Prepared remarks
Good morning, and welcome to the AGNC Investment Corp's Fourth Quarter 2025 Shareholder Call. Please note this event is being recorded. I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.
Thank you all for joining AGNC Investment Corp.'s Fourth 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; Bernie 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, everyone, and thank you for joining our fourth quarter earnings conference call. 2025 was an exceptional year for AGNC shareholders. AGNC's 11.6% economic return in the fourth quarter drove our impressive full-year economic return of 22.7%. Even more noteworthy, AGNC's total stock return in 2025 was 34.8% with dividends reinvested, nearly double the performance of the S&P 500. This outstanding performance on an absolute and relative basis clearly demonstrates the value of AGNC's actively managed portfolio of agency mortgage-backed securities and associated hedges. Looking back, we were confident that AGNC was at the forefront of a uniquely positive investment environment as the Fed's unprecedented tightening cycle of 2022 and 2023 reached its conclusion. On our third quarter earnings call in 2023, we expressed our belief that a durable and attractive investment environment for AGNC was emerging as mortgage spreads began to stabilize at historically attractive return levels. That outlook proved to be correct. And in the 9 quarters since that call and despite several episodes of extreme market turbulence, AGNC has generated an economic return of 50% for its shareholders, composed of a 10% increase in book value and monthly dividends totaling $3.24 per share. Moreover, during that same time period, AGNC shareholders have experienced a total stock return of nearly 60% or 23% on an annualized basis. And finally, since inception, AGNC has generated a total stock return of over 11% on an annualized basis with dividends reinvested, demonstrating the long-term benefit of investing in this unique fixed income asset class and the durability of our business model across a wide range of market environments. Turning back to 2025, the Bloomberg Aggregate Agency Index was the best-performing fixed income sector in the fourth quarter, and for the year, produced a total return of 8.6%. Also noteworthy, given the similar credit quality, the Agency Index outperformed the Treasury Index by 2.3 percentage points or 36% in 2025. As I discussed throughout the year, the favorable performance of Agency MBS was driven by a confluence of positive factors. First, the Fed shifted its monetary policy stance toward lower short-term rates and greater accommodation, a promising development for all fixed income assets. The Fed also transitioned its balance sheet activity from quantitative tightening to reserve management. Second, interest rate volatility trended lower throughout the year due to the shift in monetary policy, greater fiscal policy clarity, and a stable supply outlook for treasury securities which included a greater share of short-term debt. Lastly, the uncertainty and potential risks associated with GSE reform that adversely impacted the agency market early in the year gradually dissipated as the Treasury Department and other officials communicated an approach to GSE reform that focused on reducing the spread on agency mortgage-backed securities, maintaining mortgage market stability, and improving housing affordability. Collectively, these factors, combined with the sizable purchase of MBS by the GSEs later in the year, caused spreads to tighten and drove the substantial outperformance of Agency MBS relative to other fixed income asset classes. As we begin 2026, these favorable macro themes remain in place and provide a constructive investment backdrop for our business. In addition, other positive developments are possible including further actions by the administration to improve housing affordability. The recent $200 billion MBS purchase announcement is a good example of the type of action that could result in tighter mortgage spreads and lower mortgage rates. The funding market for Agency MBS has also improved in response to the Fed increasing the size of its balance sheet and improving the functionality of its standing repo program. The Fed is also considering other actions to further improve the utility of the standing repo program, which if implemented would be highly beneficial to the Agency MBS market. Finally, the supply and demand outlook for agency MBS remains well balanced. At current rate levels, the net new supply of Agency MBS this year is expected to be about $200 billion. When combined with the Fed's runoff, the private sector will have to absorb about $400 billion of MBS in 2026, an amount similar to the previous 2 years. On the demand side of the equation, however, the investor base today is more diversified and positioned to expand with GSE purchases potentially consuming about half of this year's supply. At the same time, bank, money manager, foreign investor, and REIT demand should all remain strong. Pulling this all together, the underlying fundamental and technical backdrop for Agency mortgage-backed securities continues to be favorable and supportive of our positive outlook. Moreover, as the largest pure-play agency mortgage REIT, we believe AGNC is very well positioned to generate compelling risk-adjusted returns with a substantial yield component for our shareholders. With that, I'll now turn the call over to Bernie Bell to discuss our financial performance.
Thank you, Peter. For the fourth quarter, AGNC reported comprehensive income of $0.89 per common share. Our economic return on tangible common equity was 11.6% for the quarter, consisting of $0.36 of dividends declared per common share and a $0.60 increase in tangible net book value per share driven by lower interest rate volatility and tighter mortgage spreads to benchmark interest rates. As Peter mentioned, our full year economic return was 22.7%, reflecting our monthly dividend totaling $1.44 per common share and a $0.47 increase in tangible net book value per share. As of late last week, our tangible net book value per common share was up about 4% for January or 3% net of our monthly dividend accrual. We ended the fourth quarter with leverage of 7.2x tangible equity, down from 7.6x at the end of the third quarter. Average leverage for the fourth quarter was 7.4x compared to 7.5x in the third quarter. In addition, we concluded the quarter with a very strong liquidity position of $7.6 billion in cash and unencumbered Agency MBS, representing 64% of tangible equity. Net spread and dollar roll income was unchanged for the quarter at $0.35 per common share, which includes $0.01 per share of expense related to year-end incentive compensation accrual adjustments. An important driver of our net spread and dollar roll income is the level of unhedged short-term debt in our funding mix as well as the composition of our hedge portfolio. As of the end of the fourth quarter, our hedge ratio was 77%, reflecting the level of swap and treasury hedges relative to total funding liabilities and was unchanged from the prior quarter. At the same time, during the fourth quarter, we opportunistically shifted our hedge mix toward a greater proportion of interest rate swaps. As a result, a meaningful portion of our funding remains short term and variable rate. This is consistent with the current more accommodative monetary policy environment and positions net spread and dollar roll income to benefit as additional rate cuts occur. Looking ahead, we expect that lower funding costs from the October and December rate cuts and anticipated future rate cuts, increased stability in funding markets resulting from recent Fed actions to maintain short-term rates within their target range and the shift in our hedge mix toward a greater share of swap-based hedges will collectively provide a moderate tailwind to net spread and dollar roll income. The average projected life CPR of our portfolio increased 100 basis points to 9.6% at quarter end from 8.6% in the prior quarter due to lower mortgage rates. Actual CPRs averaged 9.7% for the quarter compared to 8.3% in the prior quarter. Lastly, during the fourth quarter, we issued $356 million of common equity through our at-the-market offering program at a significant premium to tangible book value per share. This brought total accretive common equity issuances for the year to approximately $2 billion and delivered exceptional book value accretion for our common shareholders. And with that, I'll now turn our call back over to Peter.
Thank you, Bernie. Before opening the call up to questions, I would like to provide a brief review of our portfolio. Agency spreads to both treasury and swap rates tightened across the coupon stack, especially on intermediate coupons as interest rate and spread volatility remained low and the demand for MBS, particularly from the GSEs accelerated. Hedge composition was also an important driver of performance as swap spreads on 5- and 10-year swaps widened significantly during the quarter. This favorable move in swap spreads followed the announcement of the Fed's revised supplemental leverage ratio requirement and the Fed's actions to ease repo funding pressure. As a result, Agency MBS hedged with longer-dated swap-based hedges performed considerably better than positions hedged with treasury-based hedges. Our asset portfolio totaled $95 billion at quarter end, up about $4 billion from the prior quarter as we fully deployed our new capital that we raised during the quarter. The percentage of our assets with some form of favorable prepayment attribute remains steady at 76%, while the weighted average coupon on our portfolio fell slightly to 5.12%. Consistent with the growth in our asset portfolio, the notional balance of our hedge portfolio increased to $59 billion at quarter end. The composition of our portfolio also shifted toward a greater share of swap-based hedges. In duration dollar terms, our allocation to swap-based hedges increased to 70% of our portfolio from 59% the prior quarter. In light of our more favorable outlook for swap spreads, we will likely operate with a greater share of swap-based hedges in our hedge mix, particularly with short-term rates near the Fed's long-run neutral rate. With that, we'll now open the call up to your questions.
Questions and answers
The first question comes from Bose George with KBW.
Can you just talk about where you see spreads currently versus where you saw it in the fourth quarter? And then just help us walk through the dividend coverage. Spreads are obviously tighter, but you've got more capital with higher book value. Just help us do the math there.
Sure. Thanks for the question. I anticipated that would be one of the initial queries. I'll begin by discussing the outlook regarding ROE and spreads. As you noted, spreads have tightened significantly. The best way to characterize the current situation, particularly what transpired in the fourth quarter, is that mortgage spreads have entered a new range. We have broken through the range that we’ve discussed for quite some time, which has been stable for almost three years. This change is advantageous for our business and has contributed to the exceptional results we've seen over the last two years, especially in 2025. At this moment, regarding current coupon spreads compared to a mix of swap and treasury rates, I usually assess things across the curve. The potential spread for current coupon to swaps might be in the 120 to 160 range, and we are currently sitting in the middle of that, likely around 135. I'm not sure of the exact figure this morning, but that's what I would consider the new range for mortgages compared to swaps. In terms of current coupon relative to treasuries, it’s probably in the 90 to 130 basis point range, with today’s figure around 110, based on the curve. Considering this and as I mentioned, we would favor swaps in this environment. There’s much more stability in swap spreads now compared to the beginning of 2026 compared to what we saw in 2025, which is significant. This allows us to use swaps at a higher pace than previously, where we were at about 70% and possibly increasing from there. I would suggest a spread of around 130, and factoring in the leverage we typically utilize, you could anticipate returns in the current spread range of about 13 to 15 percent, possibly a bit higher depending on the hedge mix. This should result in ROEs that are competitive and well-aligned with our dividend. Moving on to the dividend, several factors come into play. We consistently discuss the sustainability of the dividend from that perspective and the marginal return is crucial. One of the key drivers of our dividend over time will be how we replace our portfolio, and these new marginal returns will matter significantly. It’s essential to understand that this process will unfold over an extended period, years rather than days, weeks, or quarters, as the portfolio gradually runs off. The prepayment speed on our portfolio will influence this, as well as how we reposition the portfolio and grow our capital base. This is a long-term consideration. When we evaluate dividend coverage currently, it’s vital to assess the return on our existing portfolio. We have successfully established a highly attractive returning portfolio in the current spread environment over the past couple of years. For instance, our net spread and dollar roll income for this quarter was normalized at $0.35, though it was slightly reduced by $0.01 due to some nonrecurring performance-related compensation. At $0.36, when you consider this relative to our book value of $8.88, that’s approximately a 16% ROE. This corresponds well with our total cost of capital, which, when combining all common stock dividends, preferred stock dividends, and normalized operating costs, was about 15.8% at year-end. Thus, the total cost of capital aligns nicely with the existing portfolio. The new portfolio also appears very appealing at mid-teens; however, this will take time to materialize. Additionally, we constantly discuss various factors that come into play. The environment is dynamic, and as I highlighted, we are experiencing shifts in spread environments. We will receive new information in the upcoming weeks, months, and possibly quarters that will affect the direction and stability of mortgage spreads, which will influence our operating leverage. The hedge mix will be a significant factor, alongside accounting considerations. REITs have specific dividend distribution requirements based on taxable income, which we will also need to consider over time. Therefore, while there are many variables at play, I believe our dividend is well-aligned with the economics and accounting of our business today.
Okay. Great. Regarding the existing portfolio, it appears to sufficiently cover the dividend. Is it accurate to say that the new portfolio's coverage is slightly lower since the additional returns are around 13% to 15%, while the breakeven return on equity seems to be approximately 15.5%?
Yes, that’s correct. It’s crucial to consider when deploying new capital that the required return on the new capital raised is not the same as the total cost of capital, which pertains to the existing portfolio. The appropriate benchmark for dividend coverage is the dividend yield on our stock, which is approximately 12%. Currently, the returns available in the marketplace, around 13% to 15%, exceed our stock's dividend yield, providing sufficient coverage from that standpoint.
The next question comes from Doug Harter with UBS.
I appreciate the ranges for spreads you gave. Can you talk about how you're thinking about the risk or the potential benefit that could get you either to the high end or the low end of those ranges and how that informs your decision around leverage today?
Yes, it's a great question. The announcement earlier this year about the GSEs using all of their portfolio capacity significantly impacted the current coupon spread, pushing it into a new range. The market was already aware that the GSEs were growing their portfolios, having increased their balance sheets by about $50 billion in mortgages as of November, with an overall increase of around $70 billion from the low point. Recently, Freddie Mac announced an additional $15 billion in MBS loans for December. This anticipated use of their portfolio capacity was made explicit with the announcement, causing spreads to tighten considerably. I believe the most likely scenario moving forward is a sideways movement for a while as we await further actions from the administration and FHFA. There are several potential actions that could tighten spreads further, for instance, changes to the portfolio cap, which may not require congressional approval, making them more appealing. A potential adjustment in the Fed's balance sheet could also play a role, especially with the possibility of a new Fed Chairman in 2026, although the Fed currently plans to reduce its portfolio. This dynamic creates a situation where the GSEs are effectively buying $200 billion of mortgages while the Fed is selling or shrinking the same amount. This discrepancy isn’t currently reflected in the market. Given the government's credit guarantee for the GSEs, there might be a justification for altering capital requirements, although this hasn't been widely discussed. Additionally, the funding market shows promise, and there could be positive adjustments in the Fed's standing repo program that benefit the agency market. On the downside, there are ideas being proposed regarding streamlined refinancing, G-fees, or mortgage portability that could negatively impact the market and lead to wider mortgage spreads due to increased prepayment risk. Overall, the government aims for greater mortgage affordability, and the changes they may implement could help maintain sustainability at current levels, which would be beneficial. As a leveraged investor, we prioritize spread stability, which is crucial for generating attractive returns. The environment looks promising, but there are actions that could positively impact the market.
And then how do you think about what that means for leverage kind of given that are you kind of comfortable in the current range? It ticked down kind of during the quarter, but the average was flat. How should we think about that?
Yes, that's really important. We have allowed our leverage to decrease in line with the tightening of spreads. At this point, we need more information to decide if we are open to adjusting our leverage profile. The main factor in this assessment is our belief about the stability of spreads. We are interested in what actions the government may take and whether those actions will promote greater stability in spreads. Specifically, will their actions be sustainable, or will they only result in a temporary tightening of mortgage spreads? There are certain measures they could implement that might tighten mortgage spreads by another 15 basis points, but without further actions, spreads could actually widen again. For instance, if the government-sponsored enterprises quickly use up their capacity, mortgage spreads may remain tight for a while, but once they hit their limit, they are likely to return to previous levels. Therefore, we are seeking more clarity on the actions they might take and their potential impact on spread stability. Maintaining spreads at these current levels would be most beneficial for the overall mortgage market in terms of affordability, especially considering how much more attractive these levels are for homeowners compared to a year ago.
The next question comes from Crispin Love with Piper Sandler.
Peter, as you mentioned, the administration is very focused on affordability, lower mortgage rates. But supply here may be the major issue to broader affordability easing. And you did mention in the prior question some of the things that could be in the toolkit for the administration, FHFA that could be positive for spreads. But if you were in their shoes, what would you do to address the affordability questions?
I believe they have accomplished a lot already and deserve significant credit for the actions taken in 2025 by the administration, FHFA, and the GSEs. The guiding principles provided by the Treasury, which the Treasury Secretary consistently references, are crucial. Their focus on mortgage spreads is essential, and the Secretary's discussions about maintaining or tightening spread stability have played a key role in the significant tightening of mortgages. This approach is critical for the market as it encourages more participants to enter, leading to greater spread stability, which in turn attracts more investors into agency mortgage-backed securities and reduces pressure on the GSEs. The guidance they provided and the actions taken by the GSEs have been very positive. I believe they can consider additional measures, like the cap, which would enhance their capacity and help maintain these attractive spread levels. Ultimately, it is vital for them to keep their focus on mortgage market stability, and they are doing an excellent job in that regard.
Great. That's helpful. And then just one follow-up on the leverage question. Your view seems to be constructive on overall agency MBS investment environment, less rate fall and accommodative administration. Of course, there's always a risk of widening and something unforeseen. But how would you gauge your positivity on the investing environment right now for Agency MBS versus a quarter ago, 6 months, a year ago and how that might impact leverage? And if you do wait for something, could it be almost too late?
Yes. I've mentioned a few points already, but I want to expand on this since it's a relevant follow-up question. When considering the current state of the mortgage market compared to a year, two, or three years ago, we find ourselves in a lower spread environment. However, historically, the spreads are still relatively widespread. Returns in the mid-teens, particularly the low to mid-teens, are significant, especially when you compare them to market returns, such as our stock performance versus the S&P 500 or NASDAQ last year. Even with these lower spreads, the returns remain very strong from a shareholder standpoint. A key positive differentiator is that, compared to a year or two ago, there's less uncertainty regarding the upper end of the spread range. The current environment shows that decision-makers and policymakers are effectively managing expectations, indicating a desire for spreads to either remain stable or decrease. If mortgage rates were to rise to the upper range, I believe we would see measures taken to push them back down. This predictability at the upper end of the range is a crucial and favorable change for a leveraged investor like us. I anticipate that if any unexpected events cause spreads to widen significantly, proactive measures will likely be implemented.
The next question comes from Trevor Cranston with Citizens JMP.
You talked a bit about swap spreads and increasing the amount of swaps in the portfolio during the fourth quarter. I was wondering if you could give us an update on your view going forward if you think there's room for spreads to continue widening in the swap market and sort of where you think ultimately those settle out?
Yes, I believe that swap spreads will remain in this range, but there is potential for further widening as the year progresses. The Federal Reserve is shifting its focus from quantitative tightening to reserve management, which is a critical change. They have eased some regulatory requirements that the market had anticipated, which is very positive for the long term. This makes treasuries more favorable from a balance sheet perspective, contributing to the widening of swap spreads. The overall funding market is in a much better position now, with the Fed increasing its balance sheet by $40 billion a month. We'll see how long this continues, but they are adding reserves to the system, which had previously dropped below $3 trillion and is now above that mark. I expect this trend to continue, putting widening pressure on mortgage spreads. From a hedging perspective, we will likely benefit more from swap-based and treasury-based hedges for some time. Even if spreads remain stable, we can still gain an extra 25 to 30 basis points in carry, which is significant leverage, equating to another 1% or 2% in return on equity. Therefore, I think the outlook is positive for swap spreads.
Yes. Okay. That makes sense. And then on MBS spreads, you talked about the positive technicals in the market, which have been pretty strong. I guess the other thing that's obviously helped MBS performance over the last several months has been volatility continuing to drop. So I was curious if we could get your thoughts on volatility going forward, if you think that continues to come down or what your thoughts are around that?
You're completely right. A major factor in the strong performance of our asset class in 2025 was the decrease in interest rate volatility. We know that when interest rate volatility rises, it negatively impacts mortgage-backed securities as it alters the optionality profile for borrowers. Conversely, a decline in interest rate volatility, like what we've observed, is beneficial for mortgage bonds. In the fourth quarter, trading largely stayed within a 25 basis point range, showing minimal daily movement. Over the past year, particularly since February, we have seen about a 50 basis point trading range. This stability, especially in long-term rates, can be credited to the efforts of the Treasury Secretary and the administration's commitment to maintaining stability in long-term rates, with a particular focus on the 10-year rate. I expect they will continue to manage their issuance in a way that supports the 10-year rate. Currently, we have been trading in a range of 4 to 4.25. Looking ahead, I anticipate that interest rate volatility will remain generally low, although possibly not as low as it has been. There are certainly geopolitical risks in the market today. However, from the Treasury's perspective, I believe that the most likely direction for interest rates is down, considering their focus on affordability. If the 10-year rate moves down to 4 or slightly below, I think it will happen gradually. Nevertheless, the volatility environment should be favorable for Agency MBS in 2026 based on our current understanding.
The next question comes from Jason Stewart with Compass Point.
Just 2 quick follow-ups. One on capital activity today. Could you give us an update on equity issuance?
You mean quarter to date? This quarter to date?
Correct.
None. No issuance.
Okay. And then in terms of your comments, maybe just tie in sort of expectations for ATM issuance? I mean, obviously, 2025 was a big year with your ROE profile, give us some two cents on that.
Yes. It was a great environment, a sort of a confluence of positive factors because we could obviously issue it very accretively and we could deploy it at really attractive return levels. Now we can still issue it accretively, and so that's a positive factor going forward. But obviously, the return profile is not quite as attractive as it was. But as I mentioned, it still exceeds the threshold. So it's something that we will continue to do. But I would also say sort of that we're certainly very comfortable with our size and our scale and our liquidity. Also, there's no urgency on our part to feel like we need to grow. The decision to issue capital will be just based solely on the economics that we see in the environment. So we're certainly very happy with our size and scale and liquidity and like where we are today.
Okay. Got it. That makes sense. And then in terms of the MBS market, we've talked a lot about demand from the GSEs. But outside of the GSEs, when we think about traditional buyers, banks, as rates are going down, and there's been a little bit more mixed activity in terms of foreign demand. What's your take on how those 2 buyers evolve over the course of the next 12 months?
When examining the market, the supply outlook remains largely unchanged at current levels. If interest rates decline and refinance activity increases, those numbers could shift. The supply outlook indicates around $400 billion that the private sector will need to absorb, with the GSEs potentially taking on $200 billion, which is significant. This means they could absorb a substantial portion of that supply, a positive development. Excluding the GSEs, it's noteworthy that unlike a year or two ago when the market was primarily influenced by money managers, the current demand for mortgages reflects a more varied investor base, which is beneficial for the market. Given the performance of the equity market and the focus on long-term interest rates by the administration, bond fund inflows are likely to remain substantial—close to about $500 billion last year and around $450 billion the year before that. I anticipate that bond fund inflows will continue to be robust, translating to money managers potentially purchasing between $100 billion and $200 billion in mortgages. Both money managers and GSEs are well-positioned to absorb a large portion of production. Banks are gradually increasing their positions, and I expect the regulatory changes expected in 2026 to have a positive impact on mortgage-backed securities and mortgage risk overall. I foresee banks purchasing over $50 billion, exceeding many projections. Foreign demand has remained stable and may also see some upside as the market improves compared to the previous years. Additionally, REITs played a significant role in the mortgage market in 2025, and I expect their demand to remain strong based on our discussions this morning. In summary, when considering all the demand factors, it is plausible to foresee a scenario where demand exceeds supply in 2026.
The next question comes from Rick Shane with JPMorgan.
I need to buzz in one question before Jason. He really covered my topics. But just one quick clarification. It sounds like you guys are slowing issuance given the incremental return on deployed capital, which makes sense. You also said in response to Jason that you hadn't issued any equity through the ATM quarter-to-date. I am curious was that actually by choice? Or are you blacked out on the ATM until you issue earnings just so we understand really how much you're dialing back if it was a function of what you're allowed to do versus what you've chosen to do?
Well, that's a good clarification. I would say 2 things that I would describe my answer to the future issuance as being opportunistic and driven not by any desire to be larger or have greater scale, but just driven by the economics of the opportunity in terms of the value to our existing shareholders. And then from a quarter-to-date perspective, most companies, I think you will find in a blackout period from the end of the previous period to sometime around their earnings call. So that would be a typical pattern for companies to not know...
The next question comes from Eric Hagen with BTIG.
I just want to get your perspective on prepayment speeds, maybe at what level for mortgage rates do you think really gets the refi market moving? And would you guys modify the hedging in any way or take off some of the longer-dated hedges, if it looked like refis were really going to accelerate?
Let me start with a few points, and then you can ask me some follow-up questions. Currently, the risk of prepayment is higher, especially considering the direction of the administration. The makeup of the portfolio will be crucial for mortgage performance moving forward. In a tighter spread environment, selecting the right assets becomes significantly more important. It’s essential to consider which assets to choose and which ones to avoid. The composition of the coupon will be critical, as well as the characteristics present in your pools. For instance, regarding our position in 5.5 and above, with a mortgage rate around 6.5, about 48% of our portfolio falls in this category. Notably, 87% of that segment has some underlying attributes that we believe will help stabilize those cash flows. It's vital to look at the underlying characteristics, including the channels they originate from, credit quality, and geography, alongside the current GSE pricing, as these factors will play significant roles in future performance. Specific pool characteristics will be very important. Chris and I reviewed some numbers this morning that caught my attention. For our 6.5 population, which constitutes only 5% of our portfolio, the cheapest to deliver group currently has a CPR of 52%. In contrast, our overall population's CPR is significantly lower. The underlying characteristics and coupon composition are critical and will drive performance. From an interest rate and hedging standpoint, maintaining a positive duration gap is also essential, as declining rates could challenge mortgages and impact supply. This positive duration gap will be crucial. Additionally, we have a substantial receiver swaption position, providing extra protection. The combination of our portfolio positioning from a hedge perspective, maintaining the duration gap, utilizing option-based hedges, and carefully selecting pools with favorable characteristics should help us navigate the rising prepayment environment effectively.
And our last question comes from the line of Harsh Hemnani with Green Street.
So as we look at the composition of the mortgage market, it's more barbelled today versus what it was over its history. And in the context of the PAR coupon being close to 5%, the coupons at 4% and 5%, there's less outstanding there versus in higher coupons and lower coupons. And then also, it sounds like from the messaging from the administration, GSE purchases are going to come in at those PAR coupons. How is that environment sort of affecting your ability to, first off, pick pools in this environment where there's less outstanding at the coupons you favored and then also deploy capital into those coupons?
Yes, I understand. You're correct. One aspect we've discussed is that I expect the GSEs to base their decisions on the economics of the mortgage market. Their purchasing focus will likely be around the PAR coupon as that will most significantly influence the primary mortgage rate, which is their target. For instance, when examining the performance across the coupon stack this quarter, the 5% coupon is probably about 15 basis points tighter. In comparison, other coupons in our portfolio reflect an average change of around 5 basis points since they haven't moved as much. Overall, this isn't particularly challenging for us. We have ample liquidity across all these coupons. The largest groups are the lower and intermediate coupons, but there is sufficient liquidity in the $9 trillion market for us to invest in various coupons, including 4s and 4.5s. We currently hold a sizeable position in those coupons. Therefore, we have plenty of flexibility to adjust our portfolio distribution as needed, and I anticipate that the current coupon will attract the most attention externally.
Got it. That's helpful. And then maybe on the duration gap, you touched on this a little bit. It's been growing for the past few quarters, and it adds that downgrade protection in an environment where prepayment risks are elevated. How should we expect that to evolve over the coming quarters? And then what's the boundaries around that, that we should be thinking about?
Yes, you're correct. I believe we finished the quarter with a duration gap of around 0.3 to 0.4 years. It's larger now due to the increase in the 10-year yield. Currently, we have approximately 0.5 years, up from 0.4 at the end of last quarter, as the 10-year yield has risen to about 4.20 or slightly higher. If the 10-year rate remains around this level or increases a bit further, I expect our duration gap to widen even more, considering the potential risk of falling rates. I don't anticipate the 10-year yield surpassing 4.35 significantly, and there is a chance it could drop back to near 4%. Therefore, our duration gap will likely stay within historical norms, typically around half a year, which could range between one-fourth of a year and three-fourths of a year.
We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.
Great. Thank you, operator, and thank you, everyone, again, for participating. We're obviously very pleased to be able to deliver outstanding results for our shareholders in 2025, and we look forward to 2026 in the environment that we're in and look forward to speaking to you again at the end of the first quarter. Thank you.
Thank you for joining the call. You may now disconnect.