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spk04: Good morning and welcome to the AGNC Investment Corporate first quarter 2024 shareholder call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. 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.
spk03: Thank you all for joining AD&C Investment Corp's first quarter 2024 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 AGMC. 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 AG&C'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 this call include Peter Federico, director, president, and chief executive officer. Bernie Bell, executive vice president and chief financial officer. Chris Kuehl, executive vice president and chief investment officer. Aaron Pass, senior vice president, non-agency portfolio management. And Sean Reed, executive vice president, strategy and corporate development. With that, I'll turn the call over to Peter Federico.
spk15: Good morning, and thank you all for joining our earnings call. AGNC generated a strong economic return of 5.7% in the first quarter, driven by a combination of our compelling dividend and book value appreciation. On our earnings call last quarter, we talked about our growing confidence that the difficult transition period for agency MBS was nearing its conclusion and that a durable and favorable investment environment for AGNC was slowly emerging. We highlighted our belief that short-term rates had peaked for this tightening cycle, that interest rate volatility would decline, and that agency MBS would remain in this new, more attractive trading range. These positive dynamics were all present to some degree in the first quarter and will ultimately drive AGMC's performance over the remainder of the year. With respect to monetary policy, there were both positive and negative developments in the quarter. On the positive side, there was a growing consensus among Fed members regarding the level and direction of short-term interest rates. As reflected in the March minutes, participants judged that policy rate was likely at its peak for this tightening cycle, and almost all participants noted that it would be appropriate to move to a less restrictive monetary policy stance this year if the economy evolved as expected. In his testimony before Congress, Chairman Powell characterized the Fed's position as waiting for a bit more data and that rate cuts may not be far away. Importantly, the Fed also indicated that it would reduce the pace of runoff on its treasury portfolio at an upcoming meeting. This initial balance sheet action is a positive development for fixed income investors. The negative development was stronger than expected economic data. Inflation indicators did not show the continued decline that the Fed was hoping for, and growth in labor readings remained surprisingly robust. As a result, the timing and magnitude of future rate cuts became considerably more uncertain. The interest rate environment during the quarter was generally positive as interest rates increased gradually across the yield curve. Interest rate volatility also declined immediately during the quarter. Against this backdrop, agency MBS performance across the coupon stack was mixed, with spreads on lower coupon securities widening and spreads on higher coupon securities tightening. Also noteworthy, agency MBS spreads remained in the same well-defined trading range, and spread volatility declined meaningfully. In fact, in the first quarter, spread volatility was 20 to 30 percent lower than what we experienced last year. The supply and demand technicals for agency MBS were also favorable in the first quarter, as seasonal factors and affordability issues significantly curtailed origination activity. At the same time, bank demand proved to be greater than expected. This uptick in bank demand was in part due to a view that Basel III would be substantially revised. Collectively, these factors drove our favorable first quarter results. That said, periods of market turbulence are to be expected given the evolving nature of monetary policy. April is a good example of such an episode. After a period of relative stability in the first quarter, benchmark interest rates and volatility increased sharply due to less optimistic inflation expectations and escalating geopolitical risks. Against this backdrop, agency MBS spreads widened meaningfully but remain below the midpoint of the recent trading range. Absent further adverse inflation developments, which caused the Fed to change the direction of monetary policy, we believe this period of fixed income market turbulence will be relatively short-lived. Looking beyond the recent downturn, the long-term fundamentals for agency MBS continue to be favorable and give us reason for optimism. With absolute yields above 6% and backed by the explicit support of the U.S. government, agency MBS are appealing to an expanding universe of investors. Moreover, if monetary policy evolves largely as expected, interest rate volatility will decline, the yield curve will steepen, and quantitative tightening will come to an end. The specific timing of Fed rate cuts is not critical to the long-run performance of agency MBS. As a highly liquid, pure play levered agency MBS investment vehicle, we believe AGNC is well positioned to benefit from these favorable investment dynamics as they evolve over time. With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail.
spk08: Thank you, Peter. For the first quarter, AG&C had comprehensive income of 48 cents per share and generated an economic return on tangible common equity of 5.7 percent, which included 36 cents of dividends declared per common share and a 14-cent increase in tangible net book value per share. As Peter mentioned, the investment environment has been more challenging in April. With longer-term interest rates moving sharply higher, and agency MBS spreads widening 10 to 15 basis points across the coupon stack. At the worst point late last week, our tangible net book value was lower by about 8% after deducting our monthly dividend accrual. Leverage as of the end of the first quarter increased modestly to 7.1 times tangible equity compared to seven times as of Q4. while average leverage for the quarter decreased to seven times from 7.4 times in Q4. Net spread and dollar roll income for the quarter remained strong at 58 cents per share. The modest decline of two cents per share for the quarter was due to a decrease in our net interest spread of 10 basis points to a little under 300 basis points for the quarter, as higher swap costs more than offset the increase in the average asset yield in our portfolio. Consistent with higher interest rates, the average projected life CPR for our portfolio at quarter end decreased 100 basis points to 10.4%. Actual CPRs for the quarter averaged 5.7%, down from 6.2% for the prior quarter. In the first quarter, we also successfully raised approximately $240 million of common equity through our at-the-market offering program at a significant price-to-book premium. Lastly, with unencumbered cash and agency MBS of $5.4 billion for 67% of our tangible equity, as of quarter end, our liquidity continues to be very strong. We believe that substantial liquidity not only enables us to withstand episodes of volatility, but also to take advantage of attractive investment opportunities as they arise. And with that, I'll now turn the call over to Chris Kuehl to discuss the agency mortgage markets.
spk10: Thank you, Bernie. Stronger-than-expected economic data during the first quarter led to a material repricing of market expectations for Fed rate cuts in 2024. Accordingly, yields on 5- and 10-year U.S. Treasuries were higher by 36 and 32 basis points, respectively. In general, risk assets handled this repricing well considering the magnitude of the adjustment, with the S&P gaining more than 10%. and the Bloomberg Investment Grade Corporate Bond Index generating an excess return of approximately 90 basis points. In aggregate, the Bloomberg Agency MBS Index lagged the performance of other fixed income sectors, but spread slightly wider versus U.S. Treasuries. However, given the large move in rates, the relatively benign magnitude of aggregate underperformance was encouraging as compared to the way that MBS performed last year during similar moves. The performance of agency MBS by individual coupons varied considerably, with spreads on the lowest index coupons widening approximately 10 basis points as the potential for bank supply weighed heavily on these coupons. In contrast, higher coupon MBS performed very well during the quarter, tightening 5 to 10 basis points as relatively slow prepayment speeds, limited supply, and steady fixed income inflows provided a favorable backdrop for these coupons. Our portfolio increased $3.1 billion from the start of the year to end the quarter at $63.3 billion as of March 31st. During the first quarter, we continued to gradually move up in coupon and optimize our holdings in specified pools versus TBA. Our TBA position ended the quarter higher at $8.4 billion, with Ginnie Mae TBA representing approximately $5.2 billion as of quarter end. Our hedge portfolio totaled $56.3 billion as of March 31st, and as I mentioned on the call last quarter, we began to gradually shift the composition in favor of a heavier allocation to swap-based hedges. This move benefited our performance during the first quarter, as swap spreads widened 9 basis points and 5 basis points at the 5 and 10-year points on the curve, respectively. As Peter discussed, the data-dependent nature of current Fed policy will likely create some volatility in markets. However, the longer-run earnings environment for agency MBS is very favorable with historically wide spreads, low levels of prepayment risk, and deep and liquid financing markets. I'll now turn the call over to Aaron to discuss the non-agency markets.
spk14: Thank you, Chris. While higher rate environments typically have negative implications for both consumer and corporate credit fundamentals, the current robust employment landscape continues to bolster credit performance. Consequently, fixed income credit generally perform well in the quarter, resulting in positive excess returns across most sectors. As an indicator for credit spreads in Q1, the synthetic investment grade and high yield indices adjusting for the role tightened by approximately 10 and 45 basis points respectively. On the credit fundamental side, we continue to expect an increasing divergence of consumer performance metrics. As we have previously noted, U.S. households have experienced varying degrees of inflationary pressures, primarily bifurcated between households with low note rate mortgage debt, who are relatively immune to the higher rate environment and housing inflationary impacts, and renter households who are not. As a result, we expect a divergence of credit performance between the two groups to widen, with renters at a relatively high risk of falling behind on obligations such as rent, auto loan payments, and credit card debt. Given our current portfolio construction, deteriorating performance for this cohort would be expected to have a negligible impact on our holdings. Accumulated inflation pressures and prolonged exposure to increased rate levels could, however, become a more material issue for a broader group of consumers to the extent they persist for a significant period of time. Turning to our portfolio, the market value of our non-agency securities ended the quarter at a billion dollars in line with the prior quarter. The composition of our holdings was largely unchanged, though we did continue to rotate some of our credit risk transfer securities down the capital structure where we saw relative value opportunities to improve risk-adjusted returns. Lastly, although asset spreads have continued to tighten, presenting a challenge for projected future returns, the funding landscape for non-agency securities is currently stable and remains relatively attractive. With that, I'll turn the call back over to Peter.
spk15: Thank you, Aaron. We'll now open the call up to your questions.
spk04: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
spk05: The first question comes from the line of Bose George with KBW.
spk04: Please go ahead.
spk12: Everyone, good morning. Can you describe the level of current spreads and what that implies in terms of incremental ROEs?
spk15: Sure. I appreciate the question, Bose. Yeah, as we talked about and Bernie mentioned, you know, we see mortgage spreads across the coupon stack widening somewhere between 10 and 15 basis points really in the month of April. The middle coupons, you know, the five and a half kind of area has been actually the worst performing coupon quarter today. But when you look at where mortgage spreads are now and they are approaching the middle of the range, but they're still below the middle of range, roughly you look at the current coupon to the five and 10 year treasury at the low one 50 range. If you look at it importantly, to where five and 10 year swaps are. That's more like 185 basis points. So it depends on what your hedge mix will obviously drive our net interest margin on the current coupon part of the stack right now. But that would translate to, given the way we hedge mix of swaps and treasuries and leaning more towards swaps than treasuries in this environment, could put that initial margin up in the 170 to 175 basis point range. and operating with the leverage that we typically operate in the mid sevens, low to mid sevens currently in this environment. That still translates to expected ROE of somewhere between call it 16 and 18% given our cost structure. So mortgages are obviously more attractive than they were at the end of last quarter, they're more attractive right now and that seems to be a pretty compelling level from our perspective.
spk12: Okay, great. Thanks. And then just a related question. Can you just talk about the comfort level on the dividend, the break-even ROE now? I guess high 17s, but I guess that's within the range you just mentioned.
spk15: Yeah. And as you pointed out in the past, it depends on how you look at that calculation. I think you're referring to the dividend yield on our common, and that would translate to 17. So you'd have to think about leverage on common if you want to think about it that way. And I think if you did that same calculation we just went through, but did it on the common leverage, you would end up with an ROE at or above that 17 level. I'd like to look at it. And we've talked about this. It's important given our capital structure and the amount of preferred, it's still generating a lot of incremental value for our common shareholders. The average cost of our preferred stock, I think in the end of the And the last quarter was around seven and a quarter. It's a little higher now given a reset of one of our preferreds. But there's a lot of incremental value there. So if you think about it from a total cost of capital, the amount of common dividends we pay, preferred dividends, and our operating costs, and you think about that as a percentage of equity, at the end of last quarter, I think that came to around 15.7% or thereabouts. So I'd look at the portfolio today at current valuation levels And I think you can see that our dividend level and that total cost of capital remains well aligned.
spk12: Okay, great. Thank you.
spk15: I appreciate the good questions, both.
spk04: The next question comes from a line of Rick Shane with JP Morgan. Please go ahead.
spk16: Hey guys, thanks for taking my questions this morning. Um, look, so one of the interesting facets of the portfolio is, um, the contribution from swaps, um, over the next 12 months, you have eight and a half billion dollars notional, um, rolling off. Um, those swaps essentially contribute about 20 to 25% of your spread income. As you look forward, given the opportunity, how do you replace that runoff?
spk15: Yeah, I appreciate the question, Rich. Yeah, I think I didn't hear the actually first part of your question, but I think you're talking about swap spread and swap spread performance to some extent. And that was an important driver of performance because swap spreads tighten a lot. But when you think about our net interest margin, we talked a lot about this. Our net interest margin has remained really, really robust. Last quarter was 298 basis points. And that is not consistent with the economics that we just went to. If you think about that net interest margin at around 300 basis points, and you divide that and think about that from an ROE perspective, you're going to get an ROE of 25, 26%, or take our net spread and dollar roll income, and divide that by our common equity, which would be consistent with that 300-ish basis points of net interest margin, you're going to get an ROE of 25%, 26%. The economics of our business, as we just talked about, are in the mid to high teens. And what's going to happen over time is as those swaps run off, and you're right, we have about $8.5 billion still maturing. We had about $5 billion mature, by the way, in the first quarter. and that contributed to somewhat that slight decline in our net interest margin. Those will roll off over time, and our net interest margin, because of those swaps rolling off, will come down. There are other factors, though, that you've got to consider. So it's not as easy as just those swaps rolling off. We will put other swaps on that have positive carry on them. A longer-term swap today, it's still a positive carry by, I think, for example, a 10-year by 150 or so basis points. And also, our asset yield is still below market yields. Our asset yield is still 25, 30 basis points below market yields. So as Chris and team roll the portfolio over and we continue to move our assets around, we'll end up seeing some uptick in our asset yield like you saw last quarter. But over time, that net interest margin over a longer time, will come down more in line with the economics of our business. So that's what you'll see over the next several quarters to years as old swaps roll off, new swaps come on, assets get replaced, net interest margin should come back down in alignment with the economics of our business, which is really the mark-to-market yield that we just talked about in the previous question. Got it.
spk16: Yeah, and that really does get to the punchline, which is that as you're looking forward to all of those factors, that's really what's dictating the dividend policy.
spk15: I appreciate that clarification. That's exactly right. It's setting the dividend policy based on the level of return from an economic perspective that we're seeing as opposed to the current period earnings that gets reflected in our net interest margin.
spk13: Okay. Thank you very much. Sure, appreciate the question.
spk04: Our next question comes from the line of Terry Ma with Barclays. Please go ahead.
spk00: Good morning, Terry. Hey, good morning. Thank you. So you mentioned that you thought the recent volatility would be short-lived. Can you maybe just give a little bit more color on what gives you confidence that it will be short-lived? And then maybe just your expectations on where near-term spreads will settle once the volatility disappears.
spk15: Sure. Both Chris and I tried to address this to some extent in our prepared remarks. And I think Chris referenced the fact that this quarter looked a lot different than previous quarters when we had similar moves. And that's really a critical point from our perspective. What occurred in the first quarter was generally a very stable market conditions, but there was a very significant repricing of the timing and magnitude of short-term rate moves from the Fed. Importantly, it was not a shift and has not yet become a shift in paradigm with respect to monetary policy. Said another way, the Fed was really clear in a number of communications that the policy rate was likely at its peak, and the next move was likely going to be an ease. What we had in the first quarter was simply a plateauing of CPI data. It came in at 3.9 and then 3.8 and 3.8 again. It just didn't show the improvement that the Fed was looking for. And in the two or three days following each of those CPI reports, the 10-year Treasury moved up 20 to 25 basis points, in a sense taking out one ease. So when we started the year, the market, probably incorrectly so, maybe too optimistic, expected the Fed to ease five or six times. Now, as we sit here today, the market has repriced to only one and a half moves this year. And importantly, in aggregate, the Fed funds futures in 2027 tell us there's only six moves in total, meaning that the Fed funds rate now, according to the market's projections, is going to settle out at around 4%. That's materially higher than what the Fed's own long-run target is, which is still 2.5%. So what we had occur is a very significant repricing of the path of short-term interest rates. We did not have a paradigm shift. If inflation continues to not evolve or re-accelerate, there could be a shift in monetary policy. We don't believe that's going to happen. We get important inflation data at the end of this week in the PCE report, but we believe, and I think the Fed still believes, that inflation will show signs of improvement. We will move more toward the Fed's long-run target, which, by the way, the Fed's own estimate of PCE at the end of this year is 2.6%. That's not going to be materially off where the number comes out at the end of this week. And with that projection, the Fed expected to remove. So we think that where the 10-year is at, call it 4.5% to 4.75%, that seems like a pretty healthy place for the 10-year in the context of a Fed funds target that's ultimately going to move to 3%. We think the inflation report will ultimately come in favor of the direction the Fed wants. And I think this repricing has simply been just a healthy movement of where short-term rate cuts are going to occur and the magnitude of those, not a paradigm shift. And so spreads moved. We had a lot of geopolitical risk. We had volatility following inflation reports. If we get two or three inflation reports that are at or better than expected, will have the same sort of significant repricing in the opposite direction. I think the Fed is looking for two or three months in a row of better data to have sufficient confidence. And once they get that data, then everybody will be pricing in the eases again, and the direction of monetary policy will be clear again. Right now, it's a little uncertain, but we think the repricing is largely over. With respect to spreads, you asked that. Again, when you look at current coupon spreads near the middle of the range, that seems like a good place from our perspective. The current coupon to the 5- and 10-year Treasury at 150 to 160 basis points seems like a healthy place. Again, swaps, 180 to 190, seems like a healthy place. We do have some negative seasonals right now between next April and May should be you know, kind of the worst seasonal months for mortgages in terms of origination. So, uh, the market sort of, I think is in a good place right now with the repricing that has taken, taken, taken place.
spk00: Got it. Thank you. Um, very helpful color. Um, and then, um, just on your hedge ratio and your duration gap, you guys took the hedge ratio down and you're now running a slightly positive duration gap. So maybe just a little bit more color on that move and then talk about where you're comfortable running the book, um, in this environment.
spk15: Sure. I've talked about this for a while. You know, it does make sense for us to gradually move our hedge ratio down as the Fed's monetary policy outlook changes. We obviously wanted to run with a very high hedge ratio, more than 100% of our short-term debt essentially termed out in order to protect our funding costs in a rising short-term rate environment. We're now at the inflection point And so over time, I would expect that to come down. And as we get more confidence when and the magnitude of the Fed cuts, then we'll ultimately probably operate with even a lower hedge ratio, such that at some point in the monetary policy easing process, we would want to operate with, in a sense, some percent of our short-term debt unhedged, have that a bigger part of our funding mix. So over time, we'll do that. Chris mentioned, and I'll let him speak to this, he mentioned...
spk10: our our gradual movement to more towards swaps in our hedge mix and i think we have a sort of a positive outlook chris you want to talk a little bit about that yeah so um our funding um is obviously sulfur based and so logically you know we want to have generally a more significant portion of our hedges and sulfur based swaps which you know also have better carry but over the last couple of years the bid for mortgages was was highly correlated with treasuries given the dominant investor base where index funds as opposed to banks and so it made sense to have a more sizable component of our hedge book in treasury based um hedges um you know u.s treasury issuance was also extraordinarily high at a time when banks were not in position to grow their securities holdings and so that had the effect of of cheapening treasuries versus swaps and Now with bank deposit stabilizing and QT likely drawing to an end, we're gradually moving our hedge book to have a higher concentration in swap-based hedges. But this will be a gradual shift, and we'll want to maintain diversification within our hedge portfolio composition just as we do on the asset side. Okay, great. Thank you. Sure. Thanks for the question.
spk04: Our next question comes from the line of Crispin Love with Piper Sandler. Please go ahead.
spk09: Thanks. Good morning. I appreciate you taking the question. Thanks. Good morning, Peter. Just looking at fund flows, bond flows have been very positive. Government fund flows have been positive as well which has positive implications for agency but only tells part of the story. So can you speak to what you're seeing on the flow side? Who are the major buyers right now of agency MBS? I think you mentioned a little bit about banks coming back in the first quarter, but do you think some of the recent rate moves could keep some of them on the sidelines for a bit?
spk15: Yeah, well, we certainly did see that. You're right. If you look at the – and this is part of the reason why it didn't feel like a paradigm shift and why the first quarter was not nearly as disruptive despite the amount of repricing that took place because bond fund flows – generally stayed positive throughout the quarter. There was probably a week or two where they actually got to zero, maybe negative, but there was never really any big movement out of bond flows like we saw at different times last year. So the bond fund flows continue to be neutral to positive. I think we're also starting to see outside the bond fund complex inflows into mortgage-backed securities. Those flows are obviously hard to quantify. I think they are evident in particular if you look at the way the mortgages performed across the coupon stack in the first quarter where lower coupons underperformed and higher coupons, the current coupon really above the six and six and a half in particular, actually tightened on the quarter. I think that shows you that there's new demand for those sort of high-yielding securities. With the backup that we have, The current coupon now at around six and a quarter percent. That again looks really, really attractive to treasuries. It also looks really attractive to investment grade corporates. That spread has again widened out to around 30 basis points. So mortgages look cheap to investment grade. Corporates, current coupon in particular, are the highest yielding ones. They look cheap to treasuries. The credit quality, obviously backed by the support of the U.S. government, helps in an environment where the economy is ultimately slowing. So I think those are going to continue to drive demand for agency mortgage-backed securities, not so much on a levered basis, but actually on an unlevered basis. And that has a really positive long-run fundamental. So I think that trend is going to stay in place for a while. Those reallocations tend to take time. for slow-moving reallocations.
spk13: Great. Thanks, Peter. I appreciate you taking my question.
spk04: Our next question comes from the line of Doug Harder with UBS. Please go ahead.
spk01: Morning, Doug. Good morning. The way you've kind of described the market, how are you thinking about continued capital raises and the attractiveness of that opportunity?
spk15: I appreciate the question. Well, obviously, we always look at it through the lens of our existing shareholders, first and foremost. And as Bernie mentioned, we were able to raise capital through our at-the-money program, at-the-market program. very accretively in the first quarter. And we'll continue to look at those opportunities. The first quarter is a really good example of, one, the cost-effective nature of that capital issuance, the book value accretion that can be generated by it, but also the flexibility that affords us. As Chris mentioned, we added a little over $3 billion worth of mortgages in the quarter. If you think about that, given the amount of capital we raised, we're able to deploy those proceeds immediately into the mortgage market. About half of those purchases, if you will, went toward levering that new capital immediately. So there's no drag from a dividend perspective. It's accretive to book value. That translates to value for our existing shareholders. We'll continue to look for opportunities to do that. I like mortgages better, obviously, at this level, Mortgages did spend a lot of time in the first quarter near the tighter end of the range, which gave us a little bit of pause. But we'll continue to be opportunistic with it. If we can generate value for our existing shareholders through our capital markets activities, we'll certainly look to do that. And then Peter, if you could just contrast. I'm sorry, Doug, go ahead.
spk01: Yeah, no, sorry. If you could just contrast that with kind of how you see leverage today and kind of how leverage might move around given kind of book value weakness, but also ability to protect and or add new assets.
spk15: Yeah. Well, we certainly have a lot of capacity the way I would describe it today, a lot of flexibility. And I think that's appropriate because We're moving and I sort of made this in my initial remarks that we're moving in a positive direction, but we're still moving essentially in that direction slowly. And there's going to be volatility along the way. And we want to be disciplined with our capital deployment and our leverage because monetary policy is still evolving. There's lots of variables that are going to drive the Fed. Over time, we're going to get more clarity and there may be a time where we have even more confidence in the outlook, but our confidence is growing. We have a lot of, as Bernie mentioned, we have a very strong liquidity position at 5.4 billion as a percent of equity. I think it may be was one of our highest points this last quarter at 67%. If you think about that on assets, it's over 8%. So we have a lot of capacity. but we also want to be disciplined. And what's important about the outlook from our perspective is that we think we're entering a period that's going to be from a long-term, durable, attractive investment opportunity. So we don't feel any rush to deploy capital. We feel like we can be disciplined. We feel like we can continue to be opportunistic like we were in the first quarter. And so the environment's going to evolve over time. Our confidence will grow. Mortgage spread behavior within the trading range is important and i think what we're starting to see is some consolidation in that spread which i think is a healthy development for the market said another way for mortgages to move to the high end of the range i think it's becoming more challenging for that to occur and there's growing reasons why mortgages can trade at the lower end of the range we just haven't seen them all evolve fully yet but We'll see that over time and we'll see how the economy unfolds over the next three to six months and how the Fed's behavior and the Fed outlook changes. That's really going to be a key driver for the fixed income market is what happens to monetary policy because once the Fed starts to ease, I think ultimately the market will price the Fed moving the Fed funds rate all the way back to 3%. But they have to start that move from a place of confidence. And the market doesn't have that confidence yet. The Fed doesn't have that confidence.
spk13: Great, thank you, Peter. Sure, appreciate it.
spk04: Our next question comes from the line of Jason Weaver with Jones Trading. Please go ahead.
spk11: Hi, good morning. I was hoping you could expand a little bit more on Doug's first question there. The 25 million shares you issued during the quarter, can you talk a little bit about the timing and coupon deployment of that capital in the quarter and subsequently?
spk15: I'm sorry, could you repeat the first part? I had a little trouble hearing the question.
spk11: Sorry, Peter. I was just trying to expand on the answer to Doug's first question about the timing and deployment of the ATM issuance you raised in first quarter.
spk15: Well, yeah, like I said, the ATM gives us a lot of flexibility. So we're able to raise money through the ATM program and deploy it immediately. As Chris mentioned, You can talk about where we'd like on the coupon set, but that gets deployed really simultaneously almost.
spk10: Peter mentioned the $3 billion increase. That was a fair value increase. We added roughly $4 billion in agency MBS during the quarter in current phase terms, majority of which was in higher coupon 30 or TBA. We also added about $400 billion in hybrid arms.
spk11: Was that sort of weighted throughout the quarter or weighted towards the beginning or end? Can you speak to that?
spk15: No, we usually don't give those sorts of details. I appreciate the question, but... Fair enough. Yeah.
spk11: No, that's fine. And what were you thinking about the implications for the Fed's reduction in QT and how that might change your portfolio strategy, hedging strategy?
spk15: Well, as Chris mentioned, just real quickly, I'll make a couple of comments. As Chris mentioned, obviously... the Fed is going to move first and significantly with respect to its Treasury portfolio. So I expect the Fed to announce next week at the meeting that they will cut the Treasury cap by half. It does not appear based on the minutes that they're going to make a change at this point to the mortgage cap because the mortgages are running off so far below. They're actually running off at about half of the cap right now. So I don't expect the Fed to make a change. that but I do expect treasuries to come down and by over the remainder of the year I expect Treasury runoff cap to actually come to come come to zero and that is a positive development generally speaking for treasuries versus swaps when you think about bank regulation and the fact that bank regulation is going to be less onerous I think that's going to also push us to that's Chris mentioned to swap so I think That's where it has an implication from a hedging perspective. Longer term, I think it's still unclear exactly how the Fed is going to handle its mortgage portfolio with respect to its changes to its balance sheet. And this is going to be an important development. Last week, for example, there was a paper that came out from the open markets desk at the New York Fed where they show two examples of how the Fed may approach tapering its portfolio runoff. And in both those scenarios, they had the mortgage cap getting cut in half. Now, that won't have any practical impact on the speed of runoff because mortgages for the Fed's portfolio are running off between $17 and $20 billion. But it would have a long-term stabilizing effect on the mortgage market if they did choose a cap structure like that they could still achieve their stated purpose of allowing mortgages to run off and be redeployed into treasuries. And ultimately, over a very long time horizon, they would be able to achieve their objective of having primarily treasuries. But that would be a sort of transfer of mortgages to treasuries that would occur over multiple years. If they use a lower cap, to allow that to happen, that could be a positive development for mortgages. We'll have to wait and see how the Fed handles that. I don't think we're going to get that level of detail right now at this first initial move, but I think we'll get that over time.
spk13: All right. Thank you for that. Sure.
spk04: Our next question comes from the line of Merrill Ross with Compass Point. Please go ahead.
spk06: Good morning and thank you. You might not answer this given what you just said, but did you add to the portfolio into April's volatility, particularly in the five and a half? And what is the current leverage given the decline, the 8% decline that Bernie referred to in book value?
spk15: I'm sorry, I didn't hear this last part. We have a little bit of a bad connection. I think the first part was did we add to the portfolio in April? What was the second? The current leverage. Current leverage, yes. Chris could talk a little bit about mortgages in the current environment and where he's adding and seeing value. With respect to current leverage, it's a little higher today. It's actually around 7.4, given the backup in net asset value and portfolio activity to date. Anything that's particular about it? today's market.
spk10: Yeah. With respect to, you know, we haven't had any material changes in the size of the portfolio quarter to date with respect to relative value within the agency space. As I mentioned earlier, higher coupons significantly outperformed, um, lower coupons during the quarter in part given concerns around bank sales and lower coupons related to some M and a balance sheet restructuring announcements. Um, that were made, but also in response to very favorable prepayment reports that showed considerably flatter refi responses in higher coupons compared with what we saw during the last refi wave during COVID with similar incentives to refinance. And so up in coupon benefited from that as well. And despite the higher coupons outperforming, I'd say relative value is still generally upward sloping across the coupon stack.
spk06: I have one other unrelated question, if you don't mind. Sure. The Series C, that's callable. Wouldn't you use some of your liquidity? I mean, maybe on the margin, it's not really material to you. I'm just curious.
spk15: Yeah, appreciate that question. We're constantly evaluating our capital structure, and you're right, that Series is callable. But as I mentioned, even though it has reset higher, and the coupon on that one is 10.7%, it is certainly materially higher than our other fixed rate preferreds. Even at 10.7, given where the returns are on our portfolio, that is still a lot of value that is accruing to the benefit of our common shareholders. We will look for, always as we do, look for opportunities to optimize that cost of our capital. The preferred market has been relatively quiet right now, so there's not a lot of activity going on, in part because of the rate uncertainty. But I expect that to change over the remainder of the year, and there might be opportunities in the preferred market as we move forward. So we'll continue to evaluate that. But it does generate incremental value right now for our common shareholders.
spk06: I believe MFA refinanced a series at 9. I'm just curious. Not that that seems like a really huge relative value trade from 10 to 9.
spk15: And the other important part, the other important point about the floating rate preferred obviously is you're we're likely at the peak of that coupon. And obviously, coupon can change very, very rapidly. So there is a lot of option value in those series right now. The Fed, obviously, a couple quarters or a couple months of positive inflation data, and the forward curve will be materially downward sloping, and those coupons could look very attractive in a year or so.
spk13: Great.
spk05: Thank you.
spk13: Sure. Appreciate the question.
spk04: And our last question comes from the line of Eric Hagan with BTIG. Please go ahead.
spk02: Good morning. This is actually Jake for Eric. I appreciate you guys taking my questions. First one, could you flesh out a little bit the outlook you have for prepayment speeds, including how much room you might see for your forecast to change with mortgage rates kind of coming up recently? And do you think faster speeds would be a benefit or maybe a headwind on earnings or possible economic return? Thanks.
spk15: Sure. Chris, you want to talk about coupon composition?
spk10: Given our coupon composition, slower speeds, the prepay reports over the last two months have been some of the more interesting reports than we've had that we've had over the last couple of years um after spending in december sort of through the december mid-february time frame it's sort of local lows and mortgage rates with rates around six and a half to six and three quarters percent after spending you know the second third quarter last year originating pools with seven and a half to eight percent note rates and so we got a lot of insight into, you know, what the refi response was going to look like on, you know, a sizable population of loans with, you know, call it 75 to a hundred basis points of incentive to refinance. And what we learned was that speeds were quite a bit slower than, you know, what many had feared and slower than what we observed during COVID on loans with similar incentives to refinance. And so we, This, as I mentioned, provided a tailwind to higher coupons. It's interesting. I think there are a number of factors that likely contributed to the slower response than what we saw during the last refi wave. Slower speeds are favorable for our position. With respect to the lowest coupons, which are a very small percentage of our holdings, You know, even there, I'd say, you know, turnover speeds have been, you know, over the last year, a little better, a little faster than, you know, what many had feared. So hopefully that gives you some insight into, you know, our outlook on speeds.
spk02: Yeah, it does. Appreciate that. And then finally, just going back to leverage, what is your historical range for leverage, Ben? And do you think that range might change at all if mortgage spreads remain historically wide?
spk15: Yeah, I mean, if you look back over a very long history and we've put these numbers out, our leverage has ranged probably at the low point, maybe around six or thereabouts, and at the highest print was probably in the nine, nine and a half. So they sort of give you some bookends. But really what you have to think about is when you think about leverage is it's dependent on the environment. It depends on where mortgage spreads are. If mortgage spreads being tight versus mortgage spreads being historically wide, that's a really critical driver, the interest rate environment, the volatility. As I talked about a lot over the last couple of years, all other things equal in an environment that we've just gone through where there's been a significant negative fixed income market repricing as the Fed went from quantitative easing to quantitative tightening. Bad for all fixed income securities. volatility was really high liquidity was challenging at times you sort of have to volatility adjust down the leverage said another way each unit of leverage has a higher risk element to it so all other things equal we had to bring our leverage down to account for the increased volatility as the environment changes as we get more and more confident that mortgage spreads will not break out of this new range that the high end, importantly, of the range will hold like it has held now for the better part of seven quarters. Those will be important drivers for leverage going forward, but it's going to depend on monetary policy. It's going to depend on the volatility of interest rates, the cost to rebalance, liquidity in the market, and obviously our view on where mortgage spreads may go.
spk02: Really good info. Thank you so much.
spk15: Sure. Appreciate all the questions.
spk04: We have now completed the question and answer session. I'd like to turn the call back over to Peter Federico for closing remarks.
spk15: Again, we appreciate everybody's time this morning and we look forward to speaking to you again at the end of the second quarter.
spk05: Thank you for joining the call. You may now disconnect.
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