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. 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 on 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 nine quarters since that call, and despite several episodes of extreme market turbulence, AGNC has generated an economic return of 50% for its shareholders, comprised 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 two 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 as short-term rates approach 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. Thank you for the question. I anticipated that would be one of the first inquiries. I'll begin by discussing the outlook regarding return on equity and spreads. As you mentioned, spreads have significantly tightened. The best way to describe the current environment, which mirrors what happened in the fourth quarter, is that mortgage spreads have now entered a new range. We have surpassed the range we've been addressing for a long time, which has held for nearly three years, benefitting our business and leading to the strong results we've seen over the past two years, especially in 2025. Currently, when I consider current coupon spreads relative to a mix of swap and treasury rates—thinking about it across the curve—I would estimate that the potential spread for current coupon to swaps is in the 120 to 160 range. Right now, we're positioned in the middle of that range, around 135. However, I'm not sure of the exact figure this morning. In terms of current coupon basis to treasuries, I estimate it's around 90 to 130 basis points, and today it's likely about 110 across the curve. Given this, in the current environment, we prefer swaps due to more stability in swap spreads compared to what we experienced at the start of 2026. This stability enables us to increase our use of swaps beyond the 70% we previously reached. I would suggest a spread of approximately 130, factoring in the leverage we typically utilize. Therefore, you might expect returns at this spread range to fall in the 13% to 15% range, possibly slightly higher depending on the hedge mix. This leads to return on equity figures that are quite competitive and well aligned with our dividend. Regarding the dividend, there are numerous considerations. We often discuss the sustainability of dividends and the importance of marginal returns. These new marginal returns will significantly influence our dividend over the long term, but it's crucial to note that this will take years to materialize as the portfolio gradually runs off, impacted by prepayment speeds and our portfolio repositioning and capital growth. In the context of current dividend coverage, assessing the returns on our existing portfolio is vital. We managed to establish an attractive returning portfolio in the past couple of years within this spread environment. If we look at our net spread and dollar roll income, normalized for this quarter, it was $0.35, slightly affected by a $0.01 reduction due to nonrecurring performance-related compensation. When considering ROE, the $0.36 alongside our book value of $8.88 translates to approximately 16%, which aligns closely with our total cost of capital. That total cost of capital, integrating all common and preferred stock dividends and normalized operating costs, was around 15.8% at year-end. The total cost of capital aligns well with the current portfolio, and the new portfolio also looks promising in the mid-teens, although this will require time. Additionally, there are several other factors to consider. As I mentioned, we are navigating a dynamic environment with shifting spread situations. There will be new information arising in the coming weeks and months that will inform the direction and stability of mortgage spreads, directly affecting our leverage. The hedge mix will also play a critical role, along with accounting considerations. REITs must adhere to a dividend distribution requirement based on taxable income, which we will need to keep in mind moving forward. Overall, these various elements indicate that our dividend is well aligned with the economics and accounting of our business today.
The existing portfolio appears to adequately cover the dividend. For the incremental portfolio, would it be accurate to say that it is somewhat closer to the coverage, considering the incremental returns are around 13% to 15%, while the breakeven return on equity seems to be approximately 15.5%?
Yes, that's correct. It's also important to consider that when deploying new capital, the required return on the capital raised is different from the total cost of capital associated with our existing business. The appropriate comparison for dividend coverage is the dividend yield on our stock, which is approximately 12%. So, when evaluating the deployment of new capital, the current market returns, which are between 13% and 15%, exceed our stock's dividend yield. This indicates there is significant coverage from that perspective.
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 that the GSEs would be using all of their portfolio capacity significantly influenced the current coupon spread, pushing it into a new range. The market had been watching the GSEs expand their portfolio, which they've been doing since the second half of the year, growing their balance sheet by approximately $50 billion in mortgages as of November, totaling around $70 billion since the low point. Freddie Mac recently reported an additional $15 billion of MBS in loans for December. The market expected this usage and growth of their portfolios, so the announcement clarified their intentions and caused spreads to tighten considerably. Moving forward, I believe the most likely outcome is that spreads will move sideways for a while as we await further actions from the administration and FHFA. There are several potential actions, such as changing the portfolio cap, that could lead to tighter spreads without needing congressional approval. Additionally, changes in the Fed's balance sheet, especially with the prospect of a new Fed Chairman by 2026, could also play a role; the Fed currently plans to reduce its portfolio while the GSEs are acquiring $200 billion in mortgages. This dynamic has not been factored into market pricing. Given the government’s credit guarantee for the GSEs, there might even be reasons to adjust capital requirements, though that topic isn't being widely discussed. Several positive developments are on the horizon, such as improvements in the funding market, which could benefit the Agency market. However, there are also negative factors to consider, such as streamlined refinances or changes in G-fees, which could negatively impact mortgage spreads by increasing prepayment risk. Ultimately, the government aims for greater mortgage affordability, and I believe that some changes they implement may help sustain these new levels, which is encouraging. As leveraged investors, we seek spread stability, which is crucial for generating attractive returns, and I think that the environment remains promising, with actions still possible that could benefit 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. Currently, we need more information to decide whether we are ready to operate with a different leverage profile. The critical factor in this situation is how stable we believe spreads will be. We need to consider the actions the government might take and whether those actions will lead to greater stability in spreads. It's essential to assess if the measures they take will be sustainable or just result in a temporary tightening of mortgage spreads. Some actions might cause mortgage spreads to tighten by another 15 basis points, but without follow-up actions, spreads could widen again. For instance, if the GSEs quickly use up their capacity, mortgage spreads will be tight during that time, but once they hit their limit, mortgage prices are likely to revert to previous levels. Therefore, we are looking for more clarity on the actions they may undertake and whether these will result in stable spreads. Achieving this would benefit the overall mortgage market by improving affordability, as current spreads are considerably more favorable 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 already accomplished a great deal and deserve significant credit for their actions taken in 2025. This includes the guidance provided by the Treasury, which is essential for the market. The Treasury Secretary continues to reference these guiding principles, emphasizing the importance of focusing on mortgage spreads. Their efforts to maintain spread stability or tighten spreads have been crucial in contributing to why mortgage rates have decreased so significantly. This strategic approach is vital as it encourages more market participants and enhances spread stability, allowing for a broader range of investors in agency mortgage-backed securities. This, in turn, reduces pressure on the GSEs. The combination of their guidance and the actions taken by the GSEs has been very positive. There's potential for them to implement additional measures, such as adjusting caps to enhance capacity and maintain attractive spread levels. Ultimately, the key for them is to keep prioritizing the stability of the mortgage market, which they are effectively managing.
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 things already, but I'll expand on them as it's a relevant follow-up. When considering the current state of the mortgage market compared to a year or two or three ago, we are in a lower spread environment now, but it's still substantial by historical measures. When we refer to returns in the mid-teens, particularly low to mid-teens, those are exceptional returns, especially when you compare them to market options, such as our stock performance against the S&P 500 or NASDAQ last year. Even with the lower spreads, returns remain impressive from a shareholder perspective. A key positive differentiator is that there is less uncertainty now about the upper end of the range compared to a year or two ago. Credit goes to the decision-makers and policymakers for limiting the upside of the range; they seem intent on keeping spreads here or even lower. If mortgage rates were to approach the upper end of that range, I believe we would see actions taken to bring them back down. This is a significant and encouraging development for investors like us, as the upper limit is now more certain than it was a year ago. I would anticipate measures being implemented should any unforeseen events lead to a significant widening of spreads.
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 likely 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 significant change. They have eased some regulatory requirements, which the market had anticipated and is a positive development in the long run. This shift makes treasuries more favorable from a balance sheet perspective, contributing to some widening of swap spreads. Overall, the funding market is now in a much better position with the Fed increasing its balance sheet by $40 billion a month. It remains to be seen how long this will continue, but they are adding reserves back into the system. Reserves dipped below $3 trillion but are now at or slightly above that level, and I expect this trend to continue. Consequently, there will likely be upward pressure on mortgage spreads. From a hedging standpoint, I believe we will benefit more from a swap-based hedge and a treasury-based hedge for some time. Even if spreads remain stable, we could gain an extra 25 or 30 basis points in carry, which, considering those spread environments, represents substantial leverage and could translate to an additional 1% or 2% return on equity. Therefore, I view the outlook for swap spreads as positive.
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 absolutely right. A key factor in our asset class's outperformance in 2025 was the drop in interest rate volatility. We all know that increased interest rate volatility negatively impacts mortgage-backed securities by altering the borrower's optionality profile. Conversely, a decline in interest rate volatility, like we’ve seen, is clearly beneficial for mortgage bonds. For instance, in the fourth quarter, the tenure traded within a narrow 25 basis point range, showing minimal daily movement. Looking back at the year, from February onward, we generally traded within a 50 basis point range. This stability can largely be credited to the administration and the Treasury’s focus on keeping long-term rates stable, particularly the 10-year rates, which have been a priority. I believe they will continue to manage their issuance in a way that supports the 10-year rate. Currently, we have been trading in the range of 4 to 4.25. Moving forward, I expect spread yield volatility or interest rate volatility to remain generally low, although not as low as it has been. There are some geopolitical risks in the market, but from the Treasury's perspective, it's more likely that interest rates will trend lower rather than higher due to their focus on affordability. However, if the tenure does decrease to around 4 or slightly below, I anticipate it will be a gradual decline. Overall, I believe the volatility environment will be favorable for Agency MBS in 2026 based on what we know today.
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?
Yes. When considering the market, I mentioned the supply outlook, which is likely to remain similar to current levels. If interest rates decrease and refinancing activity increases, these figures will change. From a supply perspective, around $400 billion will need to be absorbed by the private sector. The GSEs could take up a significant portion of this, with $200 billion being quite substantial, which would be very beneficial. Furthermore, aside from the GSEs, it's important to note that the market today is different from a year or two ago when it was heavily influenced by money managers. Currently, there is a more diverse group of investors interested in mortgages, which is encouraging for the overall market. Given the performance of the equity market and the administration's emphasis on long-term interest rates, I anticipate that bond fund inflows will remain significant. Last year saw nearly $500 billion in inflows, with the previous year at $450 million. I believe bond fund inflows will continue to be robust in the present environment, translating to money managers purchasing between $100 billion and $200 billion in mortgages. Both money managers and GSEs could absorb a lot of the production. Although banks are gradually increasing their holdings, I expect upcoming regulatory changes in 2026 to positively impact MBS and mortgage risk overall. I anticipate banks will buy more than $50 billion, exceeding most expectations. Foreign demand has remained steady, but there may be potential for some improvement compared to the last few years. Additionally, REITs, which significantly contributed to the mortgage market in 2025, should continue to show strong demand based on our discussions. Overall, I believe that when you aggregate the demand, it's plausible to envision 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, two 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.
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 by making a couple of points, and then you can ask me some follow-ups. Prepayment risk is higher now, especially considering the current direction of the administration. The composition of the portfolio will be crucial for mortgage performance moving forward. In a tighter spread environment, the selection of assets becomes significantly more important. It's essential to focus on which assets you choose and which you choose to avoid. The composition of the coupon will be very important, as will the characteristics of the pools. For instance, when I look at our portfolio, about 48% is in the 5.5 and above range, which is crucial given the current mortgage rate of around 6.5. Importantly, 87% of that group possesses attributes that are likely to make cash flows more stable. When assessing these characteristics, factors such as the channel they originated from, credit quality, geography, and the situation with GSE pricing all play a role and will significantly impact performance going forward. Specific pool characteristics are critical. Chris and I were reviewing some numbers this morning that I found interesting. Our 6.5 population makes up only 5% of our portfolio, and the most cost-effective cohort in that group has a 52% CPR. Our population is trading at just under half of that from a CPR standpoint, emphasizing the importance of underlying characteristics. The composition of the coupon will be a key driver. From an interest rate and hedging standpoint, maintaining a positive duration gap is important because as rates decline, mortgages may face challenges that could impact the supply outlook. We also have a considerable receiver swaption position, which offers additional protection. Overall, our strategy will involve positioning the portfolio with a focus on hedges, maintaining a positive duration gap, and selecting pools with attractive characteristics to navigate this rising prepayment environment.
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 that. I would agree with you. One of the key points we’ve discussed is that I expect the government-sponsored enterprises to make decisions based on the mortgage market's economics. Their purchasing focus is likely to center around the PAR coupon since it significantly influences the primary mortgage rate that they aim to affect. For instance, if we look at the performance across the coupon stack this quarter, the 5% coupon has improved by approximately 15 basis points, whereas our portfolio reflects more steady returns of about 5 basis points on average because other coupons haven't changed as much. However, from our standpoint, this isn't particularly challenging. We have substantial liquidity in all these coupons, with the largest volumes in lower and intermediate coupons. The $9 trillion market provides enough liquidity for us to transition into different coupons, including the 4s and 4.5s, in which we currently hold a significant position. Therefore, we have plenty of liquidity to manage our portfolio's coupon distribution, and I anticipate the current coupon will receive 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. We ended the quarter with a duration gap of approximately 0.3 years, but it's larger now due to the rise in the 10-year rate. Currently, it's around 0.5 years, having increased from 0.4 at the end of last quarter. The 10-year is now above 420. If the 10-year rate remains at this level or increases slightly, I anticipate our duration gap will widen further since the risk of lower rates would likely increase. I don't foresee the 10-year moving significantly above 435, and there’s a chance it could drop closer to 4%. Therefore, our duration gap will likely stay within a historical range of about half a year, typically between a quarter of a year and three-quarters 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.