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 contain statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 a 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 historically, spreads 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 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 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 lead 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 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. 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'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?
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 taking the dividends we pay on both our common and preferred stock, adding all our operating expenses, and dividing that by our total tangible capital, which was approximately $9.5 billion at that time. This calculation suggests that the breakeven return on our portfolio to cover all those costs was 16.7%. However, based on last week's book value, that total cost of capital is now likely closer to 18%. The key question is how this compares to the economic return on our fully mark-to-market portfolio. Our anticipated returns moving forward are influenced by current market valuations, particularly regarding mortgages in relation to swaps and treasuries. From that angle, the rates we’re seeing, especially for mortgages against swaps, are at unprecedented levels.
Therefore, with today's valuation levels, I would estimate the expected returns on our portfolio to be between 19% and 22%, particularly when looking at mortgages compared to swaps. I also mentioned a blend of mortgages against a blended swap curve to provide a comprehensive view of 2-year, 5-year, and 10-year swaps, which closed yesterday at a spread of 220 basis points. A portfolio of swaps, when leveraged as we do, would yield low 20% returns, which are historically high. So, to address your question, while our total cost of capital has risen with the mortgage spread and a decline in our book value, the expected returns still align well 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, you seem to have managed it pretty well, but can you detail how you were able to, just based on positioning going in as well as active management during the volatility?
Yes. Great question. One of the reasons why in my prepared remarks that we were able to navigate that without issue, it really goes to having the discipline to go into the environment with a really strong position. We ended the quarter at around 7.5 times leverage, rounded to 7.5, so it was about 0.2 of a turn higher than what we had been operating prior to the first quarter. Importantly, as Bernie mentioned, we spend an extraordinary amount of time being as efficient as we can with our capital. We have a really strong unencumbered cash and liquidity position. At the end of the first quarter, it was $6 billion but importantly, in percentage of equity terms, it was 63% of our equity. That's an extraordinary amount of excess capacity. We operate with that sort of efficiency and hold that capital unencumbered to be able to withstand these sorts of periods of volatility without having to change our asset composition or deleverage the portfolio.
We knew exactly what we had going into it. We had plenty of capacity to withstand this sort of spread widening. When we shocked our portfolio, we always think about the adverse effect on our portfolio and what it will do to our unencumbered liquidity position, what it will do to our leverage. We shock interest rates. Importantly, we never assume that there are going to be positive or offsetting correlations when we do those calculations. That's exactly what we saw this episode. One of the things that made it really challenging for all market participants is we saw a breakdown in correlations. At first, we had a flight-to-quality rally, which made sense that investors wanted to basically reduce equity positions given weaker growth outlook and favored fixed income and Agency MBS as an asset class, which I mentioned truly benefited from that initial move in the first quarter. Those correlations broke down because we had this sort of shift away from all dollar-denominated assets.
We were able to navigate that by basically just doing nothing and allowing the market to go through what it had to go through. Yes, spreads have widened further, but markets have been orderly, generally speaking, for the last two weeks, and I take that as a positive sign. I haven't seen, importantly, distressed selling per se. I think we've seen some position liquidations, particularly in the swap market, that caused a lot of unwinding of swap positions versus treasury positions. But subsequent, I think we've just seen the market fall out of favor; however, we haven't seen a lot of volume behind this repricing, which maybe is a silver lining. So I'll pause there and let you ask a follow-up.
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. 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. Certainly, spreads at this level give us the ability on all other things equal, to generate really attractive returns without taking excessive levels of leverage. So that is something, obviously over time, we'll evaluate. It is one of the reasons why we went into this episode with lower leverage than our historical norms because we were able to operate with leverage in the low 7s and still generate really attractive returns. That certainly could be the case going forward. All that said, I wouldn't expect these spread levels to hold. If they do on a go-forward basis, certainly, then we would evaluate that. But from everything that we've seen so far, I don't believe that when you look at mortgages versus swaps, in particular, that these are sustainable spread levels. I think when you look at—take, for example, current coupon mortgage today, backed by the support of the U.S. government from a credit perspective against the backdrop of a worsening economic outlook and compare that to 10-year swap rates and have that spread be about 200 basis points.
That's an extraordinary amount of excess return at 165 basis points of excess return of mortgages. I don't think those spreads are sustainable. But it doesn't mean that we don't stay here for a little while. It doesn't mean that we might not go wider, given all of this macroeconomic uncertainty and government policy uncertainty. But we'll certainly evaluate that on a go-forward basis.
Thank you Peter, appreciate you taking my questions.
Our next question comes from Doug Harter with UBS. Please go ahead.
Thank you. Good morning, Peter. Previously, you have discussed your confidence in the stability of leverage levels. You recently mentioned that current spread levels are not sustainable. How do you assess the risk of spreads widening further given the current uncertainties before they eventually return to normal, and how do you plan to manage that potential scenario?
Well, we certainly have to be prepared for it. That's what we do every day as we come in and we evaluate those risks and reassess those risks and plan for those sorts of scenarios. And it is absolutely right. I mean there's no doubt that spreads can move wider. It's important to sort of look at the difference in mortgage performance. I think this is particularly important in this environment, mortgages versus treasuries and mortgages versus swaps. In my prepared remarks, I mentioned to take, for example, mortgages versus treasuries, 5- and 10-year treasuries at 165 basis points. That is a level that we've seen on a number of occasions over the last five quarters. Not particularly distressed. I talked about that being the upper end of this sort of narrow trading range. Yesterday, we broke through that and got to 165 basis points. Just to put that in context, though, in September of 2023 when interest rates went to 5%, and there was a lot of uncertainty about government issuance.
That spread was closer to 190 basis points. That was the old range. Mortgages versus treasuries are wide to the more recent range but still within the wider band. Mortgages versus swaps tell a different story. And the story there is not driven by people concerned about mortgages per se. It's simply this technical that happened in the swap market where swap spreads moved dramatically. They took, for example, in the first quarter, at one point, the expectation was that swap spreads were going to widen as the government reduced regulation, particularly related to the supplemental leverage ratio, and a lot of people put trades on betting on that occurrence. At one point in the first quarter, 10-year swap spreads got to negative 35 basis points. We had almost a 30 basis point move wider, more negative. That really is the driver of the mortgage performance. It's not that people particularly concerned about mortgages.
There's nothing technically or fundamentally wrong with the agency mortgage market. Eventually, people will look at that value from a fixed income perspective and say, even on an unlevered basis or a coupon mortgage close to a 6% return, great credit profile, great return relative to treasuries, great return relative to swaps. I think money will flow to this asset class, particularly out of corporate and into this asset class. That's one of the reasons that I'm confident that eventually, people will look at this and say these valuation levels are unsustainable. You're right; we have to prepare for more widening and more distress than we do, and we are and we'll just wait it out. Part of the reason that we are able to navigate this most recent period is by having a really diversified portfolio: different coupons, different asset mixes, high pay-ups, low pay-ups, generic pools, TBA. You have to have all of that in order to navigate that, and you have to have a really strong cash and unencumbered liquidity position, and we have all that.
And I guess just following up on that, Peter, given the move and 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. I put in my prepared remarks, it's about 60% from a duration dollar perspective. 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. Yes, we have a little bit higher weight now to swaps. Over time, my sort of base case may be that a 50-50 mix may be the best mix on a go-forward basis as a starting point. I say that because it's important we are seeing in the marketplace to have great diversification, and that 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. I think that's the base case for us; 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-based and swap-based hedges so that we're able to withstand these periods as best we can. That has served us well this time. 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. Yesterday, there was a significant movement in the spread, with a narrowing of about 3 basis points in the 10-year swap spreads, which came as a bit of a surprise. After the initial period around early April, I thought much of the volume related to that trade had already been unwound. Currently, the swap market reflects a few factors, including balance sheet constraints at financial intermediaries, as highlighted by bank CEOs discussing their regulatory burden and their desire for relief. Additionally, there's a pessimistic view on U.S. dollar-denominated assets, leading investors to prefer holding these assets in derivative form, which contributes to the narrowness of swap spreads. I also expect changes in regulatory approaches regarding the supplemental leverage ratio, as mentioned by the Fed and Treasury Secretary, which would ultimately benefit the treasury market and could widen swap spreads. However, the process has taken longer than expected, partly because the Fed wanted to confirm the Head of Bank Supervision before implementing significant regulatory changes. Michelle Bowman just went through her nomination process, with confirmation anticipated soon, and I believe this will act as a catalyst for some normalization in the swap market.
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.
Sure. We certainly have used that as opportunistically as possible. The first quarter is another good example of that. We were able to raise capital very accretively from a book value perspective. As I mentioned, that went to support the growth of our portfolio, which is why we grew $5 billion. From an existing shareholder accretion perspective, I think that was a really good example of our existing shareholders benefiting from a book value perspective and then, also from the long run from an earnings perspective. That same approach still holds today at these valuation levels; certainly, as I mentioned, it's a good time to deploy capital. We are going to continue to approach that very opportunistically.
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. If you go back to my comments on the fourth quarter call in January, I mentioned that we had been slow to deploy capital that we raised in the fourth quarter because we were waiting for a better investment opportunity, and at that time, I felt like the opportunities were emerging, and we had begun to deploy that capital sort of around that time of that earnings call, which was in January. That gives you some perspective as to when we deploy that. You're right; our weighted average coupon on our portfolio did not change hardly at all, maybe one basis point. I think it was 5.03 for the quarter, which tells you that the mortgages that we added were all concentrated around that coupon cell in the 5.5 area. We like that part of the curve. As I mentioned, the pools we bought had favorable high-quality characteristics or some form of prepayment characteristics that we valued. About $1 billion of that growth came in the form of TBAs.
On that point, I think this gets to our view of value going forward. We are seeing improvement in the dollar roll carry implied financing levels, particularly in conventionals today going forward relative to where conventions were rolling last year, which were really unattractive. That has gradually improved over the course of the first quarter. It's one of the reasons we moved some of our TBA position from Ginnie Mae's to UMBS in the first quarter. On a go-forward basis, if that continues, I would expect us to hold perhaps more TBAs because of the pickup in implied financing levels. From a pool perspective, we continue to like the intermediate part of the coupon stack because it gives us some prepayment protection naturally, given mortgage rates now are back close to 7%. They're not there this morning, but they're at 6.8%, 6.9%. So we like that intermediate part of the curve. We still have good carry there. To the extent that we buy higher coupons, we would look to buy those with some sort 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 into 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 is center 331, not 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 went into that sort of explanation of the GSEs because I really do think that one of the things that is emerging. When you think about the outlook for Agency MBS, we are in an environment where spreads are really historically cheap. It's a great buying opportunity, but there is a lot of uncertainty around that, a lot of volatility, and a lot of unknowns because of the macro backdrop. There's no doubt about that. But on the GSE front, I think it is important to recognize that while there was a lot of noise, for lack of a better term about the future of the GSEs, I think what is clear from some of the comments, particularly take, for example, the Treasury Secretary, where he mentioned the importance of lower mortgage rates and the importance of housing affordability. Interestingly, he even mentioned early on after he got confirmed, where mortgage spreads were trading on a particular day, which I thought was indicative of his awareness and importance of that issue to the administration.
While there may be ongoing debate about the GSEs and their ultimate capital structure, my point was that the system—the housing finance system, and the key part of it is the conventional mortgage market created by the GSEs. It is functioning extraordinarily well. There is an appreciation that you can't simply just make a change, as it looks like it’s not a complicated change, but it does have far-reaching implications. Take, for example, the TBA market. The TBA market is what it is today because it trades without credit risk and $300 billion of TBA trade every single day. That's an incredibly liquid market that underpins our housing finance system. It is critical to originations. It is critical to servicing. It is critical for homeowners being able to lock in a mortgage rate 30 or 60 or 90 days forward. There is a greater appreciation of all of that interconnectedness today. While we can debate about the ultimate structure the GSEs may take.
It's also clear that the GSEs do an incredible amount of good for our housing finance system. If we want housing affordability to improve, I think we certainly do, given where mortgage rates are, then we have to approach this issue very thoughtfully, very cautiously. I think that sentiment was expressed clearly by the Treasury Secretary. So that's sort of our view: at the end of the day, the PSPA and the structure today with the GSEs operating with a strong capital position, the preferred stock agreement being outstanding, giving additional support to the GSEs. GSEs making a payment to the government, all that is working extraordinarily well. You can still make changes going forward, but you have to preserve that core. I'll pause there.
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.
Sure. Thank you. I'll get to that one second. I just want to go back — just to ensure people understand our book value update. That book value update, obviously was through the end of last week from the 31. It also includes our dividend accrual. So I just want to make sure that people understood that. On the prepayment outlook, I’ll add a couple of things, Eric, and then we can talk about it in greater detail. Obviously, one thing that has occurred is the Rocket Mr. Cooper merger. So that all other things equal, that's going to make the universe a little bit more negatively convex given the speed in their refinance efficiency. But to put it in context, for example, I think from an origination perspective, that new entity will represent something like 10% of originations and 15% of servicing volume. All other things equal, Rocket probably is maybe 10% to 20% faster than the universe in terms of refinanceability.
There was a little more convexity coming, but overall, where the mortgage market is today, prepayment risk is a risk. Our portfolio has more call risk than extension risk. You can see that in our sensitivity. We're still a long way away from having any significant amount of refinance risk in the system as a whole. For example, with the prevailing mortgage rate being at 6% and for context, it's around 6.18 this morning. Only 15% of the universe would have a 50-basis point refinance incentive. If the mortgage rate dropped to 5%, almost 200 basis points lower than today, the amount in the universe that would have a 50-basis point incentive is 25%. We have a long way to go. Given what has happened in the market, and the way the yield curve is steepening, it is actually pushing the mortgage rate even higher. There is a scenario where prepayments become an issue, but it would take a really significant rally.
From our perspective, this is one of the reasons why I mentioned this number in our tables. We typically disclose our high-quality pool characteristics, which were 42% in one table in our presentation. However, I reference other characteristics that we have in our portfolio that we value from a prepayment perspective, whether they’d be other geographies or loan balances or other FICO characteristics or LTVs. That number, as I mentioned, is up around 75% — a little more than 75%. From our perspective, particularly in our higher coupon holdings, and this is really important, whether our 6% holdings or 6.5% holdings, those positions in pool form have something in the neighborhood of around 95% of those positions have some sort of embedded prepayment protection that we value. It's not to say that they're never going to prepay. But there are characteristics that we really value. So the way we're managing that prepayment risk in this environment is by looking at those underlying characteristics and in much greater detail than just, for example, a high-quality loan balance perspective and ensuring that we have significant protection over our entire portfolio. So I'll pause and let you 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 think that risk is in the market right now?
Well, I don't think any of that had anything to do with the existing repricing in the mortgage market? Absolutely not. I did not see any of that. Haven't heard about anything like that. What we did see, and this is often the case, this is the world that we live in. We know that the predominant flow in the mortgage market, and particularly, is passive money, right? That’s both good and bad in that when fixed income flows are increased and picking up, we're seeing demand for money managers to buy mortgages. Conversely, when all the markets, what I talk about when I talk about all the market, the bond market and the equity markets, when everybody moved to cash or wanted to take risk off the table, what we saw early in April is bond fund redemptions. The predominant flow that we observed that did have an impact on mortgage valuations was money flowing out of bond funds, where they just simply raised liquidity for anticipated redemptions or actual redemptions.
That quieted down from what we've observed; the market, for example, last week came under a little bit of pressure on Thursday because we had a long holiday weekend, and we had a relatively high origination volume day ahead of the long weekend. Little things like that have pushed the market. That's not unusual. Overall, I have not seen anything about forced deleveraging, particularly when you look at the REIT community. You can look at all of the disclosures; all the REITs are in a really strong position. Look at their liquidity positions, you look at their leverage positions, you look at their portfolios. I do not anticipate that being an 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 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. I also mentioned that we have not made any changes to our swap portfolio. So that's important from that perspective. That would be something when I answered that question. I was more referring to, over the long run, that may be something 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. We'll have to wait and ultimately have the markets settle and volatility come down before making that determination. However, 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.