AGNC Investment Corp.(AGNCL)Q4 2025 法說會逐字稿

Good morning, and welcome to the AGNC Investment Corp's Fourth Quarter 2025 Shareholder Call. Please note this event is being recorded. I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.

Thank you all for joining AGNC Investment Corp.'s Fourth Quarter 2025 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.

Good morning, everyone, and thank you for joining our fourth quarter earnings conference call. 2025 was an exceptional year for AGNC shareholders. AGNC's 11.6% economic return in the fourth quarter drove our impressive full-year economic return of 22.7%. Even more noteworthy, AGNC's total stock return in 2025 was 34.8% with dividends reinvested, nearly double the performance of the S&P 500. This outstanding performance on an absolute and relative basis clearly demonstrates the value of AGNC's actively managed portfolio of agency mortgage-backed securities and associated hedges. Looking back, we were confident that AGNC was 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 with short-term rates near the Fed's long-run neutral rate. With that, we'll now open the call up to your questions.

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.

Certainly. Thank you for the question. I anticipated that would be one of the initial inquiries. I'll begin by discussing the outlook regarding return on equity and spreads. As you mentioned, spreads have indeed tightened significantly. The current environment can be characterized by the fact that mortgage spreads have entered a new range. We've surpassed the range that we've discussed for an extended period, which had remained stable for nearly three years. This shift is advantageous for our business and has contributed to the exceptional results we achieved over the last two years, especially in 2025. At present, when I consider current coupon spreads relative to a blend of swap and treasury rates, I typically examine them across the curve. The potential spread for current coupons compared to swaps seems to fall within the 120 to 160 basis point range, and currently, we are around the midpoint of that range, approximately 135. However, I am unsure of the exact figure this morning. In terms of current coupon spreads to treasuries, I estimate it to be in the 90 to 130 basis point range, with today’s number likely around 110 when viewed across the curve. Considering this data and our current preference for swaps, we see greater stability in swap spreads compared to what we experienced at the start of 2026. This stability enables us to utilize swaps more heavily than before. Previously, we operated at around 70%, and we might exceed that. I would place the spread around 130, and based on our typical leverage, you can expect returns at this spread range to be in the 13% to 15% range, potentially slightly above that depending on the hedge mix. Consequently, this should translate into really competitive and aligned return on equities with our dividend. Regarding the dividend, there are numerous factors to consider. We often discuss the need for sustainable dividends and the significance of marginal returns. These marginal returns will influence our dividend over the long term, particularly as we replace our portfolio. However, this process will span an extended period, not just days, weeks, or quarters, but years, as the portfolio gradually runs off. Prepayment speeds and our portfolio positioning will be key contributors to this long-term process. To assess the current dividend coverage, it’s crucial to evaluate the return on our existing portfolio. We have had the advantage of establishing a well-performing portfolio over the last couple of years amid the current spread environment. For instance, our net spread and dollar roll income for this quarter was approximately $0.35, though it was slightly negatively impacted by $0.01 due to nonrecurring performance-related compensation. When we consider the $0.36 against our book value of $8.88, this results in about a 16% return on equity, which aligns very closely with our total cost of capital. Our total cost of capital, accounting for all common and preferred stock dividends and normalized operating costs, was roughly 15.8% at the end of the year. The key point here is that our total cost of capital aligns well with the existing portfolio. The new portfolio continues to appear attractive with mid-teen returns, although time is required for this to materialize. There are also various additional considerations to keep in mind. As I've mentioned, we are experiencing shifts in spread environments, and we can expect a wealth of new information in the coming weeks, months, and possibly quarters that will affect the direction and stability of mortgage spreads, influencing our leverage as well. The hedging strategy will also play a significant role, along with necessary accounting considerations. As a REIT, we are subject to dividend distribution requirements that are based on taxable income, which will also be integral to our ongoing considerations. In summary, all these elements combined indicate our dividend is well aligned with the current economic and accounting landscape of our business.

Okay. Great. Regarding the existing portfolio, it appears to adequately support the dividend. For the incremental portfolio, would it be accurate to say that its coverage is somewhat limited since the additional returns are in the range of 13% to 15%, compared to the breakeven return on equity, which seems to be around 15.5%?

Yes, I think that's accurate. Additionally, it's important to consider that when deploying new capital, the required return on that capital is not the same as the overall cost of capital, which pertains to the existing business. For any new capital raised, a relevant comparison regarding dividend coverage is the dividend yield of around 12% on our stock. Currently, the market returns, which range from 13% to 15%, exceed our stock's dividend yield. Therefore, there is significant coverage from this standpoint.

The next question comes from Doug Harter with UBS.

I appreciate the ranges for spreads you gave. Can you talk about how you're thinking about the risk or the potential benefit that could get you either to the high end or the low end of those ranges and how that informs your decision around leverage today?

Yes, that's a great question. Earlier this year, the announcement that the GSEs would utilize all of their portfolio capacity significantly impacted the current coupon spread, pushing it into a new range. The market was closely watching the GSEs, which have been expanding their portfolio since the latter half of the year. As of November, they increased their balance sheet by approximately $50 billion in mortgages, totaling around $70 billion from their lowest point. Freddie Mac recently reported adding another $15 billion of MBS in loans, indicating the market was expecting them to grow their portfolios. That announcement made their intentions clear, leading to a considerable tightening of spreads. Moving forward, I believe the most likely scenario is that spreads will remain stable for some time as we observe the subsequent actions from the administration and the FHFA. There are several potential actions that could favorably tighten spreads, such as modifying the cap on their portfolios, which might not require congressional approval and could therefore be appealing. Additionally, any changes to the Fed's balance sheet, especially with a new Fed chairman potentially in 2026, could also play a role. Currently, the government is buying $200 billion in mortgages while the Fed is selling or drawing down the same amount, and any changes to this dynamic could impact the market. The government's credit guarantee for the GSEs supports this discussion, and there may be a case for revising capital requirements, although that hasn't been widely discussed. There are positive developments in the funding market, and further adjustments to the Fed's standing repo program could benefit the Agency market. On the downside, there are concerns about streamlined refinancing, G-fees, or mortgage portability and suitability, which could have adverse effects, particularly regarding prepayment risk, leading to wider mortgage spreads. However, the government's clear intention to enhance mortgage affordability suggests that certain changes may facilitate sustainability at these new levels, which is a positive outcome. As a leveraged investor, we prioritize spread stability, which is crucial for generating appealing returns. That will likely be the prevailing environment, although there are still potential actions they could undertake that would 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. At this time, we need more information to decide if we are willing to adjust our leverage profile. A crucial factor in this is the stability of spreads. We need to assess the potential actions of the government and whether they will lead to consistent spread stability. Will their measures be sustainable, or will they only result in a temporary tightening of mortgage spreads? There are actions they could take that might tighten spreads by another 15 basis points, but without further measures, spreads could widen again. For instance, if the GSEs quickly exhaust their capacity, mortgage spreads will remain tight until they hit their limit, after which prices would likely return to previous levels. Therefore, we are seeking clearer insights into their potential actions and the impact on spread stability. Ultimately, maintaining spreads at these levels would benefit the mortgage market, making it more affordable 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 made significant progress already and deserve a lot of credit for the actions they took in 2025. This includes the guiding principles previously mentioned, particularly by the Treasury, which the Secretary continues to emphasize. Their focus on mortgage spreads and the Secretary's discussions about actions to maintain or tighten those spreads are crucial and have contributed to the substantial tightening we have seen in mortgages. This mindset is essential for the market as it encourages more participants to engage. Increased spread stability will attract more investors, leading to a more diverse interest in agency mortgage-backed securities and alleviating some pressure on the GSEs. Overall, the combination of their guidance and the actions of the GSEs has been very positive. Moreover, implementing additional measures, such as a cap, could enhance their capacity and help sustain these attractive spread levels. Thus, it is important for them to keep focusing 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 things already, but I'll expand because it's a relevant question. When considering the current state of the mortgage market compared to a year, two years, or three years ago, we are indeed in a lower spread environment today, but it remains a spread by historical measures. Returns in the mid-teens, particularly low to mid-teens, are exceptional, especially when you consider how our stock performed against the S&P 500 or even the NASDAQ last year. Despite the lower spreads, returns are still strong from a shareholder perspective. A key positive differentiator is that compared to a year or two ago, there is much more certainty regarding the upper end of the range. Policymakers seem focused on keeping spreads stable or even lower. If mortgage rates were to reach the upper end of the range, I believe measures would be implemented to bring them back down. This certainty regarding the upper end of the range is a significant development for a leveraged investor like us, and I anticipate actions would be taken if any external factors caused substantial 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 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 that were anticipated by the market, which is very positive in the long run and makes treasuries more favorable from a balance sheet perspective, contributing to the widening of swap spreads. The overall funding market is in a much better position now, with the Fed expanding its balance sheet by $40 billion a month. We'll see how long this continues, but they are adding reserves to the system, which had dropped below $3 trillion and is now back at or slightly above $3 trillion. I expect this trend to continue, leading to widening pressure on mortgage spreads. From a hedging standpoint, I believe we will benefit more from a swap-based hedge than a treasury-based hedge for a period. Even if spreads remain stable, we can gain an additional 25 to 30 basis points in carry, which is significant leverage, potentially resulting in another 1% to 2% return on equity. Therefore, the outlook for swap spreads appears favorable.

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 significant factor in the strong performance of our asset class in 2025 was the drop in interest rate volatility. We know that an increase in interest rate volatility negatively impacts mortgage-backed securities because it alters the optionality for borrowers. Conversely, a decline in interest rate volatility, as we've seen, is beneficial for mortgage bonds. In the fourth quarter, we observed that trading was confined to a 25 basis point range, reflecting minimal daily movement. Looking back over the past year, particularly from February onward, we traded within a 50 basis point range. This stability can largely be attributed to the administration and the Treasury’s commitment to maintaining stable long-term rates, especially the 10-year rate, which has been a focus area. I anticipate that they will continue to manage their issuance in ways that support the 10-year rate. Recently, we have been trading between 4 to 4.25. Moving forward, I expect that spread yield volatility or interest rate volatility will remain relatively low, though not as low as it has been, especially considering the current geopolitical risks. However, from the Treasury's perspective, the trend for interest rates is more likely to be downward than upward, given their emphasis on affordability. If the 10-year rate does decrease to 4 or slightly below, I expect it to be a gradual decline. Nevertheless, the volatility environment is likely to remain favorable for Agency MBS in 2026 based on our current knowledge.

The next question comes from Jason Stewart with Compass Point.

Just two 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 two buyers evolve over the course of the next 12 months?

Yes. If we examine the market, the supply outlook remains largely unchanged at current levels. However, should interest rates decline and refinancing increase, these figures may shift. From a supply perspective, there is approximately $400 billion that the private sector needs to absorb. The GSEs are expected to acquire about $200 billion, which is significant and could absorb a substantial portion of that supply, which would be beneficial. Excluding the GSEs, it’s worth noting the current market is different from one or two years ago when it was mainly influenced by money managers. Presently, there’s a more varied investor base showing demand for mortgages, which is a positive sign for the overall market. Given the state of equity market returns and the administration's focus on long-term interest rates, I anticipate continued strong bond fund inflows, which were nearly $500 billion last year and about $450 billion the year before. As a result, I expect money managers will purchase between $100 billion and $200 billion in mortgages. Together, money managers and GSEs could account for a significant portion of the production. Banks are gradually increasing their holdings as well, and I foresee regulatory changes in 2026 positively affecting MBS and mortgage risks. I predict banks will acquire more than $50 billion, exceeding most projections. Foreign demand has remained steady, but I believe it might see some growth as conditions improve compared to prior years. Additionally, in 2025, REITs played a substantial role in the mortgage market, and I anticipate they will maintain strong demand considering our discussion today. Overall, when we combine all the demand, it’s feasible that demand could exceed supply by 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?

Say that last part again, Eric, please?

Would you adjust any of the hedges or take off some of the longer-dated hedges if it looked like the refi market was really going to accelerate?

Let me begin with a few points, and then you can ask me follow-up questions. Prepayment risk is currently higher, and I believe this increase is influenced by the administration's direction. The composition of the portfolio will be crucial for mortgage performance in the future. Even in a tighter spread environment, the selection of assets will become increasingly important moving forward. It’s essential to consider which assets to select and which to avoid. Coupon composition and the characteristics of the pools will play significant roles. For instance, when I look at our portfolio, 48% is in the 5.5% coupon rate and above range. Of that segment, 87% has certain attributes that we believe will help stabilize cash flows. The underlying characteristics, such as the channel of origin, credit qualities, geography, and current GSE pricing, will significantly impact performance moving ahead. The specific characteristics of the pools will become critical. Chris and I reviewed some numbers earlier today that caught my attention. Our 6.5% coupon rate segment, which makes up only 5% of our portfolio, includes the cheapest to deliver cohort currently operating at a 52% CPR, while our overall population is trading at less than half that rate. The underlying characteristics are essential, and coupon composition is a key driver. Moreover, from an interest rate and hedging standpoint, maintaining a positive duration gap will be crucial, especially as declining rates could challenge mortgages and impact the supply outlook. We also maintain a significant receiver swaption position for additional protection. Therefore, our strategy will involve careful portfolio positioning, managing the duration gap, using option-based hedges, and avoiding underperforming pools while selecting those with strong characteristics to better 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 believe I understand. You're correct. One of the key points we've discussed is that I anticipate the Government-Sponsored Enterprises (GSEs) will make decisions based on the mortgage market's economics, and their purchasing focus is likely to be on the PAR coupon since it significantly influences the primary mortgage rate, which is their goal to affect. For instance, if you examine the performance across the coupon stack for the quarter to date, you’ll find that the approximately 5% coupon has tightened by around 15 basis points. In contrast, the rest of the coupons, including our portfolio, are generally more in line with an average change of about 5 basis points because the other coupons haven't shifted as much. Overall, this situation is not particularly challenging for us, as we have plenty of liquidity across these coupons. The larger segments are predominantly the lower coupons, along with some intermediate ones you referred to. Nevertheless, there is sufficient liquidity in the $9 trillion market for us to invest in various coupons, including the 4s and 4.5s, where we currently hold a considerable position. Therefore, we have ample liquidity to position our portfolio as needed in terms of coupon distribution, and I expect that the current coupon will receive the most attention from external factors.

Got it. That's helpful. And then maybe on the duration gap, you touched on this a little bit. It's been growing for the past few quarters, and it adds that downgrade protection in an environment where prepayment risks are elevated. How should we expect that to evolve over the coming quarters? And then what's the boundaries around that, that we should be thinking about?

Yes, you're correct. I believe we finished the quarter with a duration gap of approximately 0.3/10 a year. It has increased since then because the 10-year yield has risen. Currently, we have about a half a year, which was 0.4 at the end of the last quarter, and I think it's slightly higher now, maybe around 0.5 this morning, as the 10-year is up about 420 or slightly more. If the 10-year remains at this level or increases a bit more, I would anticipate our duration gap to widen further since the risk of lower rates would likely increase. I don't foresee the 10-year moving much above 435, and there is a chance it could drop back down closer to 4%. Therefore, I expect our duration gap to operate in a historical range, likely 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.