AGNC Investment Corp.(AGNCM)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 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 as 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.

Sure, I appreciate the question. I anticipated that would be one of the initial inquiries. Let me address the outlook concerning return on equity and spreads. As you noted, spreads have significantly tightened. The current environment, similar to what we experienced in the fourth quarter, indicates that mortgage spreads seem to have established a new range. We've surpassed the range we've discussed for an extended period, which has been in place for nearly three years. This change is advantageous for our business and has contributed to the strong results we've seen over the last two years, particularly in 2025. Presently, when I consider current coupon spreads in relation to a mix of swap and treasury rates, I view the potential spread for current coupons compared to swaps to be in the 120 to 160 basis points range. Right now, we're approximately at the midpoint of that range, possibly slightly above it, around the 135 range. I’m not certain of the exact number today. In terms of current coupon spreads to treasuries, I estimate that to be in the 90 to 130 basis point range, and currently, it seems to be around 110 across the curve. Based on this, we would prefer swaps in the current environment since we have greater stability in swap spreads compared to the beginning of 2026 and what we saw in 2025. This stability enables us to utilize swaps more extensively, and we might increase our use from around 70%. I would estimate our spread at approximately 130, and given our typical leverage, you could expect returns in the current spread range to be around the 13% to 15% area, potentially a little above that depending on the hedge mix. This would result in return on equity figures that are quite competitive and closely tied to our dividend. Regarding the dividend, several considerations come into play. We consistently evaluate the sustainability of the dividend and its marginal return, which is significant because our ability to sustain the dividend long-term will depend on how we renew our portfolio. These new marginal returns will be important, but it will require a significant amount of time to realize—measured in years rather than days or quarters—as the portfolio gradually runs off. The prepayment speed on our portfolio will be a key factor, in addition to how we manage the portfolio and expand our capital base. As for dividend coverage today, it’s vital to assess the return on our current portfolio. We’ve successfully established an attractive returning portfolio over the past couple of years in this spread environment. For instance, our normalized net spread and dollar roll income for this quarter was $0.35, though it was impacted by a $0.01 dip due to some one-off performance-related compensation. Evaluating the $0.36 against our book value of $8.88 translates to an ROE of approximately 16%, which aligns well with our total cost of capital. Our total cost of capital, after considering common and preferred stock dividends and regular operational costs, was roughly 15.8% at year-end. Thus, the total cost of capital matches well with the existing portfolio. The new portfolio remains appealing, showing mid-teen returns, but it will take time to see those benefits materialize. There are multiple other factors to consider, and we discuss these regularly. When considering our dividend, it’s critical to understand that we are operating in a dynamic environment. We are experiencing changes in spread dynamics, and we anticipate gathering substantial new information over the coming weeks and months that will influence the stability and direction of mortgage spreads, which will affect our leverage. The hedge mix will also play a crucial role, along with necessary accounting considerations since REITs have a dividend distribution requirement based on taxable income. All these elements will contribute to our overall strategy regarding the dividend, and I believe the current alignment with our business’s economics and accounting is solid.

The existing portfolio appears to support the dividend effectively. Regarding the incremental portfolio, it seems reasonable to suggest that coverage is slightly impacted since the incremental returns are between 13% and 15%, while the breakeven return on equity is approximately 15.5%.

Yes, I think that's correct. It's crucial to consider that when deploying new capital, the required return on the new capital we raise differs from the total cost of capital, which pertains to our existing business. The appropriate comparison for evaluating dividend coverage is the dividend yield of our stock, which is approximately 12%. When assessing new capital deployment, it's notable that current market returns, as I highlighted, are around 13% to 15%, exceeding our stock's dividend yield. This indicates strong coverage from that 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, it's a great question. The announcement earlier this year that the GSEs would utilize their full portfolio capacity significantly impacted the current coupon spread, pushing it into a new range. The market had been observing this growth in their portfolio, as they had been expanding since the latter half of last year. By November, they had increased their balance sheet by approximately $50 billion in mortgages, and from their lowest point, they had added about $70 billion. Freddie Mac just reported an additional $15 billion of MBS in loans for December. The market was anticipating that the GSEs would continue to grow their portfolios, and that announcement clearly indicated their intentions, resulting in tighter spreads. Moving forward, it seems likely that the spreads may remain stable for a while as we await further actions from the administration and the FHFA. There are several potential actions that could improve spreads, such as adjusting the caps on their portfolios, which may not require congressional approval. This change appears feasible. Additionally, a shift in the Fed's balance sheet, especially with an upcoming Fed Chairman in 2026, could also play a role. Currently, the GSEs are effectively purchasing $200 billion of mortgages while the Fed is selling or running off the same amount. Any changes here wouldn't be reflected in the market yet. Given the government’s credit guarantee for the GSEs, there could be a case for altering the capital requirements, although this has not been widely discussed. I believe there are several positive developments on the horizon. The funding market shows promise, and potential changes to the Fed's standing repo program could positively influence the agency market. On the downside, there are also several risks such as streamlined refinancing, G-fees, or mortgage portability that could have negative impacts on spreads, particularly by increasing prepayment risk. Overall, the government has expressed a desire for greater mortgage affordability, and some potential changes may help maintain sustainability at these new levels, which would be beneficial. As a levered investor, spread stability is critical for generating attractive returns, and I believe this is the most likely scenario, though there are still actions that could positively impact the market.

And then how do you think about what that means for leverage kind of given that are you kind of comfortable in the current range? It ticked down kind of during the quarter, but the average was flat. How should we think about that?

Yes, that's really important. We have allowed our leverage to decrease in line with the tightening of spreads. Currently, we need more information to decide if we are willing to operate under a different leverage profile. The key factor in this decision is how stable we think spreads will be. This includes considering what actions the government may take and whether those actions will contribute to more stable spreads. It's important to determine if their measures will be sustainable or if they will only result in a temporary tightening of mortgage spreads. Some actions could lead to a tightening of mortgage spreads by 15 basis points, but if there is no subsequent action, the spreads could widen again. For instance, if the government-sponsored enterprises quickly use up their capacity, mortgage spreads will be tight during that time. However, once they hit their limit, they are likely to revert to their previous levels. Therefore, we’re seeking better clarity on what actions they might take and whether those will result in stable spreads. Keeping spreads at current levels would benefit the overall mortgage market and be more appealing for homeowners 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 already accomplished a great deal and deserve significant recognition for the actions taken in 2025. This includes the guiding principles laid out, particularly by the Treasury, which the Treasury Secretary frequently cites. Their focus on mortgage spreads and the importance of actions to maintain or tighten these spreads is crucial and contributes to the significant tightening of mortgages. This thoughtful approach is vital for the market as it encourages other participants to engage. Achieving greater spread stability will attract more investors into the market, creating a more diverse interest in agency mortgage-backed securities, which will lessen the burden on the GSEs. Overall, the guidance they provided and the actions of the GSEs were very encouraging. There are additional measures, such as specific caps, that could enhance their capacity and keep spreads at attractive levels. Therefore, it's essential for them to maintain their focus on mortgage market stability, which they are currently managing very 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 couple of things already, but I'll expand on them as it's a relevant follow-up question. When we look at the current mortgage market compared to one, two, or three years ago, we see that while we're in a lower spread environment now, it remains wide by historical standards. The returns we're seeing in the mid-teens are excellent, particularly when compared to the market performance, such as our stock's performance versus the S&P 500 or NASDAQ last year. Even at these lower spread levels, the returns are still impressive from a shareholder's standpoint. A key positive development is that the current environment offers more certainty regarding the upper end of the range compared to a year or two ago when there was much more uncertainty. Policymakers and decision-makers today appear more committed to keeping spreads at current levels or even lower. If mortgages were to approach the upper end of the range, we would likely see actions taken to bring them back down. This is an important and encouraging change for levered investors like us, as it makes the upper end of the range more predictable than it was a year ago. I would also anticipate that actions would be initiated in response to any significant exogenous events 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 within the current range, but there is a possibility for further widening as the year progresses. The Federal Reserve is shifting its focus from quantitative tightening to managing reserves, which is a significant change. They have relaxed some regulatory requirements, which was anticipated by the market and is positive in the long run. This makes treasuries more attractive from a balance sheet perspective, contributing to the widening of swap spreads. Overall, the funding market is in a better position with the Fed expanding its balance sheet by $40 billion a month. While it remains to be seen how long this will continue, they are adding reserves to the system, which have increased from below $3 trillion to around $3 trillion or slightly above. I expect this trend to continue, and it should create upward pressure on mortgage spreads. Therefore, from a hedging standpoint, we should benefit from a swap-based hedge and a treasury-based hedge for some time. Even if spreads remain stable, we could potentially gain an extra 25 or 30 basis points in carry, which represents significant leverage that could translate to an additional 1% or 2% of return on equity. Thus, 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 correct. A significant factor contributing to our asset class's strong performance in 2025 was the decrease in interest rate volatility. When interest rate volatility rises, it negatively impacts holders of mortgage-backed securities as it alters the borrowing options available. Conversely, when interest rate volatility decreases, as it has recently, it's beneficial for mortgage bonds. In the fourth quarter, we saw minimal movement, trading within a 25 basis point range daily. Looking back over the past year, particularly since February, the trading range was around 50 basis points. This stability can be attributed to the administration and the Treasury's efforts to maintain longer-term rates, especially the focus on the 10-year rate. I anticipate they will continue to manage their issuance in a way that supports the 10-year rate. Currently, we've been trading between 4 and 4.25. Moving forward, I foresee interest rate volatility remaining generally low, though it might not be as subdued as before due to some geopolitical risks present. However, from the Treasury's viewpoint, the trend for interest rates is more likely to be downward, focusing on affordability. If the 10-year rate does decrease, it will likely be a gradual decline, but the environment for volatility should remain favorable for Agency MBS in 2026 based on current information.

The next question comes from Jason Stewart with Compass Point.

Just 2 quick follow-ups. One on capital activity today. Could you give us an update on equity issuance?

You mean quarter to date? This quarter to date?

Correct.

None. No issuance.

Okay. And then in terms of your comments, maybe just tie in sort of expectations for ATM issuance? I mean, obviously, 2025 was a big year with your ROE profile, give us some two cents on that.

Yes. It was a great environment, a sort of a confluence of positive factors because we could obviously issue it very accretively and we could deploy it at really attractive return levels. Now we can still issue it accretively, and so that's a positive factor going forward. But obviously, the return profile is not quite as attractive as it was. But as I mentioned, it still exceeds the threshold. So it's something that we will continue to do. But I would also say sort of that we're certainly very comfortable with our size and our scale and our liquidity. Also there's no urgency on our part to feel like we need to grow. The decision to issue capital will be just based solely on the economics that we see in the environment. So we're certainly very happy with our size and scale and liquidity and like where we are today.

Okay. Got it. That makes sense. And then in terms of the MBS market, we've talked a lot about demand from the GSEs. But outside of the GSEs, when we think about traditional buyers, banks, as rates are going down, and there's been a little bit more mixed activity in terms of foreign demand. What's your take on how those 2 buyers evolve over the course of the next 12 months?

Yes. When considering the market, I mentioned the supply outlook, which will likely remain similar to current levels. If rates decrease and refinancing activity increases, these figures may change. Currently, there's about $400 billion in supply that needs to be absorbed by the private sector, with the GSEs expected to account for about $200 billion, which is significant. They could take on a substantial portion of that supply, which would be beneficial. However, aside from the GSEs, it's important to note that the current market is quite different compared to a year or two ago when it was primarily driven by money managers. Presently, there is a more diverse investor base for mortgages, which is encouraging for the overall market. Given the current equity market returns and the administration's focus on long-term interest rates, I anticipate that bond fund inflows will continue to be robust. Last year, these inflows approached $500 billion, and the year prior was about $450 million. I expect strong bond fund inflows to persist in the current climate, leading money managers to likely purchase between $100 billion and $200 billion of mortgages. Both money managers and GSEs are positioned to absorb a significant amount of production. Additionally, banks are gradually expanding their positions, with expectations of regulatory changes in 2026 likely benefiting MBS and mortgage risk overall. I foresee banks acquiring more than $50 billion, surpassing many projections. Foreign demand has remained steady, but there may be potential for slight growth, as the environment appears more favorable than in recent years. Furthermore, REITs, which were key players in the mortgage market in 2025, should continue to show strong demand based on what we've discussed. Taking all of this into account, it's reasonable to create a scenario where demand could 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 issue during that time frame.

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 begin by addressing a couple of points before we move to any follow-up questions. Currently, the risk of prepayment is higher, and I believe this is largely influenced by the direction of the administration. The composition of our portfolio will be crucial for mortgage performance in the future. Even in a tighter spread environment, selecting the right assets will be increasingly important. It's essential to focus on what assets we choose and what we decide to avoid. The composition of coupons will play a significant role, as will the characteristics of the assets within our pools. For instance, regarding the distribution of coupons, about 48% of our portfolio is in the 5.5 and above range. Notably, 87% of that segment possesses features that we believe will contribute to more stable cash flows. Evaluating the underlying characteristics, such as the channels through which they originated, credit quality, geography, and the impacts of pricing from GSEs, will be essential factors for future performance. Specific pool characteristics will be vital. Chris and I reviewed some data this morning regarding our 6.5 coupon segment, which comprises only 5% of our portfolio. The most affordable option in that group currently has a 52% CPR, while our overall population is trading at just under half of that. The characteristics of these assets are extremely important, and coupon composition will be a key driving factor. From an interest rate and hedging viewpoint, maintaining a positive duration gap is crucial because decreasing rates will create more challenges for mortgages and impact supply forecasts. Thus, a positive duration gap is essential. Additionally, we maintain a significant receiver swaption position, which offers us extra protection. The overall strategy includes carefully positioning the portfolio through hedges, maintaining the duration gap with option-based strategies, and selecting favorable pools while steering clear of the worst, which should help us navigate this increase in prepayment risk.

And our last question comes from the line of Harsh Hemnani with Green Street.

So as we look at the composition of the mortgage market, it's more barbelled today versus what it was over its history. And in the context of the PAR coupon being close to 5%, the coupons at 4% and 5%, there's less outstanding there versus in higher coupons and lower coupons. And then also, it sounds like from the messaging from the administration, GSE purchases are going to come in at those PAR coupons. How is that environment sort of affecting your ability to, first off, pick pools in this environment where there's less outstanding at the coupons you favored and then also deploy capital into those coupons?

Yes, I understand. I agree with your point. One of the key aspects we’ve discussed is that I anticipate the GSEs will base their decisions on the mortgage market's economics. I believe their purchases will likely focus on the PAR coupon, as this will have the most significant impact on the primary mortgage rate, which they aim to influence. For instance, when analyzing the performance across various coupons this quarter, the 5% coupon has tightened by about 15 basis points. In contrast, the other coupons, including our portfolio, have remained fairly stable, averaging around a 5 basis points change because they haven't fluctuated as much. Overall, this situation isn't particularly challenging for us as we maintain ample liquidity across all coupon ranges. Although the largest segments are in the lower coupons, including those intermediate ones, there is plenty of liquidity available in the $9 trillion market for us to engage with different coupons, including 4s and 4.5s, where we hold significant positions. Thus, we have the flexibility to adjust our portfolio according to our desired coupon distribution while focusing on the current coupon, which is expected to attract the most attention externally.

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

Yes. You're right. I mean, I think we ended the quarter, our duration gap was like 0.3 years. It's larger than that today because the 10-year has backed up. So right now, we have about a half a year, that was 0.4 at the end of last quarter. I think it's just a little higher than that, maybe 0.5 this morning. Because the 10-year now is up about 420 or a little bit above. So to the extent that the 10-year rate stays here or maybe moves a little higher, I would expect our duration gap to widen even more because I think the risk to lower rates would obviously increase. I don't expect the 10-year to move very much above, say, 435 and I expect there to be some risk that it gets back down closer to 4%. So our duration gap probably in this neighborhood where we'll operate from a historical perspective, just to give you some guidance. I mean, I would say in the half-year-ish type range, somewhere between a quarter of a year and three-quarters of a year would be typically where we would operate.

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.