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. 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, 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 provide investors with a compelling return opportunity on both a levered and unlevered basis. Recent trading history is supportive of this value proposition, as spreads historically 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 recapitalized and release narrative that garnered significant attention at the end of last year, and that 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 came quickly 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?
Certainly. To begin with, our benchmark is our total cost of capital, which we discuss regularly. At the close of the first quarter, we calculated our total cost of capital by adding the dividends paid on both common and preferred stock to all our operating expenses, then dividing that by our total tangible capital, which was approximately $9.5 billion at that time. This calculation suggests that the breakeven return on our portfolio to cover these costs was 16.7%. However, based on last week’s book value update, that total cost of capital is now likely closer to 18%. The key question is how this compares to the economic return on our fully mark-to-market portfolio. Our current returns reflect prevailing market valuations, particularly when comparing mortgages to swaps and treasuries. In this context, especially concerning mortgages and swaps, we are at unprecedented levels. Therefore, based on today’s valuations, the expected returns on investments in mortgages compared to swaps and treasuries range from 19% to 22%.
Looking specifically at mortgages versus swaps, the spread at the end of the day was 220 basis points. A leveraged portfolio of swaps, structured as we manage them, could produce expected returns in the low 20% range, which is historically significant. In summary, while our total cost of capital has risen alongside the mortgage spread and a decrease in our book value, the anticipated future returns are still well aligned 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 of the key reasons we managed the situation effectively, as I mentioned in my prepared remarks, is our strong position going into the environment. We finished the quarter with a leverage ratio of about 7.5, which is a slight increase from previous quarters. As Bernie pointed out, we focus heavily on maximizing efficiency with our capital, maintaining a solid unencumbered cash and liquidity position. By the end of the first quarter, our unencumbered cash was $6 billion, equating to 63% of our equity—an impressive amount of excess capacity. This enables us to operate efficiently and retain capital, allowing us to endure periods of volatility without needing to alter our asset mix or reduce debt. We understood our standing as we entered this period and had sufficient capacity to handle the widening spreads. When evaluating our portfolio, we consider the potential adverse impacts on our liquidity and leverage if interest rates were to rise.
Importantly, we also do not assume positive correlations in our calculations. This episode highlighted the challenges faced by all market participants due to a breakdown in correlations. Initially, there was a flight to quality, as investors sought to reduce equity holdings amid a weakening growth outlook, favoring fixed income and Agency MBS, which saw benefits during this initial phase. However, those correlations broke down as sentiment shifted away from dollar-denominated assets. We navigated this situation by taking a wait-and-see approach, allowing the market to adjust. Although spreads have further widened, the markets have generally been orderly over the past two weeks, which I view positively. I have not observed any significant distressed selling; while there were some position liquidations early on in the swap market, the overall volume behind this re-pricing has been low, which could be a silver lining. I will stop there and welcome 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 spread levels allow us to generate attractive returns without needing to take on excessive leverage. This is a key factor in our approach, which is why we entered this period with lower leverage than usual, as we managed to operate in the low 7s while still achieving good returns. However, I do not expect these spread levels to be sustainable in the long term. If they persist, we will certainly reassess our position. Based on our observations, I find it hard to believe that the current spreads between mortgages and swaps are sustainable, especially considering the current coupon mortgage backed by U.S. government support in light of a deteriorating economic outlook, when compared to 10-year swap rates showing a 200 basis point spread. This represents an exceptional amount of excess return, especially with 165 basis points over 10-year treasuries in a 5% or 6% environment. I am skeptical about the longevity of these spreads. However, this doesn’t mean we won’t remain in this position for a bit longer or possibly widen, given the existing macroeconomic and policy uncertainties. We will continue to evaluate this moving forward.
Thank you Peter, appreciate you taking my questions.
Our next question comes from Doug Harter with UBS. Please go ahead.
Thanks. Good morning, Peter. You've previously discussed leverage levels and expressed confidence in certain ranges. You mentioned that the current spread levels are not sustainable. How do you perceive the risk of spread levels potentially widening further due to this uncertainty before they normalize, and how do you approach managing that possible scenario?
We certainly need to be prepared for various risks and reassess them regularly while planning for different scenarios. It's a reality that spreads can widen. It's essential to compare mortgage performance, particularly in the context of this environment, where mortgages are compared to treasuries and swaps. For instance, the 5- and 10-year treasuries have been at 165 basis points, a level we've encountered several times in the last five quarters, which isn't particularly distressed. This marks the upper end of a narrow trading range. Recently, we reached that 165 basis points level again. To provide some context, in September 2023, when interest rates hit 5%, the spread was around 190 basis points due to uncertainties around government issuance. While mortgages are wider compared to that earlier spread, they remain within a broader range. In contrast, the situation with mortgages versus swaps is different, primarily due to significant movements in the swap market rather than concerns about mortgages themselves.
For example, during the first quarter, expectations were that swap spreads would widen as government regulations were reduced, leading many to position trades accordingly. At one point, 10-year swap spreads reached about negative 35 basis points, representing a nearly 30 basis point move wider. This primarily affects mortgage performance but not due to a lack of confidence in mortgages; rather, nothing is fundamentally wrong with the agency mortgage market. Over time, investors will recognize the value of this asset class from a fixed income perspective, especially considering the attractive returns compared to treasuries and swaps. I believe funds will eventually shift from corporate investments into this asset class. This is one of the reasons for my confidence that the current valuation levels are not sustainable. However, it's crucial to prepare for further widening and potential distress, and we are doing just that.
Our ability to navigate this recent period stems from having a well-diversified portfolio, including various coupons and asset types, as well as maintaining a strong cash position and unencumbered liquidity, which we currently have.
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, I believe that the significant movement in spreads yesterday, particularly the approximately 3 basis point narrowing in swap spreads in the 10-year segment of the curve, was somewhat unexpected. After the initial period from April 6 to 10, it seemed a lot of volume had been unwound on that trade. What we're currently observing in the swap market reflects a few factors. It appears there are balance sheet constraints at financial intermediaries that we are becoming more aware of. Last week, the CEOs of several banks indicated that these constraints, stemming from regulatory requirements, hinder their ability to operate more effectively, and they're seeking relief. This appears to be part of the situation. Additionally, there’s a general pessimistic outlook regarding U.S. dollar-denominated assets, which is leading people to avoid holding solid U.S. dollar assets and favor derivative forms instead, causing swap spreads to remain tight.
Furthermore, it's clear to us that a regulatory shift regarding the supplemental leverage ratio is anticipated. The Fed and the Treasury Secretary have discussed this, and there's a consensus that the supplemental leverage ratio will likely be eliminated, benefiting the treasury market and widening swap spreads. However, the market didn't expect it to take this long. According to the Fed's own statements, they hesitated to make any significant regulatory changes without having Michelle Bowman confirmed as the Head of Bank Supervision, which just occurred during her nomination process last week, with confirmation expected soon. I expect that this could act as a catalyst for some normalization in the swap market in the future.
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 been taking advantage of opportunities as they arise. The first quarter is a prime example of this. We successfully raised capital in a way that positively impacted our book value. This capital was directed towards the growth of our portfolio, which is why we saw an increase of $5 billion. From the perspective of our existing shareholders, this was a strong example of how they benefited in terms of book value and will also see long-term gains in earnings. This same strategy remains relevant today given the current valuation levels, and as I noted, it’s a good time to deploy capital. We will continue to approach these opportunities proactively.
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. In my comments during the fourth quarter call in January, I noted that we had been slow to deploy the capital we raised in that quarter because we were waiting for more favorable investment opportunities. At that time, I felt opportunities were beginning to emerge, and we started deploying that capital around the time of that earnings call in January. This gives context on our deployment timing. Also, our weighted average coupon on the portfolio hardly changed, remaining at about 5.03 for the quarter, indicating that the mortgages we added were primarily concentrated around the 5.5 area of the coupon. We favor that segment of the curve. The pools we acquired generally had high-quality characteristics or favorable prepayment traits. Approximately $1 billion of that growth came from TBAs. Looking ahead, we are noticing improvements in the dollar roll carry implied financing levels, especially in conventionals compared to last year when the dollar roll market was quite unattractive for financing those positions on the balance sheet.
This has gradually improved throughout the first quarter. One reason for our shift from Ginnie Maes to UMBS positions was this improvement in the TBA market. If this trend continues, we may hold more TBAs due to better implied financing levels. Regarding our pool strategy, we continue to favor the intermediate part of the coupon stack for its natural prepayment protection, especially with mortgage rates now nearing 7%, currently around 6.8% to 6.9%. We appreciate that segment of the curve and still see good carry there. If we decide to purchase higher coupons, we will seek those 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 cent 331, not the pre-release 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 provided that explanation about the GSEs because I believe it's an important aspect to consider when looking at the outlook for Agency MBS. We are currently in an environment where spreads are historically low, presenting a great buying opportunity. However, there is considerable uncertainty, volatility, and unknown factors due to the macro backdrop. It's crucial to recognize that despite the noise surrounding the future of the GSEs, comments from figures like the Treasury Secretary highlight the significance of lower mortgage rates and housing affordability. His awareness was evident when he discussed mortgage spreads shortly after his confirmation. While there may be ongoing discussions about the GSEs and their capital structure, I believe the housing finance system, particularly the conventional mortgage market created by the GSEs, is functioning very well. It’s clear that changes cannot be made lightly, as even seemingly simple alterations can have far-reaching consequences.
For instance, the TBA market, which trades without credit risk and sees around $300 billion in trades daily, is a vital component supporting our housing finance system. It facilitates originations, servicing, and allows homeowners to lock in mortgage rates in advance. There is a growing understanding of this interconnectedness, and while we can debate the future structure of the GSEs, their contribution to our housing finance system is significant. If we want to improve housing affordability, which is certainly a priority given the current mortgage rates, we must approach this matter thoughtfully and cautiously. This sentiment was clearly expressed by the Treasury Secretary. In summary, the current structure with the GSEs in a strong capital position under the PSPA and their ongoing payments to the government is working exceptionally well. While changes can happen in the future, we must maintain that core functionality.
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 shortly. I want to revisit the previous question regarding our book value update. This update covers data up to the end of last week and includes our dividend accrual. It's important for everyone to grasp that. Regarding the prepayment outlook, I’ll add a few points, and then we can delve into it in more detail. One recent development is the Rocket Mr. Cooper merger, which will slightly increase the negative convexity in the market due to their refinancing efficiency. For context, I believe this new entity will make up roughly 10% of originations and 15% of servicing volume. Other things being equal, Rocket might be 10% to 20% faster than the overall market in terms of refinancing. Although there will be more convexity coming, prepayment risk remains an issue, with our portfolio exhibiting more call risk than extension risk. This is evident in our sensitivity analysis, and we are still quite far from experiencing significant refinancing risk across the system.
For instance, with current mortgage rates around 6.18%, only 15% of the market would see a 50 basis point refinancing incentive. If rates dropped to 5%, nearly 25% would have that incentive. So, there’s a long way to go. Additionally, recent market developments and a steepening yield curve are actually pushing mortgage rates higher. While there could be scenarios where prepayments become problematic, it would require a significant market shift. From our standpoint, this is why I highlight the characteristics of our high-quality portfolio, which showed 42% in one of our presentation tables. I also often refer to other relevant characteristics we value regarding prepayment risks, such as geography, loan balances, FICO scores, and LTVs. Currently, those characteristics comprise over 75% of our portfolio. Particularly for our higher coupon holdings—specifically those at 6% and 6.5%—approximately 95% of those positions have some embedded prepayment protection that we consider valuable.
This doesn't mean they won't prepay, but there are aspects we highly regard. To manage prepayment risk in this environment, we are examining the underlying characteristics in considerable detail, beyond just high-quality loan balances, ensuring that we have substantial protection across our entire portfolio. I'll pause now for your 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 don’t believe that any of those factors are related to the current repricing in the mortgage market. I didn’t observe or hear anything indicating that. What we did notice, which is often the case, is that the primary flow in the mortgage market is driven by passive money. This has its advantages and disadvantages; when there's an increase in fixed income flows, money managers show more interest in purchasing mortgages. Conversely, during times when the overall markets, including bonds and equities, move towards cash or aim to reduce risk exposure, we observed bond fund redemptions early in April. The main influence we noted that affected mortgage valuations was the exit of funds from bond markets, as they raised liquidity for expected or ongoing redemptions. That trend has since stabilized. For example, last week, the market experienced some pressure on Thursday due to a long holiday weekend and a significant origination volume that day. Such factors can affect the market, but overall, I haven’t encountered any indications of forced deleveraging, especially within the REIT sector. All of the disclosures show that REITs are in a strong position regarding their liquidity, leverage, and portfolio, so I don’t foresee that becoming an issue.
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.