Prepared remarks
Good morning, and welcome to the AGNC Investment Corp's Fourth Quarter 2025 Shareholder Call. 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 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 9 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 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 this would be one of the first inquiries. I'll begin with the outlook regarding ROE and spreads. As you noted, spreads have tightened significantly. The best way to describe the current situation is that mortgage spreads have now entered a new range. We have moved beyond the long-standing range that has persisted for nearly three years, which has been advantageous for our business and has contributed to the excellent results we've achieved over the past two years, particularly in 2025. Currently, when I consider the coupon spreads relative to swaps and treasury rates, the potential spread for current coupons to swaps seems to be in the 120 to 160 range, and we are sitting somewhere in the middle, approximately 135. Although I don’t have the exact figure this morning, it represents a potential new range for mortgages compared to swaps. In terms of current coupons relative to treasuries, this could be in the 90 to 130 basis point range, with today’s number around 110 when viewed across the curve. Given this context, we prefer swaps in this environment since there is greater stability in swap spreads now compared to early 2026, which allows us to utilize swaps more heavily. Previously, we were at about 70% and may increase that further. I would estimate a spread around 130, and considering the leverage we typically use, you can expect returns in the current spread range to be in the 13% to 15% range, possibly slightly above that depending on the hedge mix. This translates to competitive ROEs that align well with our dividend. Regarding the dividend, we consider several factors. The sustainability of the dividend and its marginal returns are crucial, as replacements in our portfolio and new marginal returns will impact this over time. However, this process will take years, not months, as the portfolio gradually runs off. Prepayment speeds will influence this, as will how we reposition our portfolio and grow our capital base, indicating a long-term focus. When examining current dividend coverage, it's essential to assess the return on our existing portfolio. Over the past couple of years, we've built a portfolio with attractive returns in the current spread environment. If we normalize our net spread and dollar roll income for the quarter, we see it at $0.35, slightly impacted by a $0.01 nonrecurring performance-related compensation, leading to $0.36. The ROE based on that $0.36 in relation to our book value of $8.88 is about 16%, which closely aligns with our total cost of capital, which stood at around 15.8% at year-end. The total cost of capital is well aligned with our existing portfolio, and our new portfolio still looks quite attractive at mid-teens returns, although that will take some time to materialize. Additionally, there are many other considerations. This is a dynamic environment with shifting spreads, and we will receive new information in the coming weeks and months that could influence the direction and stability of mortgage spreads, thereby affecting our leverage. The hedge mix will also play a significant role, along with accounting considerations, particularly the REIT dividend distribution requirements based on taxable income, which will need to be integrated into our thinking in the long run. Collectively, these factors indicate that our dividend is well aligned with the current economics and accounting of our business.
The existing portfolio appears to effectively cover the dividend. As for the incremental portfolio, it seems that the returns are slightly lower, ranging from 13% to 15%, compared to the breakeven return on equity, which is around 15.5%.
Yes, I think that's correct. It's also important to consider that when deploying new capital, the required return on the newly raised capital differs from the total cost of capital associated with the existing business. The more relevant measure for dividend coverage is the dividend yield on our stock, which is approximately 12%. When assessing new capital deployment, the market returns today, which are around 13% to 15%, exceed our stock's dividend yield. Therefore, there is strong coverage from this viewpoint.
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, that's a great question. The announcement earlier this year about the GSEs using their entire portfolio capacity significantly impacted the current coupon spread, pushing it into a new range. The market was already watching them grow their portfolio, which they have been doing since the latter half of last year. As of November, they added approximately $50 billion in mortgages, totaling around $70 billion since the lowest point. Recently, Freddie Mac reported an additional $15 billion in MBS for December. The market expected them to expand their portfolios, and this announcement clearly confirmed their intentions, resulting in a considerable tightening of spreads. Looking ahead, I anticipate that spreads may remain stable for some time as we observe the forthcoming actions from the administration and the FHFA. There are several potential actions that could compress spreads further, such as altering their portfolio cap, which seems feasible without congressional approval. A change in the Fed's balance sheet might also occur, especially with the potential of a new Fed Chairman in 2026. Currently, the government, through the GSEs, is purchasing $200 billion in mortgages, while the Fed is selling or reducing $200 billion. Any changes here would not be factored into the market yet. The government guarantee on GSEs might provide a basis for considering changes to capital requirements, although this topic isn't currently a popular discussion. There are several factors that could positively influence the market. For instance, I view the funding market as a new beneficial development, possibly prompting more favorable changes from the Fed that may bolster the agency market. However, there are also some concerning ideas in circulation, such as streamlined refinancing and alterations to G-fees, which could negatively affect the market, particularly with prepayment risk. Although these adjustments might be intended to enhance affordability, they could also widen mortgage spreads due to increased convexity and optionality. In summary, while the government has indicated a desire for improved mortgage affordability, I believe some changes might help stabilize spreads at new levels, which would be a positive outcome. As a leveraged investor, we're focused on achieving spread stability, as this is essential for generating attractive returns. Overall, the potential exists for actions 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 if we want to operate with a different leverage profile. A crucial factor in this decision is how stable we anticipate spreads will be. We need to consider the potential actions of the government and whether they will result in greater stability of spreads. We are also questioning if these actions will be sustainable or just lead to a temporary tightening of mortgage spreads. There are instances where government actions could tighten mortgage spreads by another 15 basis points, but without further action, spreads might widen again. For example, if the Government-Sponsored Enterprises quickly use up their capacity, mortgage spreads may remain tight during that period, but once they hit their limit, prices are likely to return to previous levels. Thus, we are seeking more clarity on their potential actions and whether they could stabilize spreads. The optimal outcome for the overall mortgage market, from an affordability standpoint, would be maintaining spreads at attractive levels compared to last year.
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 their actions in 2025. This includes the guiding principles that I have mentioned several times, particularly those set forth by the Treasury, which the Treasury Secretary continues to highlight. Their focus on mortgage spreads and the Secretary's discussions about actions to maintain or tighten spread stability are crucial factors contributing to the tightening of mortgages. This approach is vital for the market, as it encourages other participants to enter. Greater spread stability will attract more investors into the market, resulting in a more diverse demand for agency mortgage-backed securities and reducing the pressure on the GSEs. Overall, the guidance they provided and the actions taken by the GSEs have been very positive. Additionally, measures like the cap could enhance their capacity and help maintain attractive spread levels. It is essential for them to keep concentrating on the stability of the mortgage market, which they are managing effectively.
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'll elaborate further since it's a great follow-up question. When considering the current state of the mortgage market compared to a year, two, or three years ago, we are indeed in a lower spread environment now, but it's still broad by historical standards. The mid to low-teens returns we are discussing are outstanding, especially in comparison to what you might achieve in the broader market, such as our stock's performance relative to the S&P 500 or even the NASDAQ last year. Returns remain excellent from a shareholder's viewpoint, even at these lower spread levels. A key positive differentiator is the reduced uncertainty about the upper end of the range compared to one or two years ago. Credit goes to the decision-makers, policymakers, and the administration for their limited approach regarding the upper end of the range, indicating their desire for spreads to remain here or possibly decrease. If spreads were to hit the upper end of the range, I believe there would be actions to pull them back down. This is an important and encouraging development for us as leveraged investors, as today the upper end of the range is considerably more certain than it was a year ago. I would anticipate proactive measures should any significant exogenous event occur that might cause spreads to widen significantly.
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 their current 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 pivotal change. They have eased some regulatory requirements, which the market had anticipated and this is positive for the long run. It makes treasuries more favorable from a balance sheet perspective, contributing to the widening of swap spreads. Overall, the funding market is in a much stronger position with the Fed increasing its balance sheet by $40 billion a month. We will see how long this continues, but they are adding reserves to the system. Reserves fell below $3 trillion but are now back at that level or slightly above. I expect this trend to continue, and I believe it will exert widening pressure on mortgage spreads. From a hedging perspective, we are likely to benefit more from a swap-based hedge compared to a treasury-based hedge for a while. Even if spreads remain stable, we could still gain an extra 25 or 30 basis points in carry, which represents significant leverage, translating to another 1% or 2% in return on equity. Therefore, I see a favorable outlook 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 absolutely right. A key factor in the strong performance of our asset class in 2025 was the decrease in interest rate volatility. We all know that when interest rate volatility rises, it negatively affects those with mortgage-backed securities because it alters the optionality for borrowers. In contrast, a drop in interest rate volatility, like we've seen, positively impacts mortgage bonds. In the fourth quarter, the range for ten-year notes was around 25 basis points, indicating minimal daily movement. Looking back over the year, from February onwards, the trading range was about 50 basis points. This stability can largely be credited to the administration and the treasury's focus on maintaining long-term rate stability, especially regarding the 10-year note. I believe they will maintain an approach that supports the 10-year rate. We've been trading within the 4 to 4.25 range. Looking ahead, I expect interest rate volatility to remain generally low, though perhaps not as low as it has been, especially given current geopolitical risks. However, I think the trend for interest rates is more likely to be downward rather than upward, considering the emphasis on affordability. If the rate does drop to around 4, it might take some time to reach that point. Overall, I anticipate a favorable volatility environment for Agency MBS in 2026 based on current projections.
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. Looking at the market, the supply outlook remains similar to current levels. If rates decrease and refinancing activity increases, the numbers may change. The private sector will need to absorb around $400 billion in supply, with the GSEs potentially taking on $200 billion, which would be significant and beneficial. Excluding the GSEs, it's important to note the market today is differentiated from a year or two ago, as it is less dominated by money managers. The demand for mortgages now reflects a more diverse base of investors, which is encouraging for the overall market. Given the current returns in the equity market and the administration's emphasis on long-term interest rates, I anticipate substantial bond fund inflows, similar to last year's almost $500 billion and the previous year's $450 billion. I expect these inflows to remain strong, leading money managers to buy between $100 billion and $200 billion of mortgages. Both money managers and GSEs will consume a large portion of the production. Banks are gradually increasing their positions, and I expect regulatory changes in 2026 to positively impact MBS and mortgage risk, leading banks to purchase over $50 billion, aligning with most projections. Foreign demand has remained stable but may see some improvement as the environment is more favorable than in recent years. REITs, having played a significant role in the mortgage market in 2025, should continue to show strong demand based on the current discussions. Overall, combining all demand factors, it is plausible to expect that demand may exceed 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 by mentioning a few points before we open the floor for follow-up questions. Prepayment risk is currently higher, and I believe this is largely influenced by the direction of the administration. The composition of the portfolio will be crucial for mortgage performance in the future. In a tighter spread environment, selecting the right assets becomes even more important. It’s essential to know which assets to choose and which to avoid. The makeup of the coupons will be significant, as will the characteristics present in the pools. For instance, regarding our coupon distribution, it’s important to note that 48% of our portfolio is in the 5.5 and above range. Of this segment, 87% possesses underlying attributes that we believe will enhance the stability of cash flows. When assessing these characteristics—whether they stem from the channel, credit quality, geography, or other factors like the Federal loan balance and GSE pricing—they can greatly impact future performance. The specific pool characteristics will play a vital role. Chris and I recently examined some data, which was quite revealing. Our 6.5 population accounts for only 5% of our portfolio, and the most affordable delivery option within this segment is experiencing a 52% CPR, whereas our holdings are trading at less than half that rate, highlighting the importance of underlying characteristics. Furthermore, the coupon composition will be a critical factor driving our performance. From the perspective of interest rates and hedging, it’s important to maintain a positive duration gap, as falling rates can pose challenges for mortgages and affect supply. We also have a substantial receiver swaption position that will provide additional protection. Overall, how we position our portfolio from a hedging perspective, utilize option-based hedges, and focus on avoiding the weakest pools while selecting more attractive ones should serve us well in 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 believe I understand everything. I would agree with your assessment. One of the key points we've discussed is that I anticipate the GSEs will base their decisions on the economics of the mortgage market. Their purchasing focus will likely center around the PAR coupon, as this will have the most significant influence on the primary mortgage rate they're aiming to impact. For instance, looking at the performance across various coupons this quarter, the 5% coupon is approximately 15 basis points tighter. In comparison, the average movement for other coupons, such as in our portfolio, is about 5 basis points because the other coupons haven't fluctuated as much. Overall, this situation isn't particularly difficult for us. We have significant liquidity across all these coupons. The largest groups are in the lower coupons, and there are also intermediate coupons you mentioned. However, there is plenty of liquidity in the $9 trillion market for us to move into different coupons, including the 4s and 4.5s. Currently, we hold substantial positions in these areas. Therefore, we have the liquidity necessary to position our portfolio as we see fit, and I anticipate that the current coupon will be the primary area of focus from an external viewpoint.
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 concluded the quarter with a duration gap of approximately 0.3 years. This has increased since then due to the rise in the 10-year rates. Currently, our duration gap is around half a year, slightly up from 0.4 at the end of the last quarter, possibly around 0.5 now. The 10-year rate is currently about 420 or slightly higher. If this rate remains stable or increases a bit, I anticipate that our duration gap will widen further, as the risks associated with lower rates would also rise. I don't foresee the 10-year rate surpassing approximately 435, and I believe there is a chance it could drop closer to 4%. Historically, we should operate within this range, 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.