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 contain 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, at 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 that question. You're correct that there has been a notable movement in spreads. As I mentioned in my prepared remarks, we’ve experienced a range of about 160 to 200 basis points over the last four years when comparing the current coupon to the blended swap curve. We're now closer to the lower end of that range, around 170 basis points. Looking at mortgages in relation to swaps and treasuries, I believe that the expected return on equity for the current coupon remains between 16% and 18%, which aligns well with our total cost of capital. When considering dividend sustainability, I like to focus on this measure, as it reflects our goal of covering all common and preferred stock dividends along with our operating costs relative to our equity base. This measure decreased about 1% quarter-over-quarter due to our increased equity base, now at about 17%, which corresponds to current mortgage trading conditions. There was also some commentary from Bernie regarding our net spread and dollar roll income, which dropped to $0.35. Some of the reasons for this decline were temporary, stemming from the expiration of certain short swaps and a lower swap hedge ratio this quarter. Nonetheless, Bernie noted that we are likely at or near a low point for this measure, and there are reasons to expect improvements going forward. Overall, while spreads have tightened significantly, both dividend sustainability and return perspectives remain aligned at this time. I'll pause here and let you ask any follow-up questions.
All really helpful. You mentioned in your prepared remarks that you decreased the hedge ratio significantly during the quarter. Can you discuss that in more detail? What was the driving factor behind this change? Are you taking a more near-term outlook on rates, particularly regarding the anticipated decrease in rates? Additionally, what do you see as the main risks associated with the lower ratio and the receiver swaptions you referred to?
There are a few key developments regarding the hedge ratio. As mentioned, we added receiver swaptions, resulting in two hedge ratios this time. Our overall hedge portfolio decreased to around 68%. However, the more significant number to consider in relation to our net spread and dollar roll income is our swap-based and treasury-based hedge ratio, which was 77% at the end of the quarter. This means that 23% of our funding mix consists of short-term debt. Short-term debt generally costs more, with an average repo cost of 4.43% last quarter, the highest in our funding structure. As the Federal Reserve eases, we anticipate this cost will decrease, starting with the first ease and likely continuing afterward. This short-term debt funding at 4.43% represents about a 100 basis points additional cost compared to swap rates in the 3- to 5-year range, translating to an expected improvement of about $0.05 as short-term rates decline. We have structured our portfolio to benefit from the Fed's shift to a more accommodating monetary policy, and it seems that momentum for rate cuts is increasing, so we expect to see this benefit in the coming quarters. Additionally, due to the current interest rate environment and the administration's focus on long-term rates, we have to be more cautious about the risks of declining long-term rates and increased prepayments on mortgages. To enhance our down-rate protection, we adjusted our asset selection and added $7 billion of receiver swaptions in the last quarter. However, because this position is a receiver, it complicates the hedge ratio calculations. Overall, understanding our net spread and dollar roll income and the current pressures we are facing is vital, but we expect these trends to reverse over time while seeking 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 changes in monetary policy are significant. The fixed income market has been anticipating a pivot from the Fed, and with that shift now happening, it appears to be gaining momentum. Bond fund flows have been remarkable, totaling $150 billion in the first half of the year, with an increase to $180 billion in the third quarter. Currently, we're seeing inflows of over $8.5 billion per day, putting us on track for around $450 billion in bond fund inflows this year. I don’t see any reason why this trend won’t continue, especially given the Fed’s expected easing in the next two meetings and the current less optimistic outlook for equities. A lot of capital remains in money market funds, and there may be some rotation away from the equity market due to its recent highs. I anticipate continued strong bond fund inflows, particularly supporting lower and middle coupons through the end of the year. Additionally, while the future demand from banks remains uncertain, I believe it looks promising. Banks have added approximately $50 billion in mortgages and $200 billion in treasuries this year. As potential bank reforms come into play, particularly the new Basel Endgame expected in the first quarter, this could positively impact bank capital relating to mortgage credit. This might lead to increased bank demand for mortgages and a possible shift from treasuries to mortgages once the regulations are clarified. Overall, the demand outlook seems steady, if not 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 decline, possibly around $0.01 or $0.02 more than anticipated. Bernie mentioned timing mismatches in our capital raising efforts. We discussed this at the end of the second quarter when we raised funds, but we were slow to deploy those proceeds intentionally. As a result, we ended the quarter with some excess capital which has since been deployed. This situation can negatively impact our earnings, and we felt that effect. However, all those proceeds have now been fully deployed, which is significant. Regarding short-term debt, it's crucial to look at where short-term swap rates are priced in relation to the Fed funds neutral rate or target rate. Recently, as the Fed has made adjustments, we saw a first easing that is significant. For instance, 2- and 3-year swap rates now align closely with the neutral Fed funds rate at approximately 3.25%. You can approach the situation in one of two ways: either wait for the actual eases to impact our repo balance or extend that into the swap market at a similar long-term neutral rate. I anticipate this will be advantageous over the next three to four quarters.
Next question will come from Rick Shane with JPMorgan.
In my office, I have a note that says it's never different this time. However, when we examine the refinancing environment, the distribution of outstanding mortgages looks different than we have ever seen before. Instead of a bell curve, it's a barbell. We have borrowers from the past three years who were likely sold mortgages with the expectation they could refinance. I think what we have been predicting for two decades may finally be coming to fruition, as technology is on the verge of transforming the mortgage origination process. Are you observing any changes in behavior regarding speeds? Is this a risk we should be considering at this point?
Yes to all of the above. One of the reasons I mentioned wanting more down-rate protection is that the administration is focused on mortgage rates and housing affordability, which are very important factors. To put the refinance outlook in perspective, we consider that to be when mortgages are about 50 basis points in the money. With the current mortgage rate around 6%, only 20% of the market is in that position. This rate has been consistently high and is expected to remain around this level, making it hard for the 10-year yield to drop significantly. If we saw a drop in the mortgage rate to 5%, it would increase that percentage to 30%. For 40% of the market to become refinanceable, a full drop to 4% would be necessary, which would require a significant shift in the rates. Therefore, a large move in mortgage rates is needed for a substantial prepayment event. However, we are consistently observing a lot of capacity for refinance activity in the system. Technology is certainly making a difference. For example, when mortgage rates briefly dip below 6.15% for a short period, we observe a rapid increase in refinance activity. This indicates there is pent-up demand and the ability to process loans more quickly than in the past. We need to be aware of this, which is why we aim for more down-rate protection, and we will likely maintain a positive duration gap. We continuously optimize our asset portfolio to have the best characteristics for prepayment protection. Currently, we are operating with a higher percentage than the targeted 75% to 76%, often above 80%, especially for higher coupons, where we want that percentage to be substantial. Additionally, our focus on purchasing within the production coupon range of 5% to 5.5% has changed our portfolio composition to half being between 4.5% and 5.5%, providing us with further 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 respond to that in two ways because it's quite intriguing. Firstly, there is currently a lot of capacity in the origination market from the perspective of mortgage originators, and given the refinance opportunities and technological advancements, there seems to be anecdotal evidence that some mortgage borrowers are refinancing with incentives lower than 50 basis points. Some might be refinancing with incentives as low as 25 basis points, especially if the process is simple and costs are minimized. The geographical location significantly influences refinance costs, as factors like state regulations, local settings, title, taxes, and recording vary widely. That has to be taken into account. There are actions that could streamline the refinancing process further, such as the GSEs sometimes implementing measures to waive appraisals or certain insurance requirements. The discussion regarding waiving insurance for refinances is noteworthy, though I am uncertain if it will come to fruition due to associated risks. Nonetheless, it exemplifies how GSEs and regulators are striving to enhance the refinancing process. They could also adjust their guarantee fees. From an administrative standpoint, I find the current administration’s attention to mortgage spreads unprecedented. The Treasury Secretary has identified the gap between mortgage rates and the risk-free rate with remarkable clarity. This suggests that they believe taking action, possibly through reforms, could stabilize or reduce that spread, which would influence mortgage rates and refinancing opportunities. They can also alter their treasury issuance strategy, and there is a clear emphasis on the 10-year bonds. It will be important to monitor whether they shift their interest composition towards more short-term issuance compared to long-term. Considering the ongoing GSE reform process, how they approach MBS from a capital perspective under new banking regulations will be crucial to observe. This could potentially lead to increased refinancing activity or adjustments in capital requirements for Agency MBS based on the reform trajectory. There is a lot of potential for changes, and it’s a fascinating period for the market.
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, it's an important question. As we discussed earlier, spreads are currently at the lower end of the range, and everyone is wondering if they will rebound into the middle of the range, which has typically been the trend. It’s also crucial to consider what factors might push spreads in either direction. Looking at spreads from a macro perspective, over the last few years, numerous uncertainties made it difficult to define the upper end of the range, including monetary policy changes, fiscal policy, geopolitical risks, and the Federal Reserve's tightening of monetary policy alongside balance sheet runoff. However, I now have considerable confidence in the upper end of the spread range. In contrast, I'm less certain about the lower end, as there are several factors that could lead to spreads breaking below that level. The current administration is focused on spreads, and with the demand outlook improving while supply remains stable, the funding market is also noteworthy. The Fed is approaching a pivotal moment regarding its balance sheet, and with the current funding rates, I anticipate the Fed will conclude its balance sheet management soon, possibly by the next meeting and certainly by the year's end, given the current funding market trends. Additionally, the Fed is considering other measures that could positively impact the repo market. Moreover, the Treasury's efforts on GSE reform demonstrate their commitment to finding actions that could enhance the spread outlook. From a volatility perspective, we are seeing a favorable monetary policy stance, which is promising. If we achieve clarity on tariffs in the coming weeks, the interest rates may remain stable, contributing to a conducive environment for spreads. Overall, the reasons for mortgages breaking through the lower end of the range appear to outweigh those for wider mortgages or exceeding the upper end of the range.
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?
Yes. We developed that index not for economic reasons but because we believed it would be beneficial to the market. The mortgage market is often misunderstood and lacks transparency. While there is a large fixed income market, retail investors find it challenging to access and obtain information about it. Without a Bloomberg terminal, it's difficult to understand mortgage behavior. Currently, the primary benchmark for mortgage performance is the Bloomberg Mortgage Index, which represents a $9 trillion market. The average coupon on this index is approximately 3.5%. When an investor engages with a bond fund gaining exposure to the mortgage market, they are effectively accessing this index and receiving an average coupon of around 3.5%. However, there wasn't an index available that reflects the characteristics of newly originated mortgages. Therefore, we created an index that rebalances monthly, focusing on the right mix of coupons that centers around the par coupon, with a current yield example of 5%. This initiative allows investors to access more information, with the performance history available on our website, eliminating the need for a Bloomberg terminal. We aim to enhance transparency and provide investors with additional insights, which may also facilitate access to a current coupon ETF, for instance. We believe that more information ultimately attracts more investors to this fixed income 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. If there are significant changes in fiscal policy that affect the inflation outlook, those changes might not be reflected in the market. Additionally, if inflation and volatility increase and the Fed needs to pause its actions again, that could create pressure on the fixed income market as a whole and specifically on Agency MBS. The key issues are the major macroeconomic forces at play. If there are notable shifts in tariff expectations or if the Fed perceives a dramatic change in the inflation outlook, they may need to adjust their approach. However, for the inflation outlook to compel such a change, it would need to be quite significant and likely not related to tariffs, as the Fed currently sees tariffs as a stabilizing influence rather than ongoing inflationary pressure. Ultimately, this inflationary pressure would need to be substantial enough to outweigh the evident weakening in the labor market, which the Fed will have to 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, we would like to have a slightly larger duration gap than we currently have. Right now, it's around 0.2, which is not very substantial. With the 10-year rate being at 4% or just below, the near-term risk for that rate seems to lean a bit higher rather than lower. There may come a time when we want to operate with a higher duration gap, but given that the rate is currently a little below 4%, now may not be the right time.
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 mentioned is based on the assumption that if short-term rates, currently at 4.43, were to reflect about a 100 basis point difference, we would see that $0.05 impact over approximately six months. This will depend on how quickly the Fed lowers short-term rates or how we transition that short-term debt into swaps at the corresponding rate.
Okay. That makes sense. In terms of whether tighter spreads are beneficial or detrimental, it's clear they increase your book value, but do they complicate dividend coverage? Or does the calculation still hold since you're achieving a lower return on equity based on a higher 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. You mentioned that quantitative tightening is likely to conclude soon. However, if the Fed continues to reduce its holdings of Agency MBS and reinvests in treasuries, could that increase the risk of spreads widening compared to treasuries?
Yes. Chairman Powell discussed recently that they are reaching a turning point with the balance sheet and plan to stop the runoff. It appears they are moving in that direction. He continues to refer to the existing guidance, which indicates they will mainly hold treasury securities. However, what "primarily" means has not been defined for the market, which is crucial for the mortgage outlook. It could mean 95% or 60%, and without clarity on that, it's a significant distinction. He mentioned they will review and clarify this. They also have a clear mandate to manage the runoff in a way that does not disrupt the market, and I don't foresee any actions related to the mortgage portfolio that would cause instability. Currently, the pace of the Fed's balance sheet runoff is about $200 billion a year, which the private sector can manage, and those mortgages will be redirected into treasury. There remains some discussion regarding the balance sheet and its composition, which may change. Ultimately, as we mentioned, this could serve as a lever that the government sees as important to improve mortgage affordability by modifying the composition to include mortgages. If that occurs, it would likely 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 as like a substitute for common stock?
Sure. The recent transaction allowed us to access a market we've been away from for about five years. This market has essentially been inactive for four years, so reopening it was crucial. We were the second transaction in this market, and the terms were favorable, with a higher coupon rate compared to previous issues. The 8.75% coupon on this transaction performed well in the aftermarket, which makes us very pleased. For our common shareholders, this translates into a potential return of around 16%, which means an additional 9% in earnings could benefit them. We aimed to increase our preferred issuance, which now makes up around 18% of our total capital structure. This is a solid mix, although we've previously gone as high as 22% to 25%, giving us some flexibility. We wanted to seize the opportunity to reopen this market, as it will bring additional returns for our common shareholders due to this preferred stock issuance.
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. One of the reasons we provide a table showing what we refer to as high-quality prepayment characteristics is to address your question. Additionally, we consider other characteristics beyond just low loan balance that contribute to prepayment protection. I mentioned earlier that 76% of our portfolio possesses these varying characteristics. Regarding the higher coupons, as noted on Page 8, we break it down to indicate that 39% exhibit high-quality prepayment characteristics and 37% have other beneficial traits. These additional characteristics are significant; they can include loan age, credit scores, FICO scores, geography, and specific metropolitan statistical areas (MSAs). When it comes to our higher coupons, nearly all of them, in the high 90s percentage, have certain embedded prepayment characteristics that we favor. Although we are aware of the prepayment risk associated with some higher coupons in the current environment, we also remain focused on the attributes of those pools. We aim to source pools that we believe will ensure more stability in cash flows. We have slightly reduced our exposure to higher coupons, and those we maintain in our portfolio possess characteristics that align with our preferences.
That's helpful. And then maybe one more for Bernie. I know you gave an unchanged book value estimate to date, but can you give me any sense of the level of liquidity into October and whether it's substantially different from your cash on hand at quarter end?
Sure. Our liquidity is largely unchanged since the end of the quarter.
I appreciate everyone joining our call today. We are happy to report the results from the third quarter, which may be one of our fourth best quarters in the last decade. We are pleased to provide these results for our shareholders. As I mentioned, we remain optimistic about the outlook for the agency market and our business. We look forward to connecting with you again at the end of the fourth quarter, sometime in January.
Thank you for joining the call. You may now disconnect.