AGNC Investment Corp. (AGNCM) Q1 2025 Earnings Call Transcript

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 for joining our first quarter conference call. Government policy actions and their potential negative effects on economic growth and inflation led to a more cautious investor sentiment in the first quarter. This heightened uncertainty around macroeconomic and monetary policy resulted in investors initially favoring high-quality mortgage-backed securities and cash over riskier assets like equities and corporate debt. Due to our appealing monthly dividend, AGNC achieved an economic return of 2.4% in the first quarter, with a total stock return of 7.8% when dividends were reinvested. However, a tariff policy announcement in early April significantly increased volatility across all financial markets. The scope of the tariffs was greater than expected, leading to heightened fears of a recession. Consequently, equity prices fell further from their February peak and entered bear market territory.

Interest rate volatility also surged, as evidenced by the 10-year treasury yield, which initially dropped sharply before rising sharply again. In total, the yield fluctuated by more than 100 basis points within a short time. This interest rate volatility and general macroeconomic uncertainty disrupted normal financial market correlations, constrained liquidity, and caused a negative shift in investor sentiment. The agency MBS market faced similar adverse conditions and was under considerable pressure in early April. In relative terms, the current coupon spread to a blend of 5- and 10-year treasury rates widened to 160 basis points, the highest point in the last five quarters. The performance of Agency MBS compared to swaps was significantly worse because of the unprecedented narrowing of swap spreads during the market turmoil. As a result, the current coupon spread to a blend of swap rates peaked intraday at 230 basis points.

For reference, the widest level reached during the peak of the COVID pandemic was 235 basis points for this measure. As of yesterday, this spread was approximately 220 basis points, still high but lower than its peak. AGNC was well-prepared for the recent market volatility and managed it effectively. Although AGNC's net asset value was negatively affected by the widening of mortgage spreads, the expected return on our portfolio is higher due to these wider spreads. Additionally, we believe that at current valuation levels, Agency MBS presents investors with a strong return opportunity, both on a leveraged and unleveraged basis. Recent trading history supports this value proposition, as historically spreads have not remained at these levels for extended periods. Agency MBS also provides investors with an appealing fixed-income alternative to corporate debt and other credit-sensitive instruments, particularly given the worsening economic outlook.

Therefore, despite the likelihood of continued elevated macroeconomic uncertainty in the near term, our outlook for agency MBS remains very positive. I will now hand over the call to Bernie Bell to discuss our financial results in more 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 UMBS 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 recapitalized 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 lead quickly 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.

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, which was sort of back to the wides we saw. But it's going to be volatile. This is the kind of conditions 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, 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's 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?

Let me start with our total cost of capital, which we consistently discuss. At the end of the first quarter, our total cost of capital was calculated by taking the dividends paid on both our common and preferred stock, adding all our operating expenses, and dividing that by our total tangible capital, which stood at about $9.5 billion. Based on this calculation, the breakeven return on our portfolio to cover all these costs was 16.7%. However, considering recent updates, this figure likely reflects closer to 18%. Now, regarding the economic return on our fully mark-to-market portfolio, our future returns are determined by current market valuations related to mortgages, swaps, and treasuries. From this viewpoint, the levels we're seeing, particularly in mortgages compared to swaps, are unprecedented. Therefore, looking ahead at today's valuation levels, the expected returns for mortgages relative to swaps and treasuries are projected to be between 19% and 22%.

For instance, the spread between our blended mortgage rates and the swap curve, which incorporates 2-year, 5-year, and 10-year swaps, was 220 basis points as of yesterday. A leveraged portfolio of swaps would yield returns in the low 20% range, which is historically high. To summarize, while our total cost of capital has risen due to widening mortgage spreads and a decline in book value, the anticipated returns remain consistent with this 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, you seem to have managed it pretty well, but can you detail how you were able to just based on positioning going into as well as active management during the volatility?

Yes, that's a great question. One of the reasons we managed the situation effectively was due to our strong position going into the environment. We ended the quarter with a leverage ratio around 7.5, which was slightly higher than in the previous quarter. As Bernie mentioned, we focus heavily on being efficient with our capital, and we held a significant amount of unencumbered cash and liquidity, totaling $6 billion at the end of the first quarter. This represented 63% of our equity, providing us with substantial excess capacity. We operate with this efficiency to endure periods of market volatility without needing to change our asset composition or reduce our leverage. We were well aware of our position going into the market shifts and had the capacity to manage the widening spreads. We always consider the potential adverse effects on our portfolio and our liquidity position when we model interest rate shocks, and we assumed no positive correlations in our calculations.

This time, we witnessed a breakdown in correlations that was challenging for the entire market. Initially, there was a flight-to-quality rally as investors sought safety in fixed income and Agency MBS in light of a weaker growth outlook. However, the sentiment shifted away from all dollar-denominated assets, complicating matters. We managed this by taking a passive approach and letting the market adjust. Although spreads widened, the markets remained relatively orderly over the past two weeks, which I view as a positive indicator. I haven’t observed significant distressed selling, primarily just some position liquidations in the swap market early on, which led to the unwinding of swap positions compared to treasury positions. Overall, while the market fell out of favor, we haven’t seen heavy trading volume in response to the repricing, which may be a silver lining. I'll pause here for any follow-up questions.

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 correct. The current spreads allow us to achieve attractive returns without taking on too much leverage. This is something we will assess over time. One reason we entered this period with lower leverage than usual is that we could operate with leverage in the low 7s while still generating strong returns. This could also be the case moving forward. However, I do not anticipate these spread levels to remain. If they do persist, we would certainly assess the situation. From what we have observed, I doubt that the current spreads between mortgages and swaps are sustainable. For instance, right now, the current coupon mortgage, supported by the U.S. government amid a deteriorating economic outlook, has a spread of about 200 basis points compared to 10-year swap rates. That's a significant level of excess return, especially with a 165 basis point excess return compared to 10-year treasuries. In a 5% or 6% environment, those spreads seem unsustainable. However, that doesn't mean we won't stay at this level for a while, or that we might not see wider spreads, given the overall macroeconomic and government policy uncertainties. We'll definitely evaluate the situation going forward.

Thank you, Peter, appreciate taking my questions.

Our next question comes from Doug Harter with UBS. Please go ahead.

Thanks. Good morning, Peter. Previously, you've discussed leverage levels and expressed confidence in the stability of certain ranges. You mentioned that the current spread levels are not sustainable. How do you view the risk of spread levels potentially widening further due to this uncertainty before they normalize, and how do you plan to manage that possible situation?

We definitely need to be ready for it, and that's what we do daily by assessing and planning for those risks. It's true that spreads can widen. It's crucial to examine the differences in mortgage performance, especially in the current environment between mortgages and treasuries, as well as mortgages and swaps. For instance, mortgages compared to treasuries showed a spread of 165 basis points for 5- and 10-year treasuries, a level we've encountered multiple times in the past five quarters. This spread isn't particularly distressed, and I noted that it sits at the upper range of our narrow trading band. However, we recently surpassed that to reach 165 basis points. To provide some perspective, back in September 2023, when interest rates rose to 5% amid uncertainty about government issuance, that spread was about 190 basis points. So while mortgages are wider than the recent range versus treasuries, they're still within a broader band.

In contrast, the situation with mortgages compared to swaps tells a different story. The market's concerns aren't tied to mortgages directly, but rather to a technical move in the swap market that caused swap spreads to shift dramatically. For example, in the first quarter, there was an expectation that swap spreads would widen after the government relaxed regulations related to the supplemental leverage ratio, leading many to bet on that outcome, resulting in 10-year swap spreads dropping to around negative 35 basis points—almost a 30 basis point shift. This shift is driving the performance of mortgages; it’s not due to specific concerns about them. There aren’t any technical or fundamental issues with the agency mortgage market. Eventually, investors will recognize the value of mortgages from a fixed-income viewpoint. With attractive returns close to 6% and a strong credit profile compared to treasuries and swaps, I believe funds will flow into this asset class, particularly from corporate investments.

This is one reason I'm confident that these valuation levels can't last indefinitely. However, we do need to prepare for potential widening and increased distress, and we're already doing that. One key to navigating this recent period has been our diversified portfolio, which includes various coupon types, asset mixes, high and low pay-ups, and TBA, along with maintaining a solid cash and unencumbered liquidity position, which we possess.

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 to 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. The spread movement yesterday was quite significant, with about a 3 basis point narrowing in the 10-year swap spreads, which was somewhat unexpected since I believed much of the positioning had been unwound after the initial period from April 6 to the 10th. Currently, the swap market reflects a couple of factors. There are ongoing balance sheet constraints at financial intermediaries that have been acknowledged. Bank CEOs noted that these constraints stem from regulatory obligations, and they are seeking relief as they believe they could do more with fewer restrictions. Additionally, there is a general pessimism regarding U.S. dollar-denominated assets, leading investors to prefer holding those assets in derivative forms rather than directly, which contributes to the narrowness of swap spreads. It’s also important to mention that there is a clear expectation for a regulatory change concerning the supplemental leverage ratio, as indicated by comments from the Fed and the Treasury Secretary.

There seems to be consensus that the supplemental leverage ratio will eventually be eliminated, which would benefit the treasury market and likely widen swap spreads. However, the process has been slower than the market anticipated partly because the Fed wanted to avoid making significant regulatory changes until the Head of Bank Supervision was confirmed. Michelle Bowman just went through the nomination process last week, and her confirmation is expected soon. I believe this will act as a catalyst for 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 whenever possible. The first quarter is a prime example of this. We successfully raised capital in a way that positively impacted our book value, which supported the growth of our portfolio, leading to a $5 billion increase. From the perspective of existing shareholder value, this was a significant instance of benefiting from our book value and also positions us well for long-term earnings. I believe this strategy remains valid at current valuation levels. It's indeed a good time to invest capital, and we will continue to pursue opportunities in this manner.

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 kind of 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 to my comments during the fourth quarter call in January, I indicated that we were slow to deploy the capital we raised in the fourth quarter because we were waiting for better investment opportunities. At that time, I believed that such opportunities were starting to emerge, and we began deploying that capital around the time of that earnings call in January. This provides some perspective on our deployment timing. Additionally, our weighted average coupon on the portfolio changed very little, only by about one basis point, and it was 5.03 for the quarter. This suggests that the mortgages we added were primarily concentrated around the 5.5 area, which we find appealing. The pools we purchased had either high-quality characteristics or favorable prepayment features, with about $1 billion of that growth coming from TBAs. As for our outlook on value, we are noticing improvements in dollar roll carry and implied financing levels, especially for conventionals compared to last year when the dollar roll market was less attractive, prompting better financing on the balance sheet.

This trend has gradually improved through the first quarter, which is why we shifted some of our TBA positions from Ginnie Mae's to UMBS. If this trend continues, we might hold a higher proportion of TBAs due to the increase in implied financing levels. Regarding pool selections, we still favor the intermediate part of the coupon stack for its natural prepayment protection, especially since mortgage rates are now approaching 7%. They are currently around 6.8% to 6.9%, which keeps that intermediate segment appealing for carry. If we decide to purchase higher coupons, we would seek those with some form 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. 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 pre-release date, right?

Yes.

Got you. Okay. And then you mentioned.

Thank you for the great clarification, by the way.

Yes, no problem. You mentioned greater appreciation for complexity of the housing finance system. Is that comment tied to the SLR change that you're expecting? Or is there something more specific to housing that you see as a catalyst to kind of get some clarity in the market?

Yes. I discussed the GSEs because I believe it's important to consider the outlook for Agency MBS. We are currently in an environment where spreads are historically cheap, presenting a great buying opportunity, but there is significant uncertainty and volatility due to the macro situation. It's important to note that despite the noise surrounding the future of the GSEs, comments from key figures, such as the Treasury Secretary, highlight the importance of lower mortgage rates and improving housing affordability. He even referenced mortgage spreads, indicating his awareness of these issues. While there may be ongoing debates about the GSEs and their capital structure, the housing finance system, particularly the conventional mortgage market established by the GSEs, is functioning exceptionally well. There is an understanding that changes, no matter how seemingly simple, have far-reaching implications.

For instance, the TBA market, which is critical to our housing finance system, operates without credit risk and sees $300 billion in trades daily. This market supports origination, servicing, and allows homeowners to lock in mortgage rates in advance. There is a growing recognition of this interconnectedness. While the structure of the GSEs may be debated, it is clear they play a vital role in the housing finance system. If we want to enhance housing affordability, which is essential given current mortgage rates, we must approach this issue carefully and thoughtfully. This sentiment was echoed by the Treasury Secretary. Ultimately, the current structure with the GSEs maintaining a strong capital position and making payments to the government is functioning very well. Changes can be made in the future, but we must preserve the core of what works. I'll stop here.

Got it. Makes 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'd like to clarify the recent update on our book value, which is current through the end of last week and includes our dividend accrual. Regarding the prepayment outlook, I want to mention a few points. The merger between Rocket and Mr. Cooper is significant, as it may lead to a more negatively convex situation, especially with their refinance efficiency. To put it into perspective, this new entity may account for about 10% of origination and 15% of servicing volume, and Rocket is likely 10% to 20% faster in terms of refinanceability than the overall market. Therefore, prepayment risk is present, and our portfolio has more call risk than extension risk, as reflected in our sensitivity analysis. Currently, we are distant from any considerable refinance risk within the system. With the prevailing mortgage rate around 6.18%, only 15% of borrowers would have a 50 basis point refinance incentive.

If rates dropped to 5%, about 25% would qualify for that incentive. We are far from that scenario, and given market conditions, the steepening yield curve is pushing mortgage rates even higher. A significant rally would be needed for prepayments to become a concern. We usually disclose the characteristics of our high-quality pool, currently at 42%, but I also highlight additional characteristics we value, which amount to over 75%. Particularly for our higher coupon holdings, around 95% of those positions have embedded prepayment protection that we consider valuable. While prepayments are still a possibility, we assess underlying characteristics in detail beyond just loan balances, ensuring we have adequate protection across our portfolio. I’ll stop here and welcome any questions you might have.

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 that any of that relates to the current repricing in the mortgage market. I haven't observed anything indicating that. What we did notice, which is often the case, is that the majority of activity in the mortgage market is driven by passive investment. This has both positive and negative aspects; when there is an increase in fixed income flows, money managers are inclined to purchase mortgages. On the flip side, when the bond and equity markets experience turmoil and investors prefer to hold cash or reduce risk, we see bond fund redemptions. The main influence we noted that affected mortgage valuations was the outflow from bond funds as they sought to raise liquidity for anticipated or actual redemptions. This trend has calmed down. For instance, last week, the market faced some pressure on Thursday due to a long holiday weekend and a relatively high origination volume that day. Such fluctuations are not uncommon. Overall, I haven't noticed any evidence of forced deleveraging, especially in the REIT sector. A look at their disclosures shows that all REITs are in robust positions in terms of liquidity, leverage, and portfolio strength. Therefore, I don't expect that to be a concern.

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 are 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 settle 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 on 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.