peter. Thanks for the color and comments. A couple of quick follow-ups. You've talked a lot about conceptually changing the swap portfolio, the hedge portfolio going forward? Were there any meaningful changes to date post-quarter end that we can incorporate for our modeling purposes?
There have not been. We have not really had any substantial portfolio changes.
Okay. Thanks. And then just a clarification. Your 7.5% to 8% down on book was from the April 9, not the pre-release date, right?
Yes.
Got it. Okay. And then you mentioned.
Thank you for the great clarification, by the way.
Yes, no problem. You mentioned greater appreciation for the complexity of the housing finance system. Is that comment tied to the SLR change that you're expecting? Or is there something more specific to housing that you see as a catalyst to kind of get some clarity in the market?
Yes. I explained the situation regarding the GSEs because I believe it highlights something significant. Considering the outlook for Agency MBS, we find ourselves in a context where spreads are historically low, presenting a fantastic buying opportunity. However, there's substantial uncertainty, volatility, and numerous unknowns due to the macroeconomic environment. It’s essential to recognize that despite the noise surrounding the GSEs, recent comments—such as those from the Treasury Secretary—underscore the importance of lower mortgage rates and enhancing housing affordability. He even referenced the trading levels of mortgage spreads shortly after his confirmation, reflecting his awareness of these issues. While the debate regarding the GSEs and their capital structure continues, it is evident that the housing finance system, particularly the conventional mortgage market established by the GSEs, is operating exceptionally well.
There is a growing understanding that changes which may seem straightforward can have significant implications. For instance, the TBA market, which handles $300 billion in trades daily without credit risk, is crucial for our housing finance system. This market is essential for originations, servicing, and enabling homeowners to secure mortgage rates in advance. Today, there’s a heightened awareness of this interconnectedness. While discussions about the ultimate structure of the GSEs are valid, it’s clear that they play a vital role in our housing finance system. If we aim to enhance housing affordability, particularly in the current mortgage rate environment, we must consider this issue carefully and thoughtfully, a sentiment echoed by the Treasury Secretary. Ultimately, it’s evident that the current arrangement with the GSEs, operating under a solid capital framework with the preferred stock agreement in place, is functioning very effectively. While changes can still be made in the future, it is crucial to maintain that core stability. I'll stop there.
Got it. Make sense, thanks Peter.
Next question comes from the line of Eric Hagen with BTIG. Please go ahead.
Hi, thanks, good morning guys. I want to take your temperature on the prepayment environment and maybe how you'd characterize the level of convexity risk that you see in the market generally and how you maybe compare the level of convexity risk that we're taking in the portfolio with spreads at these levels versus the nature of the level of prepayment risk in the portfolio, the last time spreads were near these levels?
Thank you for your patience. I want to clarify our book value update, which is current as of the end of last week and includes our dividend accrual. Regarding the prepayment outlook, I want to mention the Rocket Mr. Cooper merger, which has made the market more negatively convex due to their speed and efficiency in refinancing. In terms of origination, this new entity will account for about 10% of originations and 15% of servicing volume. Rocket typically operates 10% to 20% faster in terms of refinance capacity. Therefore, while there's some concern about convexity, the overall prepayment risk remains present in the market, and our portfolio has more call risk than extension risk, as indicated by our sensitivity analysis. Currently, with mortgage rates around 6%—specifically 6.18% this morning—only 15% of the market would see a 50 basis point refinancing incentive. If rates drop to 5%, that figure could rise to 25%.
We have a considerable distance yet to travel before significant refinancing risks appear in the market. Additionally, recent trends indicate rising mortgage rates due to the steepening yield curve. There’s a scenario where prepayments could become a concern, but this would require a significant market rally. We've typically disclosed our high-quality pool characteristics, which stand at 42%, but I also reference other portfolio characteristics valuable for prepayment considerations, such as geography, loan balances, FICO scores, and LTVs. Approximately 75% of our portfolio reflects these characteristics. Particularly in our higher coupon holdings—around 95% of our 6% and 6.5% holdings—possess some embedded prepayment protection, which we find valuable. While we do not rule out the possibility of prepayments, we focus on underlying characteristics beyond just high-quality loan balances to manage prepayment risk effectively across our entire portfolio. Please feel free to ask questions.
That's great stuff. I appreciate the detail. I want to ask maybe a more general question related to the mortgage market and the sensitivity that you guys see to margin calls with respect to levered investors like mortgage REITs potentially being forced to sell assets or raise liquidity in certain shock scenarios and whether you think that could reverberate or contribute to wider mortgage spreads and how meaningful do you guys think that risk is in the market right now?
I don't believe any of that relates to the current repricing in the mortgage market. I haven't witnessed anything of the sort. What we have observed, which is often typical, is that the major flow in the mortgage market is from passive money. This has both positive and negative aspects; when fixed income flows rise, it drives demand for managers to purchase mortgages. Conversely, during times when the bond and equity markets shift toward cash or seek to mitigate risks, we noticed bond fund redemptions taking place early in April. The main flow that affected mortgage valuations was money exiting bond funds as they raised liquidity for expected or actual redemptions. This trend has calmed down recently. For instance, last week, the market faced slight pressure on Thursday due to a long holiday weekend, compounded by a relatively high origination volume ahead of that weekend. Such fluctuations are not unusual. Overall, I haven't observed any signs of forced deleveraging, especially within the REIT community, which is in a robust position when you consider their liquidity, leverage, and portfolio status. Therefore, I don't foresee that posing a significant issue.
Gotcha. Thank you, we appreciate you guys.
The next question comes from the line of Rick Shane with JPMorgan. Please go ahead.
Hi, thanks for taking my question. Actually, Jason asked the question I wanted to ask, and he asked it far more articulately than I would have. So thank you.
We have one more question.
The next question is from the line of Harsh Hemnani from Green Streets. Please go ahead.
Hey, good morning. So you sort of touched on swap spreads to mortgages widening a lot more than spread treasuries and maybe on the flip side of that, if I heard you correctly, I think you mentioned that the swap-based hedges might come down or that's what you're planning to do. Can you talk through that decision on how you're paying, on the one hand, sort of playing offense because these spreads look unsustainably high versus, on the other hand, being more diversified and more defensive. So could you walk through your thoughts on the business in making there?
Yes. No, you're right. So I mentioned both those factors. And I also mentioned that we have not made any change to our swap portfolio. So important from that perspective. So that would be something when I answered that question, I was more referring to, over the long run, that may be something that we factor into our overall risk management strategy as sort of from a base case desire to have a more balanced position between swaps and treasuries. But we'll have to wait and ultimately have the market settled and volatility to come down and make that determination. But in the short run, you're 100% correct that there is much better carry, on mortgages versus swaps, and we’ll try to take advantage of that.
Right. That's helpful. Thank you.
Thank you. We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.
Well, again, thank you everyone for participating in the call. Thank you for the questions. Although the market is volatile, as I mentioned, our long run view continues to be very positive for Agency MBS as an asset class, and we look forward to talking to you again at the end of the second quarter.
Thank you. Thank you for joining the call. You may now disconnect.