管理層發言
Good morning, and welcome to the AGNC Investment Corp. First Quarter 2025 Shareholder Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Katie Turlington in Investor Relations. Please go ahead.
Thank you all for joining AGNC Investment Corp.'s first 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; Bernice 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 first quarter conference call. Government policy actions and their potentially adverse effects on economic growth and inflation caused investor sentiment to turn decidedly more cautious in the first quarter. This elevated macroeconomic and monetary policy uncertainty led investors to initially seek the safety of high-quality mortgage-backed securities and cash over higher risk assets like equities and corporate debt. Driven by our attractive monthly dividend, AGNC generated an economic return of 2.4% in the first quarter. AGNC's total stock return with dividends reinvested for the quarter was positive 7.8%. The tariff policy announcement at the beginning of April, however, caused volatility to increase significantly across all financial markets. With the breadth and magnitude of the tariffs being greater than anticipated, recession fears increased materially.
Equity prices in turn fell further from their February peak and into bear market territory. Interest rate volatility also increased substantially - over the first nine trading days of April, the yield on the 10-year treasury moved initially sharply lower and then sharply higher. In total, over the short period of time, the yield on the 10-year treasury fluctuated by more than 100 basis points. This interest rate volatility and broad macroeconomic uncertainty caused normal financial market correlations to break down liquidity to become constrained and investor sentiment to turn negative. The agency MBS market was not immune to these adverse conditions and also came under significant pressure in early April. In spread terms, the current coupon spread to a blend of 5- and 10-year treasury rates widened to 160 basis points, the top of the trading range over the last five quarters. The performance of Agency MBS relative to swaps was substantially worse given the unprecedented narrowing of swap spreads that occurred during the height of the market turmoil.
As a result, the current coupon spread to a blend of swap rates reached an intraday peak of 230 basis points. For comparison, the widest level reached during the height of the COVID pandemic was 235 basis points for this measure. As of yesterday, this spread was about 220 basis points still very elevated but off the wides. AGNC was well prepared for the recent market volatility and navigated it without issue. While AGNC's net asset value was negatively impacted by the mortgage spread widening, the expected return on our portfolio is also now higher as it reflects these wider spread levels. Moreover, at current valuation levels, we believe Agency MBS provides investors with a compelling return opportunity on both a levered and unlevered basis. Recent trading history is supportive of this value proposition, as historically spreads have not remained at these levels for an extended period of time.
Agency MBS also offer investors an attractive fixed income alternative to corporate debt and other credit-sensitive instruments, especially in light of the deteriorating economic outlook. For these reasons, and despite the fact that the macroeconomic uncertainty is likely to remain elevated over the near-term, our outlook for agency MBS continues to be very favorable. With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail.
Thank you, Peter. For the first quarter, AGNC reported total comprehensive income of $0.12 per common share. Our economic return on tangible common equity was 2.4% consisting of $0.36 in dividends declared per common share and a $0.16 decline in tangible net book value per share due to modest spread widening during the quarter. Quarter end leverage increased to 7.5 times tangible equity, up from 7.2 times at year-end, driven by the decline in tangible net book value per share and the deployment of recently issued equity capital. Average leverage was 7.3 times for Q1, up slightly from 7.2 times in the fourth quarter. We ended the first quarter with a strong liquidity position consisting of $6 billion in cash and unencumbered Agency MBS, representing 63% of tangible equity. During the quarter, we raised $509 million of common equity through our at-the-market offering program at a material premium to tangible net book value, generating meaningful accretion for common stockholders.
Net spread and dollar roll income increased $0.07 to $0.44 per common share for the quarter, driven by a higher net interest rate spread and larger asset base. Our net interest rate spread rose 21 basis points to 2.12%. This improvement was driven by higher asset yields, a greater proportion of swap-based hedges, and lower funding costs as our repo positions fully reset to prevailing short-term rate levels during the first quarter. Our treasury-based hedges generated additional net spread income of approximately $0.02 per share for the first quarter, which is not reflected in our reported net spread and dollar roll income. Lastly, the average projected life CPR in our portfolio increased to 8.3% at quarter end from 7.7% at year-end, consistent with lower rates. Actual CPRs averaged 7% for the quarter, down from 9.6% in the fourth quarter. And with that, I'll now turn the call back over to Peter.
Thank you, Bernie. Before opening the call up to your questions, I want to provide a brief update on our portfolio as of quarter end and discuss in greater detail our outlook for agency mortgage-backed securities. As I already mentioned, slower economic growth expectations pushed equity prices meaningfully lower during the quarter. In contrast, fixed income returns as reflected by the major Bloomberg indices were positive with Agency MBS being the best performing fixed income asset class in the first quarter with a total return of 3.1% followed by U.S. treasuries at 2.9% and corporate debt at 2.3%. On a hedge basis, however, the performance of Agency MBS was more mixed with spreads to treasuries generally widening during the quarter, particularly in the low and middle coupon segments of the market. The current coupon spread to the blended 5-year and 10-year treasury rate widened 8 basis points during the quarter.
Our asset portfolio totaled $79 billion at quarter end, up about $5 billion from the prior quarter. The mortgages that we added were largely high-quality specified pools and pools with other favorable prepayment characteristics. As a result, the percentage of our assets with favorable prepayment characteristics increased to 77%. The weighted average coupon of our portfolio, meanwhile, remained steady at just over 5%. Our aggregate TBA position was relatively stable during the quarter, although the composition shifted to include a combination of Ginnie Mae and conventional UMBS in response to changing implied financing levels and delivery profile characteristics. Consistent with the growth in our asset portfolio, the notional balance of our hedge portfolio increased to $64 billion at quarter end. In duration dollar terms, our hedge portfolio composition was about 40% treasury-based hedges and 60% swap-based hedges at quarter end.
Despite the recent financial market volatility, our outlook for agency MBS remains positive. On the demand side of the equation, we continue to believe that regulatory relief will eventually lead to greater demand for Agency MBS from banks. We also believe more favorable bank capital requirements are forthcoming, which could benefit the treasury and swap markets. Another noteworthy development in the first quarter relates to the future of the GSEs. The rapid recapitalization and release narrative that garnered significant attention at the end of last year, which was a source of uncertainty for investors, seems to have quieted somewhat. Importantly, many key decision-makers have expressed the desire for lower mortgage rates, improved housing affordability, and for the preservation of the many positive attributes that characterize today's housing finance system. There also appears to be a greater appreciation for the very complex and interconnected nature of our $14 trillion housing finance system, the cornerstone of which is the GSE conventional mortgage market.
This most recent episode of financial market volatility is a good reminder that uncertainty related to the housing finance system can quickly lead to meaningfully higher mortgage rates. In our opinion, the best way to improve housing affordability is to clarify and importantly, make permanent the role of the government in the housing finance system as it exists today. If the government were to do so, the demand for agency mortgage-backed securities would increase, the capital requirement for these securities could be reduced to be consistent with Ginnie Mae securities, and lastly, mortgage rates and housing affordability would improve. Also noteworthy, taking this action would not preclude the government from choosing a different capital structure for the GSEs at some point in the future. With that, we'll now open the call up to your questions.
分析師問答
We will now begin the question-and-answer session. The first question comes from the line of Bose George with KBW. Please go ahead.
Hi, everyone. Good morning. Actually, I wanted an update on your book value. You gave the April 9 number with the pre-release, but how does it look since then?
Yes. Thank you for the question, Bose. Yes, Bernie did not include that in the prepared remarks. But mortgage spreads did widen a little bit further from our pre-release number. I would have put our book value down at the end of last week, somewhere in the range of 7.5% to 8% range.
Okay. Great. And then, I mean yesterday, spread widening suggested a little bit lower since then as well?
Yes. Yesterday was a difficult day in all the markets. Mortgage spreads widened both relative to swaps and relative to treasuries, the number I quoted was 220 basis points was sort of back to the wides we saw. But it's going to be volatile. This is the kind of conditions we are. I would also point out yesterday that while mortgage spreads did underperform considerably, again, there's not a lot of trading volume. I don't believe it's indicative of any forced selling. I believe it's just indicative of really bad investor sentiment. And we also saw again yesterday weakness, if you will, or narrowing of swap spreads, which continues to be a challenge, and that's what's making mortgage performance relative to swaps so difficult. It's not so much what's happening with mortgages to an extent, but it's what's happening with the swap market and swap spreads narrowing like they have really been unprecedented kind of moves, which I think are indicative of the currency flows and the balance sheet constraints and just lack of correlations that's going on right now.
Great. That's helpful. Thanks. And then can you just talk about the comfort level with the dividend, just given where the mark-to-market book value is, if you can just sort of walk through the ROE math that you guys have done in the past?
Yes, let me begin with our total cost of capital, which we discuss frequently. At the end of the first quarter, our total cost of capital, calculated by adding the dividends paid on both our common and preferred stock to our operating expenses and then dividing by our total tangible capital, was approximately $9.5 billion. By this measure, the breakeven return on our portfolio needed to cover all these costs was 16.7%. However, based on last week's book value, this cost of capital is likely closer to 18%. The question then becomes how this compares to the economic return on our fully mark-to-market portfolio, which reflects current market valuations of mortgages relative to swaps and treasuries. From that viewpoint, especially comparing mortgages to swaps, we are experiencing unprecedented levels. Therefore, moving forward, at today’s valuation levels, I would estimate expected returns from mortgages compared to swaps to be between 19% and 22%. When considering the blended swap curve, the spread closed at 220 basis points yesterday, which means a levered portfolio of swaps would generate returns in the low 20% range—historically high levels. To address your question, while our total cost of capital has indeed risen alongside the mortgage spread and a decline in our book value, the expected returns still align well with that total cost of capital.
Great. That’s helpful. Thanks.
Thank you. We have the next question from Crispin Love with Piper Sandler. Please go ahead.
Thank you, and good morning everyone. Just going back to a few weeks ago, can you discuss how you were able to manage the extreme rate volatility where 10-year yields went from about 4% on April 4 to 450-plus over the course of the next few days. Just based on the book value update, seem to have managed it pretty well, but can you detail how you were able to just based on positioning going into as well as active management during the volatility?
Yes, that's a great question. One reason we navigated that situation effectively is due to our disciplined approach and strong position entering the quarter. We finished the quarter with a leverage of 7.5 times, slightly higher than what we had before the first quarter. As Bernie mentioned, we focus heavily on being efficient with our capital. We ended the first quarter with $6 billion in unencumbered cash and liquidity, which represents 63% of our equity. This gives us a significant amount of excess capacity, allowing us to operate efficiently and hold our capital unencumbered, helping us withstand periods of volatility without needing to alter our asset composition or reduce our portfolio leverage. We understood our situation going in and had the capacity to manage the spread widening. When we assess our portfolio, we consider the potential adverse effects on our unencumbered liquidity and leverage, and we do not assume positive correlations in our calculations, which is exactly what we observed in this episode.
A key challenge for market participants was the breakdown of correlations. Initially, there was a flight-to-quality rally as investors shifted from equities to fixed income and Agency MBS due to a weaker growth outlook, benefiting that asset class in the first quarter. However, the correlations later broke down as sentiment shifted away from all dollar-denominated assets. We managed to navigate this by taking a passive approach and allowing the market to adjust, and while spreads widened, the markets have remained generally orderly over the past two weeks, which I view as a positive sign. Importantly, I have not observed distressed selling per se. We did see some position liquidations in the swap market early on that led to unwinding of swap positions versus treasury positions. However, since then, the market appears to have fallen out of favor, but we haven't witnessed significant volume behind this repricing, which may be a silver lining. I'll pause here for any follow-up questions.
Peter. That's all helpful. And in the beginning of that answer, you did mention leverage. But can you just share your go-forward outlook on leverage and the hedge ratio? You said that you expect more volatility. And in recent years, you've kept leverage pretty well contained. So are you comfortable with the recent levels you've had? Or could you take it down even further, just given wider spreads, so returns could be protected even if you bring it down a bit, but just leveraging the hedge ratio?
That's correct. The current spreads allow us to generate attractive returns without relying on excessive leverage. Over time, we will reassess this, which is why we entered this period with lower leverage than usual. We were able to maintain leverage in the low 7s while still achieving appealing returns, and this could continue. However, I do not expect these spread levels to remain stable. If they do persist, we will reassess our position. From what we've observed, I don't think the current spreads between mortgages and swaps are sustainable. For instance, considering a current coupon mortgage backed by U.S. government support amidst a worsening economic outlook, the spread compared to 10-year swap rates is about 200 basis points, which offers an extraordinary return of 165 basis points over 10-year treasuries. This is a substantial return in a 5% or 6% interest rate environment, but I believe these spreads won't last. That said, we may stay at these levels for a while or even see them widen due to macroeconomic and government policy uncertainties. We will continue to evaluate the situation as it evolves.
Thank you, Peter, appreciate, taking my questions.
Our next question comes from Doug Harter with UBS. Please go ahead.
Thank you. Good morning, Peter. In the past, you've discussed leverage levels and expressed confidence in the ranges being stable. I know you mentioned that the current spread levels are not sustainable. How do you view the risk of spread levels potentially widening further due to this uncertainty before they normalize, and how do you plan to manage that possible scenario?
We need to be prepared for the risks we face every day. It's essential to continuously evaluate and reassess these risks while planning for various scenarios. There’s no doubt that spreads can widen. It’s crucial to analyze the differences in mortgage performance, especially in the current environment when comparing mortgages to treasuries and swaps. For instance, I referred to the spread between mortgages and 5- and 10-year treasuries, which recently reached 165 basis points—a level we’ve seen several times over the last five quarters. That’s not particularly distressed, as it's at the upper end of a narrow trading range. However, we broke through this range yesterday when we hit that 165 basis points mark. To provide some context, in September 2023, when interest rates rose to 5% and there were uncertainties regarding government issuance, that spread was closer to 190 basis points, which was the prior range.
While mortgages are wider compared to that older range, they remain within a broader band. The situation between mortgages and swaps tells a different story, primarily influenced by significant changes in the swap market rather than concerns about the mortgage market itself. In the first quarter, there was an expectation for swap spreads to widen due to government regulatory changes, leading many to engage in trades anticipating that outcome. At one point, 10-year swap spreads fell to around negative 35 basis points, marking a substantial shift. This movement significantly impacted mortgage performance, although there’s nothing fundamentally wrong with the agency mortgage market. Eventually, investors will recognize the value from a fixed income perspective, considering the attractive return of around 6% for coupon mortgages, alongside a solid credit profile, especially when compared to treasuries and swaps.
I anticipate that money will flow into this asset class, particularly from corporate sectors. That’s why I’m confident that the current valuation levels cannot last indefinitely. However, we must be ready for further widening and potential distress, and we are preparing for that. We’ve successfully navigated this recent period due to our well-diversified portfolio, which includes various coupons, asset types, and a strong position in cash and unencumbered liquidity.
And I guess just following up on that, Peter, given the move, the volatility in swap spreads, have you or are you considering kind of changing some of the makeup of your hedge portfolio?
Yes, that's a great question. And I put in my prepared remarks, it's about 60% from a duration dollar perspective. So when you think about it from a market value perspective, it is important to think about the mix of your hedges on a duration dollar basis. And yes, we have a little bit higher weight now to swaps. I do think that over time, that a sort of a base case may be that a 50-50 mix may be the best mix on a go-forward basis as a starting point. And I say that because it's important we are seeing in the marketplace to have great diversification and that also applies from the asset portfolio, as well as the hedge portfolio because we see all these sorts of temporary dislocations that have occurred, and they happen from time-to-time, and they happen for reasons that nobody anticipated like the tariffs. The same applies for having great diversification in your hedge portfolio, and I think that's sort of the base case for us is that we want to have a mix on a go-forward basis that gives us the best diversification, so the starting point may be having hedges across the curve for sure, but also having a mix of both treasury and swap-based hedges so that we're able to withstand these periods as best we can. And that served us well this time. So I think you're right to some extent that the mix may come down on a go-forward basis.
Great. I appreciate it, Peter. Thank you.
The next question comes from the line of Trevor Cranston with Citizens JMP. Please go ahead.
Hi, thanks, good morning. Actually, a follow-up question on your choice of hedge instruments and swap spreads. You mentioned sort of the unwinding of trades betting on a widening of spreads in the earlier part of this year. Can you maybe just share your thoughts on kind of where you think we are in that process and kind of what your general outlook is for swap spreads going forward from here? Thanks.
Yes. While the spread movement yesterday was significant, with a narrowing of about 3 basis points in the 10-year swap spreads, it was a bit unexpected considering that much of the volume had been unwound from that trade earlier this month. Currently, what we’re seeing in the swap market reflects a few factors. There are balance sheet constraints at financial intermediaries that have been well-documented. Last week, the CEOs of various banks pointed out these constraints due to regulatory requirements and expressed a need for relief, believing they could take on more. Additionally, there seems to be a pessimistic view regarding U.S. dollar-denominated assets, leading people to prefer holding them in derivative forms rather than directly, thereby contributing to the narrow swap spreads. Furthermore, it is evident that a change in regulatory stance concerning the supplemental leverage ratio is anticipated.
The Fed and the Treasury Secretary have both acknowledged this, and consensus suggests that the supplemental leverage ratio will eventually be removed, which would be beneficial for the treasury market and likely widen swap spreads. However, the process is taking longer than expected because the Fed wanted to wait for the confirmation of the new Head of Bank Supervision, Michelle Bowman, who recently went through the nomination process. Her expected confirmation in the coming weeks could potentially act as a catalyst for normalization in the swap market.
Got it. Okay. That's helpful. And then on the capital side of things, obviously, you guys have been utilizing the ATM program over the last several quarters. Can you just give an update on kind of how you guys are thinking about that after the selloff over the last few weeks? Thanks.
We have definitely taken advantage of the situation whenever possible. The first quarter is a prime example of this, as we managed to raise capital in a way that positively impacted our book value. This capital supported the growth of our portfolio, allowing us to expand by $5 billion. From the perspective of existing shareholders, this was a clear benefit in terms of book value and will also contribute positively to earnings in the long run. I believe our strategy remains relevant at current valuation levels, and it’s still a good time to invest capital, so we will continue to take advantage of these opportunities.
Okay, got it. Thank you.
The next question comes from the line of Matthew Erdner with JonesTrading. Please go ahead.
Hi, good morning guys. Thanks for taking the questions. Kind of as a follow-up to the ATM, could you talk about kind of the pace of deployment throughout the quarter? And it looks like you guys kind of invested in that 5.5 coupon there? And as a follow-up to that, where do you guys think is the best opportunity in the coupon stack right now? Thank you.
Yes. Referring back to my comments during the fourth quarter call in January, I noted that we had been hesitant to use the capital we raised because we were waiting for a more favorable investment opportunity. At that time, I felt that opportunities were starting to appear, and we began to deploy that capital around the time of the January earnings call. This context is important for understanding our deployment timeline. Additionally, it’s true that our weighted average coupon remained nearly unchanged, around 5.03% for the quarter, indicating that the mortgages we added were primarily concentrated around the 5.5 area. We appreciate that segment of the curve. The pools we purchased featured either high-quality traits or some advantageous prepayment characteristics, and about $1 billion of this growth was from TBAs. Regarding our outlook for value moving forward, we are noticing an enhancement in the dollar roll carry implied financing levels, especially in conventionals, compared to last year when the dollar roll market was quite unfavorable.
It has improved gradually throughout the first quarter, which is one reason we shifted some of our TBA positions from Ginnie Mae's to UMBS during that period. If this trend continues, I would expect us to maintain a larger position in TBAs due to rising implied financing levels. From the perspective of pools, we are still keen on the intermediate part of the coupon stack as it provides some natural prepayment protection, especially now that mortgage rates are approaching 7%. While they are not quite there yet, they are currently around 6.8% to 6.9%. We remain optimistic about that intermediate segment of the curve, as it continues to offer good carry. If we decide to purchase higher coupons, we will focus on those that come with some form of prepayment protection.
Got it. That’s very helpful. I appreciate all the color to that.
Sure.
The next question comes from the line of Jason Stewart with Janney Montgomery. Please go ahead.
Good morning, Peter. Thanks for the color and comments. A couple of quick follow-ups. You've talked a lot about conceptually changing the swap portfolio, the hedge portfolio going forward? Were there any meaningful changes to date post quarter end that we can incorporate for our modeling purposes?
There have not. We have not really had any substantial portfolio changes.
Okay. Thanks. And then just a clarification. Your 7.5% to 8% down on book was cents, not the prerelease date, right?
Yes.
Got it. Okay. And then you mentioned.
Thank you for the great clarification, by the way.
Yes, no problem. You mentioned greater appreciation for complexity of the housing finance system. Is that comment tied to the SLR change that you're expecting? Or is there something more specific to housing that you see as a catalyst to kind of get some clarity in the market?
Yes. I explained the GSEs because I believe a significant development is unfolding. This is crucial when considering the outlook for Agency MBS. We are in a situation where spreads are historically low, presenting a fantastic buying opportunity. However, there is substantial uncertainty, volatility, and numerous unknowns due to macroeconomic factors. It's important to acknowledge that although there has been considerable discussion about the future of the GSEs, some comments, especially from the Treasury Secretary, highlight the significance of lower mortgage rates and the need for improved housing affordability. He even noted the trading levels of mortgage spreads on a specific day, which indicates his awareness and the administration's focus on this issue. While debates about the GSEs and their capital structure will continue, it’s evident that the housing finance system—and specifically the conventional mortgage market established by the GSEs—is performing exceptionally well.
There’s a recognition that changes, even those that seem straightforward, can have extensive consequences. For instance, the TBA market exists as it does today because it operates without credit risk, with $300 billion traded daily, creating an incredibly liquid environment essential to our housing finance system. This market is vital for originations, servicing, and enabling homeowners to secure mortgage rates well in advance. Today, there’s a deeper understanding of this interconnectedness. While we can discuss the GSEs' future structure, it's clear that they contribute significantly to our housing finance system. If we wish to enhance housing affordability, particularly with current mortgage rates, we must approach this matter carefully and thoughtfully, a sentiment echoed by the Treasury Secretary. Ultimately, the current structure under the PSPA, with the GSEs maintaining a strong capital position and the preferred stock agreement in place, is functioning extraordinarily well. Adjustments can still be made in the future, but it’s crucial to maintain that foundation. I’ll stop there.
Got it. Make sense, thanks Peter.
Next question comes from the line of Eric Hagen with BTIG. Please go ahead.
Hi, thanks good morning guys. I want to take your temperature on the prepayment environment and maybe how you'd characterize the level of convexity risk that you see in the market generally and how you maybe compare the level of convexity risk that we're taking in the portfolio with spreads at these levels versus the nature of the level of prepayment risk in the portfolio, the last time spreads were near these levels?
Sure. Thank you. I’ll address that in a moment. I want to clarify our book value update, which covers data up to the end of last week, including our dividend accrual. It's important that everyone understands this. Regarding the prepayment outlook, I'll add a few points, then we can discuss further. The Rocket Mr. Cooper merger is a significant factor; this merger will negatively impact the market's convexity due to their refinancing efficiency. To put this in context, the new entity is expected to account for about 10% of originations and 15% of servicing volume, and Rocket may refinance 10% to 20% faster than the overall market. Overall, prepayment risk remains a concern, and our portfolio faces more call risk than extension risk, as indicated by our sensitivity analysis. Currently, we're far from facing major refinancing risks across the market. For instance, with prevailing mortgage rates around 6.18%, only 15% of the market would have a 50 basis point refinancing incentive.
If rates drop to 5%, that percentage jumps to 25%. Given current market dynamics and the steepening yield curve, mortgage rates could increase, creating a scenario where prepayments could become problematic, but that would require a significant rate drop. From our perspective, we usually share our high-quality pool characteristics, which are about 42%, but I reference other valuable characteristics in our portfolio that enhance prepayment protection, which total around 75%. In our higher coupon holdings, particularly those at 6% and 6.5%, about 95% of these positions have some form of embedded prepayment protection, which we find valuable. While these positions may prepay, specific characteristics greatly influence our valuation. We're managing prepayment risk by closely examining these underlying features rather than only focusing on high-quality loan balances, ensuring we have strong protection across our entire portfolio. I’ll stop here and invite any questions.
That's great stuff. I appreciate the detail. I want to ask maybe a more general question related to the mortgage market and the sensitivity that you guys see to margin calls with respect to levered investors like mortgage REITs potentially being forced to sell assets or raise liquidity in certain shock scenarios and whether you think that could reverberate or contribute to wider mortgage spreads and how meaningful do you guys think that risk is in the market right now?
I do not believe any of that relates to the current repricing in the mortgage market. I have not noticed anything like that. What we have observed is that the primary flow in the mortgage market is passive investment. This situation has its advantages and disadvantages; when fixed income flows increase, there is a greater demand from money managers to purchase mortgages. Conversely, in circumstances where markets shift, particularly in the bond and equity markets, and investors prefer cash or want to reduce their risk exposure, we noticed bond fund redemptions early in April. The major flow affecting mortgage valuations was the outflow from bond funds as they raised liquidity for expected or actual redemptions. This trend has calmed down; for instance, last week the market experienced some pressure on Thursday due to a long holiday weekend and a high origination volume day before the weekend. Such occurrences are not uncommon. Overall, I have not seen evidence of forced deleveraging, especially within the REIT sector. Looking at their disclosures, REITs are in a strong position in terms of liquidity, leverage, and portfolio quality, so I do not foresee this being a concern.
Gotcha. Thank you, we appreciate you guys.
The next question comes from the line of Rick Shane with JPMorgan. Please go ahead.
Hi, thanks for taking my question. Actually, Jason asked the question I wanted to ask and he asked it far more articulately than I would have. So thank you.
We have one more question.
The next question is from the line of Harsh Hemnani from Green Streets. Please go ahead.
Hey, good morning. So you sort of touched on swap spreads to mortgages widening a lot more than spread treasuries and maybe on the flip side of that, if I heard you correctly, I think you mentioned that the swap-based hedges might come down or that's what you are planning to do. Can you talk through that decision on how you're paying on the one hand, sort of playing offense because these spreads look unsustainably high versus, on the other hand, being more diversified and more defensive. So could you walk through your thoughts on the business in making there?
Yes. No, you're right. So I mentioned both those factors. And I also mentioned that we have not made any change to our swap portfolio. So important from that perspective. So that would be something when I answered that question, I was more referring to, over the long run, that may be something that we factor into our overall risk management strategy as sort of from a base case desire to have a more balanced position between swaps and treasuries. But we'll have to wait and ultimately have the market settled and volatility to come down and make that determination. But in the short run, you're 100% correct that there is much better carry on mortgages versus swaps and we’ll try to take advantage of that.
Right. That's helpful. Thank you.
Thank you. We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.
Well, again, thank you everyone, for participating on the call. Thank you for the questions. Although the market is volatile, as I mentioned, our long run view continues to be very positive for Agency MBS as an asset class, and we look forward to talking to you again at the end of the second quarter.
Thank you. Thank you for joining the call. You may now disconnect.