Prepared remarks
Good morning and welcome to the AGNC Investment Corp. Fourth Quarter 2024 Shareholder Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's 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's fourth quarter 2024 earnings call. Before we begin, I'd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contain statements that, to the extent they are not recitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by their formats. Actual outcomes and results could differ materially from those forecast 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 this call include: Peter Federico, Director, President and Chief Executive Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; Chris Kuehl, Executive Vice President and Chief Investment Officer; Aaron Pas, Senior Vice President, Non-Agency Portfolio Management; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.
Good morning, everyone, and thank you for joining our call. The favorable investment themes that emerged in 2024 continued to support our positive outlook for agency mortgage-backed securities. Last year, the Fed shifted its restrictive monetary policy stance and began the process of returning short-term rates to a neutral level. Declining inflationary pressures and accommodative monetary policy caused interest rate volatility to ease and the yield curve to steepen after being inverted for more than two years. As we begin 2025, the supply and demand outlook for agency MBS appears to be well balanced. In addition, and most important to our business, we expect agency spreads to benchmark rates to remain in the same well-defined trading range, thus providing levered and unlevered investors very attractive return opportunities. Against this improved investment backdrop, AGNC generated a positive economic return of 13.2% in 2024, driven by our compelling monthly dividend.
Our performance last year demonstrates AGNC's ability to generate strong investment returns in environments where spreads are wide and stable. Since September, the Fed lowered short-term rates by 100 basis points as it recalibrated monetary policy. While the path of monetary policy continues to move toward a neutral level, strong economic data late in the quarter extended the timeline as evidenced by the Fed's December summary of economic projections, which showed fewer rate cuts in 2025 and 2026 relative to the September release. The US presidential election also raised concerns about fiscal policy, deficit spending, and the magnitude of future treasury issuance. This elevated monetary and fiscal policy uncertainty overshadowed the positive investment sentiment that characterized the first three quarters of the year. Together, the sharp increase in interest rates and modestly wider agency spreads drove our slightly negative economic return for the fourth quarter.
As we begin 2025, our outlook for agency mortgage-backed securities continues to be very favorable. Despite significant monetary policy easing, longer-term interest rates have increased meaningfully and the 30-year primary mortgage rate is once again close to 7%. At this rate level, the supply of agency MBS this year should be similar to what we experienced last year and reasonably well aligned with investor demand. Greater bank demand is also possible given the likelihood of less onerous regulation. Lastly, agency mortgage-backed securities offer investors unique diversification benefits and an attractive return profile but are difficult for many investors to access. AGNC's common stock provides investors an easy way to invest in this unique fixed income asset class on a levered and hedged basis, which is otherwise only available to institutional investors with sophisticated trading desks.
So, in summary, the current monetary policy stance of the Fed provides a positive underlying investment foundation for high-quality fixed income instruments like agency mortgage-backed securities, particularly at current valuation levels. The supply and demand outlook for agency MBS appears to be well balanced with upside demand possible. And finally, we expect agency spreads to remain in their current attractive trading range. Collectively, these positive dynamics create a favorable investment backdrop for AGNC in 2025. With that, I'll now turn the call over to Bernie Bell to discuss our financial results in greater detail.
Thank you, Peter. For the fourth quarter, AGNC had a comprehensive loss of $0.11 per common share. Economic return on tangible common equity was negative 0.6% for the quarter, comprised of $0.36 of dividends declared per common share and a $0.41 decline in our tangible net book value per share resulting from higher interest rates and modestly wider spreads for the quarter. As Peter mentioned, our full year economic return was a positive 13.2%, driven by our monthly dividend totaling $1.44 per common share and a $0.29 decline in tangible net book value per share. As of late last week, our tangible net book value per common share was up about 1% for January or largely unchanged after deducting our monthly dividend accrual. In the fourth quarter, we opportunistically raised $511 million of common stock through our at-the-market offering program at a considerable premium to tangible net book value.
This brought our total issuance of accretive common equity for the year to approximately $2 billion, delivering meaningful book value accretion to our common stockholders. Our average and ending leverage for the fourth quarter was unchanged at 7.2 times tangible equity compared to the third quarter. Additionally, we concluded the quarter with unencumbered cash and agency MBS of $6.1 billion or 66% of our tangible equity. The average projected life CPR for our portfolio at quarter end decreased to 7.7% from 13.2% at the end of the third quarter, consistent with higher interest rates. Actual CPRs for the quarter averaged 9.6%, up from 7.3% in the third quarter. Lastly, net spread and dollar roll income declined by $0.06 to $0.37 per common share in the fourth quarter due to a 30 basis point narrowing of our net interest rate spread to just above 190 basis points. The decline in our net spread income and net interest margin was driven by a slightly higher pay rate on our interest rate swap portfolio, the timing differences between the receive rate on our interest rate swaps and our repo cost, and lastly, our shift toward a greater proportion of treasury-based hedges, which are not included in our reported net interest spread or net spread income.
To enhance transparency, we have included additional details on our treasury position and associated carry components in our investor presentation and earnings release. We estimate that the carry on our treasury hedges was $0.04 per share for the fourth quarter. And with that I'll now turn the call over to Chris Kuehl to discuss the agency mortgage market.
Thanks, Bernie. The fixed income investment landscape in 2024 was shaped by economic data and evolving Fed policy expectations, leading to significant interest rate volatility. The fourth quarter was no exception with strong economic data leading to renewed hawkish rhetoric from the Fed and the pairing back of future rate cuts from market pricing. This evolving monetary policy outlook combined with the general risk-off sentiment ahead of the presidential election caused agency MBS to underperform swap and treasury hedges, particularly in the month of October. Following the election, however, MBS spreads recovered somewhat with the 30-year par coupon spread to a blend of 5 and 10-year treasury hedges ending the quarter six basis points wider. Performance across the coupon stack was mixed with higher coupon MBS performing the best, while 4.5s and lower coupons generally experienced the greatest underperformance.
During the fourth quarter, we added approximately $2 billion in agency MBS and as a result, our investment portfolio totaled $73.3 billion as of December 31st. Our asset growth was concentrated later in the quarter at attractive spreads and we've continued to add to the investment portfolio in the month of January. In terms of portfolio composition, we continued to move up in coupon, reducing holdings in 4.5s and lower coupons, up by roughly $6 billion while adding approximately $8 billion and 5% in higher coupons. As has been the case for several quarters now, our TBA position consisted primarily of Ginnie Mae TBAs as valuations and role-implied financing levels remained attractive. Our non-agency securities portfolio ended the quarter at $884 million, down slightly from the previous quarter with the composition of our holdings mostly unchanged. Given the meaningful backup in interest rates, associated asset duration extension, and portfolio growth, we added close to $12 billion in longer-term mostly treasury-based hedges during the quarter.
As a result, our hedge ratio to funding liabilities increased materially to 91% and treasury-based hedges as a percentage of our hedge portfolio represented 53% on a dollar duration basis as of quarter end. However, with longer-term treasury rates and swap spreads beginning to show signs of stabilization, our allocation to swap-based hedges will likely increase over the coming quarters. I'll now turn the call back over to Peter.
Thanks, Chris. Before opening the call up to your questions, I want to take a moment to discuss the US housing finance system and the status of the GSEs. The outcome of the presidential election has clearly reignited the market's interest in the GSE conservatorships and the nature of the government's involvement in the housing finance system. A number of proposals and opinion pieces recently have advocated for various outcomes ranging from ending the GSE conservatorships to maintaining status quo. Importantly, there also appears to be a growing consensus that any change should be done in a way that preserves the current functionality of the conventional mortgage market, avoids disrupting the domestic real estate market, and ensures housing affordability does not decline further. To that end, some key policymakers have already signaled a desire to pursue any change in a careful, deliberate, and transparent way.
The $7.5 trillion agency mortgage-backed security market is the cornerstone of this country's $14 trillion housing finance system, a system that is the envy of the world by providing the uninterrupted availability of the 30-year pre-payable mortgage at uniform rates across the nation and throughout market cycles. The size of the agency market, the liquidity and the finance ability of these instruments, their use as a monetary policy tool, and the existence of the TBA market and the important role it plays for mortgage originators and servicers all exist today because of the government's ongoing involvement and because of the actions that the government and the Fed have taken during times of stress. Moreover, the agency mortgage-backed security market is critical to facilitating homeownership, achieving the many societal benefits that accompany it, and doing so in a manner that is fair and equitable.
Preserving these attributes and avoiding a disruptive outcome for the housing finance system, we believe requires the ongoing involvement of the US government. Changing the structure of the GSE hastily and without thoughtful consideration of the many complexities and interconnectedness of the current system would be unnecessarily disruptive and very harmful to housing affordability. That said, change done in a way that preserves the many highly desirable aspects of the current system provides clarity regarding the form of the government's ongoing involvement and which is done in a way that protects taxpayer interests could be a very positive development for the agency mortgage-backed security market. With that, we'll now open the call up to your questions.
Questions and answers
Thank you. We will now begin the question-and-answer session. And today's first question comes from Bose George with KBW. Please go ahead.
Hey, everyone. Good morning.
Good morning, Bose.
Actually I wanted to ask first about equity issuance. Can you just talk about the potential magnitude of equity issuance this year? If spreads are similar, your book value premium remains the way it is and just thoughts on, is there a level of balance sheet where it gets too big or just conceptually how you're thinking about that?
Sure. I appreciate the call, the question, Bose. Yes, as you know, we were active using our ATM this last quarter and I'll start with talking about the approach this last quarter and how it is a little bit different than some of our previous quarters because I think it's informative to your question. In this last quarter, for example, the opportunity, the attractiveness of the equity issuance was more pronounced early in the quarter, whereas mortgages were more attractive later in the quarter. I point that out because it differs a little bit from the previous quarters where we were very active in raising capital and deploying those proceeds almost simultaneously. This quarter, we took a more opportunistic approach in that the capital raises were done early in the quarter. And as Chris mentioned, some of our capital deployment was at a more gradual pace later in the quarter. It was one of the reasons why there's a little bit of a negative impact from net spread and dollar roll income.
But we'll continue to approach the capital issuance and our capital management from the perspective of doing it opportunistically. Obviously, we look at the accretion benefit and book value benefit. You look back over the course of the year, it was all of our capital raises were really significant contributors to book value for our existing shareholders and deploying those proceeds, as you say, in this market is really attractive. You look at where mortgage spreads are today ranging from 150 basis points to 170 basis points depending on hedge mix and so forth. You're talking about attractive ROEs, particularly now that we've gone through some of the uncertainty of the fourth quarter. The last point I'll make is that obviously from, you look at AGNC scale today, we are really comfortable with our scale and operating efficiency. Really happy with that. Our operating costs are still, I think, the lowest in the industry.
I expect them to remain in that 1% to 1.25% range. The liquidity of our stock is outstanding, giving shareholders the great opportunity to enter our space in a very liquid, easy way. So there's no need to grow for the sake of growing, I guess, is my final point. We'll do so when we believe that it is in the benefit of our existing shareholders and approach that activity throughout the remainder, throughout this year, just like we do every other year and do so very opportunistically. I'll pause there.
Great. That's helpful. Thanks, Peter. Can you explain the return on equity calculations when using treasury futures compared to swaps, given that nominal spreads are lower and the variables involved in each?
Yes, that's an important point, and I will cover several aspects. One issue with our earnings measures, particularly our net spread and dollar roll income, is that we prefer investors not to consider these as indicators of our dividend policy because they do not drive it. Instead, we analyze the economics of our portfolio from a dividend standpoint. This reflects current earnings rather than the long-term earnings from our portfolio. We assess how the mark-to-market of our portfolio aligns with this view. Furthermore, the net spread and dollar roll income, as we define it and as most define it, include only swap-based hedges. We have added some disclosures in our presentation this quarter to help investors better understand the carry characteristics of treasuries and swaps. In the treasury market, using a treasury hedge involves shorting the treasury and gaining from the repo transaction, which means there is a pay and receive dynamic.
We included this information to clarify that carry. Additionally, as we increase our use of treasury-based hedges, we experience less carry and a narrower spread between treasury-based hedges and mortgages due to current swap spreads. Chris mentioned that our treasury-based hedges peaked, with about 55% of our hedges in the fourth quarter being treasury-based, which is unusual. We did this because these hedges offered a better market value offset to our asset portfolio, particularly as swap spreads have significantly tightened over the past year. For instance, 10-year swap spreads hit a historic low, dropping below negative 50 basis points in the fourth quarter. Consequently, treasury-based hedges provided superior market value. If swap spreads stabilize, as Chris indicated they are starting to, it would be logical for us to shift back toward swap-based hedges to reach a more typical level, which might range from 70% to 80%.
This shift would allow us to gain additional carry, provided swap spreads remain stable. Currently, when I assess spreads, I find that treasury coupons are likely in the range of 130% to 150% for treasury hedges, while current coupons for swap-based hedges are expected to be around 160% to 180%. As we transition between these two, it will affect the expected return on equity moving forward. While I provided a detailed explanation, I believe these points are significant.
Great. That's helpful. Thank you.
Okay.
Thank you. And our next question today comes from Doug Harter with UBS. Please go ahead.
Good morning, Doug.
Good morning, Peter. I was hoping you could talk about your dividend outlook. I know you just mentioned that you don't view EAD as representative, but kind of how you are seeing the economics of the mark-to-market returns and how that compares to kind of the current dividend level?
Sure. Well, the first thing we look at from a dividend perspective is what is the total cost of capital hurdle rate, if you will, versus our expected return at current valuation levels of the portfolio. When you think about the total cost of capital, I think that's really critical as you think about what is the cost to run our business to pay our common dividends, to pay our preferred stock dividends, and our operating expenses as the numerator in that equation. The denominator is our total capital base, which is about $9.2 billion. If you look at our actual expenses in the fourth quarter and annualize those versus our capital base, it would tell you that our hurdle rate is around 16.5%, maybe 16.7% to be precise. And the question is, what do we compare that to? And the relevant comparison is what is our expected, if you will, gross ROE at current valuation levels. Using a combination of spreads because they're obviously always changing as a single point instead.
But I use a blended spread that is a blend between treasury-based hedges and swap-based hedges. And I'll give you three points in time 150 basis points, 160 basis points, and 170 basis points. They sort of have the range of, those are spreads that I think are indicative of today's valuations. And those would translate to gross ROEs of somewhere between 17% and 18.5%. So, said another way, if we were to deploy capital today, we would expect to earn spreads in that range or ROEs on a go-forward basis of somewhere between 17% and 18.5%. And that aligns very well with our total cost of capital and that's one of the reasons why, in looking at it that way, we've been able to maintain our current dividend. So I think we're going out about 58 months. So that's the way we look at it and I think it's still well aligned at today's valuations.
I appreciate that. I'm just curious how you think about volatility and the cost of volatility in kind of in that equation that you just walked through?
Yes. There's no doubt, that's a point, that's for sure that obviously interest rate volatility is a big driver of how your ex-ante returns will convert to ex-post return. So will we have to spend a lot of money rebalancing or will we have to spend less money? It's one of the key drivers of, for example, our outlook for this year. I think interest rate volatility now that the 10-year has backed up and this is important that the 10-year has gotten back into a new trading range of, let's say, between 4.25% and 5%, it appears that interest rate volatility should remain relatively low going forward, given we've gotten through all of the quantitative tightening and the dramatic shifts from the Fed. We have stabilization, we have a more accommodative Fed. We have a path for short-term rates that seems to be fairly well telegraphed. Those things should contribute to lower volatility going forward.
At least that's our outlook right now, which should then translate to lower hedge costs on a go-forward, but market conditions obviously change. One other point that I would make there is that our ability to raise capital, this is kind of a good tieback to the first question, our ability to raise capital at accretive level is also a potential driver of ex-post returns, which could offset some of that incremental hedge costs that we would occur over time with hedging. But you're 100% right, it would be, it's going to be a drag. It's just an order of magnitude. And right now the outlook is I think pretty favorable for that.
Great. I appreciate all those answers, Peter. Thank you.
Sure.
Thank you. And our next question today comes from Crispin Love with Piper Sandler. Please go ahead.
Thank you. Good morning, everyone. Just first on the hedge ratio and hedges continuing the recent conversation, but you decreased the hedge ratio meaningfully in the third quarter but increased it to 91% in the fourth quarter. So one just curious when you added more hedges in the quarter, was it leading up to the election? And then just thoughts and views on the hedge ratio today and outlook going into or kind of continuing through 2025, also with your view of lower ball expected. Thanks.
Yes, thank you for the question. We did increase obviously fairly significantly back to 91% from 72%. But it goes back to the question that I just answered as a starting point, which is that we obviously expected more interest rate volatility as we went into the presidential election. And clearly, there was a lot of uncertainty and still is about fiscal policy and tariffs and what that might mean for monetary policy and what that might mean for treasury issuance. But we had an 80 basis point move higher in the 10-year treasury in the fourth quarter. And the reason why we were so active in rebalancing and kept our duration gap essentially unchanged quarter-over-quarter, 0.2% to 0.3% and that's not always the case with respect to our delta hedging and our rebalancing, but we were so active in doing so this quarter because we didn't expect rates to whipsaw back the other way. From our perspective right now, the backup in rates particularly in the 10-year moving up to the 4.5% to 4.3% quarter range appears to be sort of a better valuation for that part of the curve, given all of the uncertainty about the strength of the economy and potential sources of inflation or deflation as it may be.
But we felt like being active in delta hedging was really important because we don't expect rates to drop materially from here. We expect long-term rates to remain stable. So therefore, we did add a lot of hedges and we did so, particularly by adding mostly, in fact, almost exclusively treasury-based hedges because of our uncertainty about what swap spreads would do during the quarter. So over time, we may rotate out of those. As Chris indicated, that likely will be the case. But that's why we were so active in rebalancing and keeping our duration gap low because we didn't expect rates to whipsaw back.
Great. Thank you, Peter. Appreciate that. And then just one last question from me. Just an update on agency MBS demand as you see it today, banks, money managers, and just thoughts on demand in this environment? Thank you.
Yes, I mentioned earlier the outlook for supply, which I believe is quite positive for the mortgage market. The technical aspect for mortgages suggests that the supply in 2025 should be similar to 2024. In 2024, the total supply was slightly over $210 billion, landing at the lower end of expectations. This is related to the 10-year treasury yield being at 4.5% or higher, which has raised the 30-year primary mortgage rate close to 7%. Consequently, the supply of mortgages at the start of this year is likely to remain below expectations. I anticipate that the supply of mortgages will be in the range of $200 billion to $250 billion, which is a positive trend. Looking at sources of demand, last year saw about $450 billion in total inflows into bond funds, with approximately 20% going into the mortgage market, and this trend may continue into 2025. If bond fund flows remain strong, especially in light of recent shifts into bonds due to equity market weakness, money managers might again demand between $50 billion and $80 billion in mortgages.
Additionally, bank demand has been steady and gradually increasing. Bank holdings of mortgages have risen since the low point in September 2023 and continue to grow into 2024. With potential reductions in bank regulation, they may increase their purchasing in 2025 compared to 2024. While this remains uncertain, it’s a factor we will monitor. Ultimately, when considering all these elements, supply and demand appear fairly balanced, which is a key factor in our outlook. Any follow-up on this?
Thank you.
Sure.
I'll move on to our next question. Our next question comes from Trevor Cranston with Citizens JMP. Please go ahead.
Hey, thanks. Good morning.
Good morning, Trevor.
You guys mentioned that you've been adding towards the end of the quarter and have continued into January. Assuming that the portfolio additions are increasing leverage, can you talk a little bit about kind of what your current leverage target would be, what the investment opportunities where they are today?
Sure.
And part of that also as you're adding, if you can maybe talk a little bit about if you've seen any sort of changes in your relative value views of TBAs versus spec pools? Thanks.
Sure. I'll start with the first part and then Chris can talk about TBA versus pools and other relative value. So first, when you look at our leverage, it's been fairly consistent, in fact, very consistent over the last 12 months in the 7.2% to 7.3% range. And the good news there is we were able to generate really attractive returns with that sort of leverage level. And with leverage at that level, we obviously still have a huge amount of our capital and unencumbered. As Bernie mentioned, 66% of our capital is unencumbered. So we have a really strong position from a risk management perspective. And when we think about leverage, obviously, there's a lot of drivers. One, we want, obviously, mortgage spreads to be attractive, which they are. We want interest rate volatility to be stable or declining, which we think it may be, which is a positive. And then we'll just make that decision sort of on a case-by-case basis, but I think one of the key points is, when you think about spreads, not only do they need to be attractive, we want them to be stable.
And one of the things that I think materialized in 2024 is the fact that mortgage spreads stayed very traded in really a relatively tight range, particularly if you look at like current coupon to 5 and 10-year treasuries, they traded in an exceedingly tight range. 80% of the year last year, mortgages traded in a 20 basis point range between 135 basis points and 155 basis points. That's great for our business. We want spread volatility to be low. We want spreads to be attractive. If those conditions continue, it would make us positively inclined about the market and our risk position. So again, I'm not going to give a forecast on that, but those are the conditions that we look at for taking risk a little higher. And Chris can talk about where we've been deploying proceeds. As he mentioned, we started to add some mortgages in January.
Sure. So during the quarter, we continued to shift our holdings to higher coupons. As I mentioned, we reduced holdings in 4.5s and lower coupons by about $6 billion, added just under $8 billion in 5% higher coupons. Production coupon valuations still offer some of the best longer-run risk-adjusted returns. And while higher coupons performed very well last year, the vast majority of that return was carried, not spread tightening. And so spreads are still very attractive. And so that's where we've been allocating marginal capital. The relative value picture across the coupon stack could certainly shift this year if banks are more involved and issuance remains light given where mortgage rates currently are. But again, given current spread relationships with respect to the coupon stack, marginal capital is going to mostly be deployed in higher coupons. With respect to TBAs versus specified pool specs, they generally have performed very well. They did in the fourth quarter. And while we did have some opportunities to add higher-quality pools at good levels, there are some newer production categories that are trading at relatively full valuations. And so we're content to be patient there and carry a bit higher TBA position with prepayment risk low and rolls starting to trade better.
Got it. Okay. That's helpful. Thank you.
Sure.
And our next question today comes from Eric Hagen at BTIG. Please go ahead.
Good morning, Eric.
Hey, thanks. Good morning, guys. If we tease apart the projection for prepayment speeds, can you maybe share roughly what mortgage rate you were assuming in that projection and how you might and how it's maybe changed in the start of the year? And then how you might compare or characterize the reinvestment risk that you face with prepays and spreads at these levels versus once speeds have been faster.
Yes. Our CPR projections are based on the spot and the forward curve as of the end of the year. More generally, the fourth quarter provided some of the most interesting reports we've seen since COVID. In October and November, mortgage rates approached 6%, and a significant portion of the floating-rate and higher coupons had an incentive to refinance, leading to very fast speeds in October that exceeded most model expectations. However, with the sharp increase in rates, November speeds slowed significantly under most model expectations. October speeds were likely impacted by high pull-through rates. When looking at both months together, the response was the steepest we've experienced since COVID. In a sustained rally, we are not assuming a benign prepayment response. It is evident that lenders will aggressively seek out easy-to-refinance borrowers. Nonetheless, prepayment risk is manageable through careful asset selection and diversification. Asset selection does not solely involve acquiring the highest-quality pools with the most prepayment protection; often, it requires avoiding the worst pools or the fastest collateral. Active management is essential across various rate scenarios.
Great color there. I appreciate that. All right. So maybe building off the outlook from the question around banks, I mean, how do you see the impact of bank regulation maybe driving bank appetite as repo counterparties, both for AGNC and for the market more broadly? I mean, do you have any perspectives on the supply of repo going forward and really just any impact that could transmit onto more mortgage spreads at the same time?
Yes. So first on the bank side, again, bank balances have been growing, which is an important fact. Two, it appears that banks, when they do add, they appear to be adding in an available-for-sale capacity as opposed to hedging more and that's just anecdotal versus the held-to-maturity. So that's obviously I think a good sign for their ability to add mortgages and do so on a hedged basis and manage their interest rate risk. And then clearly, from where we were, let's say, I guess it was probably in the middle of the year when Basel endgame was so uncertain that there was lots of unintended consequences in some of those earlier versions of that regulation to where we are now. It appears that bank regulation is going to be certainly less onerous and maybe even quite for a period of time, which I think bodes well for bank demand. So obviously, we don't have any other insight into it than that.
But it does seem from a directional perspective that it could be larger as opposed to smaller. With respect to the repo market, as the Fed drains balances, bank reserve balances out of the system, which they are doing now, there will come a time and I expect it to be this year where they are going to stop because I think when you look at where bank reserves are now at about $3.2 trillion, I think they're getting into the range of where bank reserves from a target perspective relative to GDP, somewhere in the 10% to 11% range is some of the guidance that the Fed has talked about, not that they are managing to that, but it's certainly an indication, it appears that bank reserves are getting into the target range where they've moved from abundant to ample. And that's what the Fed is looking for. And the Fed is looking to the repo market for indications of that. And we are seeing indications of that, meaning that the repo market is now at period ends and reporting periods showing some of the volatility that you would see normally when bank reserves get to that less abundant level.
And we saw the repo spreads to SOFR over year end be in the 50 to 100 basis points range. We saw it in the third quarter. We saw it prior to that. So reporting periods will have some volatility. It will be a little bit higher cost. It's one of the things that contributed to our higher costs relative to our swap book going forward. The Fed is clearly watching this very closely, willing to, and has already made changes, which is important changes to the way they run their programs to manage this carefully. The Fed does not want the funding markets to be disrupted and I don't expect any limitation from a repo perspective to get to the specific answer that you're talking about. There's plenty of repo capacity for agency mortgage-backed securities. Yes, it may be a few basis points more cost, particularly over reporting periods, but it is a cost question, not a capacity question. So I don't expect that to be a limiting factor for demand at all.
Great stuff. I appreciate the answer. Thanks, guys.
Sure. Thank you.
Thank you. And our next question today comes from Jason Stewart at Janney. Please go ahead.
Good morning.
Good morning, Peter. Thanks for the color on earnings. That does a good walk through. Bernie, just I missed the point on futures and what that would have added if it was in that spread and dollar roll income on a comparable basis to the quarter.
Yes. Bernie mentioned that, I think your question was about treasuries. Is that correct?
It's on page 24.
On page 24. That shows you the sort of the pay side of the equation, what we're paying and where our repo rates were. And if you look at that, we concluded that it was probably around $0.04 of earnings that if we had, if net spread and dollar roll income included that, it would be something like about $0.04. Obviously, because one of the challenges with that measure is because we use futures, that carry component has to be sort of imputed, if you will. So we had to come up with a methodology that is one of the shortcomings of it. But nonetheless, to give you an order of magnitude, we think it's in that range of around $0.04 this last quarter.
Got it. Thank you for that. And then were you able to quantify the impact of the ATM timing, so issuing early and deploying later in the quarter?
Well, what I would say is, when you look at the impact of the issuance, I think you can do it a number of different ways. You can look at our average price and the average price, meaning $500 million worth of stock versus $53 million would give you an average price of $9.60 just on that calculation. And you look at that relative to our beginning and ending book value, you could conclude that it was a substantial amount of accretion. You could also look at our comprehensive income and our dividend and conclude based on our book value that it probably contributed something in the neighborhood of $0.06 or so cents of book value, maybe a little bit more. And then, as Chris mentioned, there was obviously a lot of volatility and uncertainty early in the quarter. So raising capital at an accretive level and then deploying it more gradually later in the quarter, we obviously saw mortgage spreads widen during the quarter. They peaked around mid-quarter and now are still ended the quarter wider than they were at the beginning. So by deploying those proceeds at a slower pace gave us the capacity to invest, as Chris mentioned, at attractive levels late in the quarter and still at attractive levels this quarter.
Okay. All right. We'll make some assumptions on how that impacted earnings. I appreciate it, Peter.
Sure.
Thank you. And our final question today comes from Harsh Hemnani with Green Street. Please go ahead.
Thank you.
Good morning, Harsh.
Good morning. You've mentioned that your base case for spreads is that they remain within the trading range that they have been in for some time. What in your mind are the risks to that base case that could drive spreads either higher from your outside that trading range or lower?
You’re right. The spreads have been quite stable, and we’ve been in this trading range for about seven quarters, which is encouraging. Mortgages appear to be in a more favorable position at the midpoint of this range compared to the tight end. However, there are two main risks to consider. The first is related to monetary policy and interest rates. If interest rates become highly volatile, moving significantly higher or lower than we expect, it could trigger refinance activity or cause pressures on fixed income due to concerns about deficit spending and treasury issuance. This could affect mortgage spreads. The second risk involves housing policy. There's greater interest in the GSEs and their conservatorship now than there was before the Trump administration, creating uncertainty about future outcomes. We believe that the beneficial aspects of the current system will be recognized and need to be preserved.
Politically, economically, and from the perspective of homeownership, it’s hard to imagine a scenario where these features aren’t valued. Therefore, to maintain these elements, government involvement will likely be necessary. The specifics of how this will be structured and the compensation involved are still to be determined, but differing opinions could introduce some spread volatility. Consequently, spreads might widen a bit beyond expectations, but I believe they will ultimately revert to the trading range. At the current spread levels, mortgages present a strong investment opportunity, offering value compared to treasury securities and investment-grade corporate debt, which isn’t always the case. Mortgages, at this valuation, appear to be a great asset class.
Got it. Appreciate it.
I'll just add. I think Peter covered the what could surprise to the wider side. The other side of the equation, I think, look, to the extent that bank securities growth is much stronger than anticipated, that's a possibility on a looser regulatory outlook going forward. I mean, overseas activity could also surprise to the extent that the Fed and BOJ policy continue to move in opposite directions that reduces FX hedging costs for banks in Japan. And so, look, there's a lot of things that are unknowns and could surprise to the tighter side as well. But again, our base case is pretty firmly rooted and maybe unchanged to maybe modestly tighter spreads for this year.
Got it. Thank you. I'll leave it there.
Thank you.
Thank you. And this concludes our question-and-answer session. I'd like to turn the call back over to Peter Federico for closing remarks.
Again, I appreciate everybody participating on the call today. And again, we're encouraged by the outlook for our underlying asset class and for our business in 2025 and we look forward to speaking to you again at the end of next quarter.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.