管理層發言
Thank you all for joining AGNC Investment Corp.'s Third 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 facts, 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 forecast 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, and thank you all for joining our conference call. In the third quarter, the Federal Reserve's pivot to a less restrictive monetary policy stance and the easing of fiscal policy concerns drove robust financial market performance and a significant improvement in investor sentiment. Agency mortgage-backed securities were one of the best-performing fixed income asset classes during the quarter and have now outperformed U.S. treasuries for five consecutive months, a sequence of outperformance that has not happened since 2013. In this favorable investment environment, AGNC generated a very strong economic return of 10.6%, comprised of our attractive monthly dividend and book value appreciation. At its September meeting, the Fed lowered the federal funds rate as expected and signaled further monetary policy accommodation with the possibility of rate cuts at the October and December meetings.
On the fiscal policy side, the passage of the tax bill early in the quarter and several positive tariff developments eased some of the concerns that dampened the investment outlook in the second quarter. These investor-friendly developments led to a material decline in interest rate volatility and contributed to the outperformance of Agency MBS. As we have discussed, a number of emerging factors support our constructive outlook for agency mortgage-backed securities. The first relates to the improved spread environment for Agency MBS. Over the last four years, the spread range between agency securities and benchmark rates has become increasingly well defined with incremental investor demand consistently emerging when spreads trade near the upper end of the range. In addition, the administration has begun to focus on mortgage spreads as a means of improving housing affordability. In an interview in late September, the Treasury Secretary reinforced this view when he said, 'The really important thing is that we either maintain mortgage spreads or narrow them further to help the American people.'
This focus on spreads by the administration is good for Agency MBS and good for our business. Second, the supply and demand dynamic for agency mortgage-backed securities continues to be well balanced. With the primary mortgage rate persistently above 6%, the net new supply of Agency MBS this year will be about $200 billion, the lower end of initial expectations. At the same time, the demand outlook has improved. Bank demand for Agency MBS has been relatively muted this year, but should increase as regulatory reforms get implemented. The money manager community is another important source of demand for Agency MBS. Demand from this sector increased meaningfully in the third quarter, as the favorable shift in monetary policy led to $180 billion of bond fund inflows, which are now running slightly ahead of last year's pace. Third, the financing market for Agency MBS remains strong. With bank reserves just under $3 trillion, the Fed will likely end balance sheet runoff within the next few months.
Importantly, the Fed is also considering joining the FICC for purposes of the standing repo facility and using a repo-based measure as its primary target rate. If adopted, these changes would be highly beneficial to the repo market for U.S. treasuries and Agency MBS, particularly during times of stress. Fourth and finally, the potential path of GSE reform continues to move in a favorable direction. The Treasury Department has taken a leadership role in the reform process, holding a series of roundtable discussions with a wide range of housing and mortgage market participants to gain insight into potential reform actions. This careful approach demonstrates the Treasury's commitment to maintaining mortgage market stability. To that end, the treasury has emphasized three important guiding principles for GSE reform, maximize taxpayer value, lower the mortgage rate through stable or tighter mortgage spreads and do no harm to the housing finance system.
The mortgage market has responded well to this approach. Collectively, the four factors that I mentioned are currently pointing in a favorable direction for Agency MBS. Moreover, given the treasury's thoughtful approach, it is possible the agency market emerges from this reform process with a stronger and more durable structure. In this evolving investment environment, we believe AGNC as the largest pure-play levered agency investment vehicle is well positioned to generate attractive risk-adjusted returns for our shareholders. With that, I'll now turn the call over to Bernie Bell, our Chief Financial Officer, to discuss our financial results in greater detail.
Thank you, Peter. For the third quarter, AGNC reported comprehensive income of $0.78 per common share. Our economic return on tangible common equity was 10.6%, consisting of $0.36 of dividends declared per common share and a $0.47 increase in tangible net book value per common share, driven by a significant decline in interest rate volatility and tighter mortgage spreads to benchmark rates. As of late last week, our tangible net book value per common share was unchanged to slightly up for October. We ended the third quarter with leverage of 7.6x tangible equity and average leverage of 7.5x, both unchanged from the prior quarter. Our liquidity position remained very strong with $7.2 billion in cash and unencumbered Agency MBS at the end of the quarter, representing 66% of tangible equity. Net spread and dollar roll income declined $0.03 to $0.35 per common share for the quarter, driven by lower swap income due to the maturity of $4 billion of legacy swaps and a timing mismatch between the issuance and deployment of new preferred and common equity capital.
Another important driver of our net spread and dollar roll income is the amount of unhedged short-term debt in our funding mix as measured by our hedge ratio. As of the end of the third quarter, our hedge ratio was 77%, representing the amount of swap and treasury-based hedges, excluding option-based hedges relative to our total funding liabilities. This hedge portfolio positioning reflects our expectations for an accommodative monetary policy environment and positions our net spread and dollar roll income to benefit from rate cuts as they occur. Looking ahead, we expect that lower funding costs from the September rate cut and widely anticipated future rate cuts, along with the full deployment of recently raised capital and a 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 80 basis points to 8.6% at quarter end from 7.8% the prior quarter on lower mortgage rates.
Actual CPRs averaged 8.3% for the quarter compared to 8.7% in the prior quarter. Lastly, during the third quarter, we issued $345 million of Fixed-Rate preferred equity, the largest mortgage REIT preferred stock offering since 2021 and $309 million of common equity through our At-the-Market Offering program at a significant premium to our tangible net book value per share. Notably, the preferred issuance carries a cost significantly below the levered returns available on deployed capital, which is expected to further enhance future earnings available to common shareholders. And with that, I will now turn the call back over to Peter for his concluding remarks.
Thank you, Bernie. Before opening the call up to your questions, I want to provide a brief review of our portfolio activity. Agency spreads to both treasury and swap rates tightened meaningfully across the coupon stack in the third quarter as interest rate volatility declined sharply. Intermediate coupons performed the best driven by strong index-based buying from money managers. Higher coupons also generated positive excess returns, but to a lesser extent, as the sizable inter-quarter rally in long-term interest rates increased prepayment concerns associated with these coupons. Hedge composition was also a driver of performance in the third quarter as swap spreads widened 2 to 5 basis points across the curve. Our asset portfolio totaled $91 billion at quarter end, up meaningfully from the prior quarter as we fully deployed the capital that we raised in the second and third quarters. As is often the case when we deploy new capital, the mortgages that we added were largely newly originated production coupon MBS.
Over time, however, we optimized our asset composition by rotating into pools with favorable prepayment characteristics as opportunities arise. Consistent with the growth in our asset portfolio, our TBA position increased to $14 billion at quarter end. As a result, the percentage of our assets with favorable prepayment attributes declined to 76% in the third quarter. The weighted average coupon of our portfolio increased slightly to 5.14%. The notional balance of our swap and treasury-based hedges remained relatively stable during the quarter, but the composition of our portfolio shifted to a greater share of longer-dated swap-based hedges. In duration dollar terms, our swap-based hedges increased to 59% of our overall portfolio. Lastly, given the convexity profile of our assets and the large decline in interest rate volatility, we opportunistically added $7 billion of receiver swaptions during the quarter as an additional source of downgrade protection. With that, I'll now open the call up to your questions.
分析師問答
And the first question will come from Crispin Love with Piper Sandler.
Spreads have tightened materially over the last few months and just looking at your results, core earnings were $0.01 below the dividend. Can you just discuss expected ROEs? Have they shifted at all just given the spread tightening and then just touching on the sustainability of the current EBITDA?
Sure, I appreciate your question. You're correct that we've seen a significant movement in spreads. As mentioned in my prepared remarks, the four-year range has typically been around 160 to 200 basis points, and we are currently closer to the lower end of that range at about 170 basis points. In terms of the relationship between mortgages and swaps, I would still say that mortgages are yielding a return on equity in the expected range of 16% to 18%, which aligns well with our total cost of capital. When considering the sustainability of our dividends, I focus on this measure, as it is critical for covering all common and preferred stock dividends as well as our operating costs over our equity base. Our equity base has increased, resulting in a drop of about 1% quarter-over-quarter, bringing our breakeven rate to around 17%. This is in line with the economic conditions of current mortgage trading.
There has been some noise regarding our net spread and dollar roll income, which decreased to $0.35 due to several temporary factors, including the expiration of some short swaps and a lower hedge ratio this quarter. However, we believe we are at or near a low point for these earnings and expect improvements moving forward. Overall, while spreads have tightened significantly due to various factors, our dividend sustainability and return perspectives remain well aligned at this time. I'll pause here to let you follow up.
All really helpful. You mentioned in your prepared remarks that you significantly decreased the hedge ratio in the quarter. Can you elaborate on that? What prompted this change? Are you adopting a more short-term rate outlook, especially regarding decreased rate fall? What do you consider the key risks associated with the lower ratio, and how do those receiver swaptions play into these risks?
There are a few important developments regarding the hedge ratio. We've discussed receiver swaptions, which I'll address further at the end of this question. Bernie also highlighted our overall hedge ratio. With the inclusion of receiver swaptions, we provided two hedge ratios this time. Our overall hedge portfolio has decreased to around 68%. However, the key figure to consider in relation to our net spread and dollar roll income is our hedge ratio for swap-based and treasury-based hedges, used to convert our short-term debt into synthetic long-term debt. This hedge ratio stood at 77% at the end of the quarter, meaning 23% of our funding comes from short-term debt. It's important to compare the costs of short-term debt with other funding costs; last quarter, the average repo cost for short-term debt was 4.43%, which is the highest in our funding mix. As the Fed eases, we expect this cost to decrease, which will benefit us.
Specifically, having short-term debt funded at 4.43% versus swap rates in the 3- to 5-year sector presents about a 100 basis points additional cost and translates to an estimated $0.05 improvement as short-term rates decline. We've structured our portfolio to take advantage of the Fed's shift toward a more accommodative monetary policy, and the momentum for rate cuts seems to be strengthening, so we anticipate this benefit over the next few quarters. Additionally, given the current rate environment and the administration's focus on long-term rates, we must be more aware of the risks associated with falling long-term rates and increasing mortgage prepayments. To manage this, we've focused on asset selection for down rate protection, and we also added $7 billion in receiver swaptions last quarter for additional protection. However, since this is a receiver position, it affects the hedge ratio calculation, which is why I wanted to clarify.
There are two key aspects to our hedge composition: understanding our net spread and dollar roll income, which currently faces some pressure that we expect to reverse over time, and the need for additional down-rate protection.
Your next question will come from Terry Ma with Barclays.
Maybe just touch on your comments around incremental demand for MBS from money managers in the quarter. Was that kind of episodic or do you think that appetite will be sustained going forward?
It's truly fascinating, and the shift in monetary policy can't be underestimated. It was a significant change for fixed income, and we've collectively waited for the Fed to pivot amid uncertainty around tariffs. Now that we have seen that pivot gaining momentum, bond fund flows have surged. In the first quarter, there were $100 billion in inflows, followed by $50 billion in the second quarter, totaling $150 billion for the first half of the year, and then a jump to $180 billion in the third quarter. That translates to over $8.5 billion a day in inflows. We are on track for around $450 billion in bond fund inflows this year, with no signs of that slowing down. I expect these robust inflows to continue, particularly with anticipated easing in the next two Fed meetings and a weakening equity outlook in the current market. With money still parked in money market funds, especially as the equity market is at all-time highs, there could be a rotation occurring.
I expect the strong bond fund inflows to support the lower and middle coupons through the end of the year. An important factor in demand, which remains uncertain but seems promising, is the activity from banks. They have added about $50 billion in mortgages and $200 billion in treasuries this year. As bank reforms are realized, especially with the new Basel Endgame anticipated in the first quarter, this could positively impact bank capital related to mortgage credit. Consequently, we might see an increase in bank demand for mortgages and a potential shift from treasuries to mortgages once regulations are clearer. Overall, I believe the demand outlook is stable or even improving.
Got it. That's helpful. And then just a follow-up. I appreciate all the color on net spread and the dynamics around that. But I guess, to the extent that Fed easing gets delayed or pushed out or maybe doesn't even materialize. Do you still expect a near-term tailwind to the net spread when you kind of factor in just, I guess, capital deployment and then also just swaps rolling off?
Yes, I do. There are several factors that have contributed to a slight downturn in our earnings, likely more than anticipated. As Bernie mentioned, there have been some timing mismatches related to our capital raising initiatives. We raised capital at the end of the second quarter and were deliberate in deploying those proceeds, which resulted in some excess capital at the end of the quarter. This situation can adversely affect earnings, and we observed that impact. However, I want to note that all proceeds have now been fully deployed, so that challenge is behind us, which is significant. Additionally, regarding short-term debt, what's crucial is the positioning of short-term swap rates in relation to the neutral Fed funds rate. Recently, with the Fed's transition, we have seen the first easing, which is key, and now, for instance, 2- and 3-year swap rates reflect the neutral Fed funds rate around 3.25%. There are two options: we can wait for the actual easing to influence our repo balance, or we can extend this into the swap market at the same long-run neutral rate. I anticipate this will provide a benefit over the next three to four quarters.
Next question will come from Rick Shane with JPMorgan.
In my office, I have a note that reminds me it's never truly different this time. However, when we examine the refinancing environment, the distribution of outstanding mortgages appears unlike anything we've seen before. It's not a typical bell curve; instead, it resembles a barbell. Over the past three years, borrowers have likely been sold mortgages under the assumption that they would be able to refinance. I believe we may finally be on the verge of a transformation in the mortgage origination process due to technology, something we've anticipated for two decades. Are you noticing any changes in terms of borrower behavior regarding speeds? Is this a potential risk we should be considering at this time?
Yes, I agree with all the points mentioned. This is why I emphasized in my previous response the need for more down-rate protection, especially considering the administration's focus on mortgage rates and housing affordability, both of which are critical factors. Let me provide some perspective on the refinance outlook from a mortgage point of view. When discussing the refinance potential in the market, we refer to mortgages that are approximately 50 basis points in the money. Currently, with mortgage rates around 6%, only about 20% of the market benefits from this 50 basis point incentive. Since mortgage rates have been consistently above 6% and are likely to remain elevated, particularly as the 10-year rate struggles to drop below 4%, this limited percentage underscores the current situation. If there were to be a full 100 basis point decrease in mortgage rates to 5%, we would see that percentage rise to 30% of the market.
Furthermore, reaching a full 200 basis point decline to 4% would allow for 40% of borrowers to consider refinancing. Essentially, significant movement in mortgage rates is essential to trigger a large prepayment event. That being said, we have observed considerable capacity within the system for refinancing. The impact of technology is evident, as we've seen in the last couple of quarters. For instance, during a brief period in September when mortgage rates dipped below 6.15%, we experienced a rapid increase in refinance activity. This indicates pent-up demand, and mortgage originators are processing these loans much faster than historical norms. These insights highlight the importance of being aware of market conditions, which is why we seek more down-rate protection as we maintain a positive duration gap. We consistently strive to optimize our asset portfolio to enhance prepayment protection.
Currently, we aim for our prepayment protection percentage to be around 75% to 76%, but we have often been operating at or above 80%. For higher coupon rates, we prioritize having that percentage as high as possible. Additionally, our focus on purchasing in the production coupon range of 5% to 5.5% has led our portfolio to concentrate between 4.5% and 5.5%, further bolstering our prepayment protection.
Got it, Peter, this is why I love this job. That's such an interesting answer. I do appreciate it. If I can ask one follow-up, which is that as policymakers are looking for ways to improve affordability, do you see levers out there that are available to reduce the incentive that borrowers need to narrow that 50 basis points in a way that could increase speeds as well?
I'll answer that in two ways because it is really fascinating. First, there’s a significant amount of capacity in the mortgage origination business right now. Anecdotal evidence suggests that some mortgage borrowers are refinancing with incentives of less than 50 basis points, potentially as low as 25 basis points, because of the simplicity and low costs associated with the technology. Geography plays a crucial role in refinance costs, as factors like state regulations, local taxes, and title recording fees vary widely. Streamlining processes could help, including possible actions from the government-sponsored enterprises, like waiving appraisals or insurance. There's ongoing discussion about insurance waivers for refinances, but it's uncertain if that will be implemented due to associated risks. This reflects the GSEs and regulators exploring ways to enhance refinancing options, including adjustments to guarantee fees.
Furthermore, the administration's unprecedented focus on the spread between mortgage rates and risk-free rates signifies their belief that actions taken to stabilize or lower this spread could positively impact mortgage rates and refinancing possibilities. The treasury's focus on 10-year securities will also be important, and it will be interesting to see if they adjust their interest composition. Additionally, reforms regarding how mortgage-backed securities are treated from a capital perspective under new bank regulations could drive more refinance activity. There's a lot happening and many potential developments in this area.
Next question will come from Trevor Cranston with Citizens JMP.
Peter, you painted a pretty positive picture in terms of the supply-demand outlook for MBS. I guess the other thing that could have a major impact on spreads would be implied volatility and how that's being priced. So can you maybe share your outlook on volatility if you think there's room for that to continue coming down or if there are things you guys are thinking about that could cause that to move back to a higher level?
Yes, that's an excellent question. It's crucial to address this because, as we mentioned earlier, spreads are currently at the lower end of their range. The key question everyone has is whether we will see a rebound into the range. Are there reasons for spreads to move off these lows and return to the middle of the range, which has been our historical trend? We also need to consider the evolving factors that could influence spreads in either direction. From a macro perspective, my outlook on spreads has changed significantly. Over the past few years, we faced various uncertainties regarding the upper end of the range, including monetary policy, fiscal policy, and geopolitical risks. The Fed's unprecedented tightening and balance sheet reduction raised questions about the highest point of the spread range. However, I now have strong confidence in identifying where the upper range is, while I feel less secure about the lower end.
There are several emerging factors that could lead to spreads breaching these lower limits. The administration is focused on spreads, and the demand outlook seems to be improving while supply remains steady. The funding market is particularly intriguing as the Fed is nearing a critical juncture with its balance sheet. Given the current funding rates, I expect the Fed to conclude its balance sheet adjustments soon, possibly announcing it in November or December, but definitely by year-end, based on how the funding markets are behaving. Additionally, the Fed is considering other changes that could positively impact the repo market. Furthermore, the Treasury's leadership on GSE reform suggests they are seeking ways to enhance the spread outlook. From a volatility standpoint, we see a favorable monetary policy climate, which is encouraging. If we gain some clarity on tariffs in the coming months, it could contribute to a relatively stable volatility environment for interest rates.
Taking all of this into account, there are compelling reasons to believe that mortgage spreads could break through the lower end of the range, with fewer concerns about widening or surpassing the upper end.
Yes. Okay. That makes sense. And then you guys recently announced the creation of these current coupon indices. Can you maybe just briefly talk about kind of what the economics are for AGNC and if there's kind of any other things you guys are sort of exploring on the like third-party asset management side of things?
We created the current coupon indices not for economic reasons but because we believe it would benefit the market. The mortgage market is not well understood and lacks transparency, making it difficult for retail investors to access and obtain information about it. Without resources like Bloomberg, it’s challenging to understand mortgage behavior. The only benchmark available is the Bloomberg Mortgage Index, which covers a $9 trillion market. The average coupon for the Bloomberg Aggregate Index is about 3.5%, meaning investors in bond funds accessing the mortgage market are seeing that average yield. However, there wasn’t an index that provided information about newly originated mortgage coupons, so we developed one that rebalances monthly to reflect a mix of coupons centered around a par coupon, which is currently at 5%. This index aims to provide investors with more information, and we’ve made its historical performance accessible on our website, eliminating the need for a Bloomberg terminal. This initiative is intended to enhance transparency and potentially attract more investors to this asset class.
Next question will come from Doug Harter with UBS.
It's actually Marissa Lobo on for Doug today. If you could talk to us about your view of optimal leverage in the current spread and ball environment?
Yes. Yes. Well, I would say right now, you look at our leverage, we're sort of operating right where we have normally been. It was a little higher at times when mortgages were cheaper; we're back to around 7.5x leverage, as Bernie mentioned, I think that's a good place to be. We think we're at that unencumbered cash, which is 66% of our equity. So we have a lot of flexibility. And what I would just say is that given all that flexibility and given all the considerations and the factors that we are looking at, as they evolve, over the next couple of months. Those factors will inform whether or not we want to continue to operate with this leverage or higher leverage or lower leverage. But certainly at this level, we have a lot of capacity, a lot of flexibility, and we're able to generate really attractive returns.
And I know you touched on this with Trevor's question. But what do you see as the biggest near-term risk to your constructive view on spreads?
Yes, I would say the main risks are related to macroeconomic factors. For instance, if there were significant changes in fiscal policy that affected the inflation outlook, those changes might not be reflected in the market. Additionally, if inflation rises and volatility increases, leading the Fed to pause, those factors could place pressure on fixed income assets and Agency MBS in particular. At this stage, these are the significant macroeconomic influences we are considering. Any substantial changes in the tariff situation or if the Fed perceives a dramatic shift in inflation expectations could prompt a change in their approach. However, any such change would need to be quite significant, likely not linked to tariffs, which the Fed now seems to regard as a stable price change rather than a continuous source of inflation pressure. Therefore, the inflation effects would have to surpass and outbalance the apparent weakening in the labor market, which the Fed must address.
The next question will come from Kenneth Lee with RBC Capital Markets.
Just one from me. And I think you've touched upon this briefly. In terms of the hedges, net duration gap didn't change that much. Is the thinking here that it could potentially be more positive over the near term as you look to get more down rate protection, but I just wanted to get your thoughts around that?
Yes. Well, we certainly would like to operate with maybe a slightly larger duration gap than we have today. I think today, was it Chris? 0.2, duration gap right now. So it's not very substantial. But then again, the 10-year rate is at 4% or a little bit below 4%. And just from a rate perspective, I think the nearer-term risk for the 10-year rate is that it's a little higher, not a little lower. So I think there could be at a point in time where we want to operate with a higher duration gap, but at a little bit below 4%, it may not be right now.
Your next question will come from Harsh Hemnani with Green Street.
You touched on this in the prepared remarks a little bit, but there's two ways to manage that down rate risk. The first is asset selection, as you mentioned, and the second would be the path you took this quarter was maybe expanding TBAs and getting outright convexity hedges. Given that you've deployed all the capital you raised in, call it, the second quarter and third quarter, was this sort of a decision driven by sizing at all in the sense that it might be harder for you to source those specified pools in the market at this time or at the speed you would like to? Anything on that front in terms of sizing?
Yes. No, it's a really good question, Harsh. Thank you. You're right. So quite often, as I mentioned, when we raise capital, we want to deploy it sort of immediately. And so we do that by buying generic kind of mortgages, TBAs or production coupons that have the most negative convexity, if you will. But what's important is that over time, we continue to refine and upgrade, if you will, our asset composition. And there's lots of opportunities and capacity to do that. In the third quarter, for example, what you don't see in our overall numbers is that we actively rotate out of certain specified pools into new specified pools as those opportunities arise as the GSEs, for example, sell new specified pools. Just to put a number on that in the third quarter, about $8 billion of our specified pools rotated and changed into different specified pools that had slightly different characteristics that we preferred more than our existing holdings.
So that optimization happens all the time in our portfolio, and that is an important source of alpha generation for us. And I think that there's lots of capacity to do that. It does take some time months and quarters, but you can do that in significant size on a regular basis. And so what you'll likely see us because we are always trying to give ourselves greater down-rate protection, particularly in the current environment. You'll see us rotate out of those generic pools as opportunities arise into specified pools with certain characteristics that we think are beneficial in the current environment. It could relate to credit, it could relate to LTV, it could relate to HPA in certain areas; lots of little factors can have a big impact on the refinanceability of a mortgage.
Next question will come from Bose George with KBW.
Actually, a couple of little things for me. Peter, you mentioned the $0.05 tailwind. What's the time frame for that? Is that sort of looking at the forward curve and by the time the Fed is done? Or just any color on that?
The $0.05 I calculated represents the drag that would occur if short-term rates, instead of being at 4.43, reflected a difference of about 100 basis points, moving towards the neutral rate. If this were to happen over the next six months, the $0.05 effect would unfold during that period. It ultimately depends on how quickly the Fed reduces short-term rates or how we convert that short-term debt into swaps at the comparable rate.
That makes sense. Regarding the potential for spreads to tighten further, is that beneficial or detrimental? While it obviously increases your book value, does it complicate covering the dividend? Or does the calculation still function, given that a lower return on equity is applied to a larger dollar amount of equity?
Well, you're right in that if the entire change of our book value is due to spreads, then from an investor perspective, they get the benefit, the same economics of the benefit. So if spreads stay where they are, for example, then there's no change in our book value and the future earnings stay strong. Conversely, if the only thing that changes is that spreads tighten, then our book value goes up by the present value of those earnings that you give up. So from an investor perspective, you're sort of indifferent from a return perspective; you're going to get the same economics of the return whether it's in the form of future earnings or in book value appreciation. From that point forward, then the dividend yield on our book value would be lower. The return on our portfolio would be lower, but they would still be aligned. And from an investor perspective, they would have gotten the same economic benefit all in.
Okay. That makes sense. I have one more question about spreads. Given that quantitative tightening might be concluding soon, if the Fed continues to reduce its holdings of Agency MBS and reinvest in treasuries, could that lead to a potential risk of spreads widening compared to treasuries?
Yes. Chairman Powell recently mentioned in a meeting that they are at a turning point for the balance sheet and plan to end the runoff. It has become clear that they are moving in that direction. He continues to reference the guidance that they intend to primarily hold treasury securities. However, what "primarily" means hasn't been clearly defined, which is crucial for the mortgage outlook. It could mean 95% or as low as 60%, and that distinction is important. He noted that they will examine and clarify this. They are expected to manage the runoff in a way that does not destabilize the market, and I don't anticipate any actions regarding the mortgage portfolio that would disrupt stability. Currently, the Fed's balance sheet runoff, which is about $200 billion a year, is an amount of mortgages the private sector can manage; these mortgages will be redeployed into treasuries. There are still discussions and potential changes regarding the balance sheet composition that could impact mortgage affordability if the government opts to include more mortgages. If that happens, it could lower mortgage spreads and rates.
Your next question will come from Eric Hagen with BTIG.
Can you walk through the approach behind raising the preferred stock and how much leverage in the capital structure you feel like you're comfortable taking both maybe in the near and longer term. And just generally, I mean, what are the variables that you consider to raise preferred stock is like a substitute for common stock?
Sure. It was great to access that market again. We hadn't participated in it for about five years, so it had been dormant for a while. Reopening that market was important, and we were the second transaction completed there. From our perspective, this new transaction had a higher coupon than previous ones but was in line with our floating rate breakevens. The coupon on this transaction is 8.75%, and it performed very well in the aftermarket, which makes us really happy. For our common shareholders, the 8.5% coupon is significant; if we can leverage those proceeds effectively, it could yield around a 16% return, providing an additional 9% carry that benefits our shareholders. We wanted to increase our overall percentage of preferred stock, and after this transaction, it stands at about 18% of our total capital mix. This ratio seems to be a healthy part of our capital structure. It could increase further, as in the past, it has been between 22% to 25%, giving us some flexibility. We aimed to capitalize on the reopening of this market, which will lead to additional earnings for our common shareholders because of the preferred stock.
Our last question for today will come from Jason Weaver with JonesTrading.
Peter, can you talk a little bit about how you see the prepay risk in those higher coupon 30s in the 6% and 6.5% range? I think a bit under half are spec, but what specific type of collateral protection are you focusing on there?
Yes, that's an important point, and that's why we provide a table showing what we refer to as high-quality prepayment characteristics. There are additional characteristics we consider beyond just low loan balance that offer prepayment protection. I mentioned earlier that 76% of our portfolio has these characteristics. Regarding the higher coupons, as detailed on page eight, 39% are classified as having high-quality prepayment characteristics, while 37% possess other characteristics. These other factors are significant; they can include loan age, credit scores, FICO scores, geography, and specific MSAs, all of which interplay. Almost all of our higher coupons, I believe in the high 90s, have some form of embedded prepayment characteristics that we value. Even though these higher coupons carry prepayment risk, especially in the current environment, we are very aware of the characteristics of those pools. We assess whether we can source pools that have characteristics we believe will provide greater stability in cash flows. We have also reduced our exposure to the higher coupons, and the ones we still hold in our portfolio have favorable characteristics.
Sure. Yes, our liquidity is largely unchanged since quarter end.
I want to thank everyone for joining our call today. We are pleased to report the results from the third quarter, which may be one of our top four quarters in the last decade. This is a positive outcome for our shareholders. We remain optimistic about the agency market and our business outlook. We look forward to updating you again at the end of the fourth quarter, likely in January.
Thank you for joining the call. You may now disconnect.