AGNC - NASDAQ

Good morning, and welcome to the AGNC Investment Corp. Second Quarter 2025 Shareholder Call. [Operator Instructions] 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. Second Quarter 2025 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.

Good morning, and thank you all for joining our second quarter earnings call. Following the administration's tariff announcement in early April, elevated governmental policy risk caused investor sentiment to turn sharply negative and financial markets to reassess the macroeconomic and monetary policy outlook. After a sharp repricing in April, most markets retraced their early period losses and ended the quarter at better valuation levels. The performance of Agency mortgage-backed securities relative to benchmark interest rates, however, was notably weaker quarter-over-quarter. As a result of this underperformance, AGNC's economic return for the second quarter was negative 1%. During the first 3 weeks of April, when the financial market stress was most pronounced, the yield on the 10-year treasury fluctuated by more than 100 basis points and the S&P 500 Stock Index declined by 12%. This volatility and macroeconomic uncertainty adversely impacted Agency mortgage-backed securities with spreads to treasury and swap rates widening meaningfully. A primary focus of AGNC's risk management framework is maintaining sufficient liquidity to withstand episodes of significant financial market stress. One important measure of this capacity is the percentage of equity that we hold in unencumbered cash and Agency mortgage-backed securities, which are available to meet margin calls in the normal course of business. This focus enabled us to begin the second quarter with a strong liquidity position and to navigate the financial market volatility without issue and importantly, without selling assets. Moreover, we were able to take advantage of the wider MBS spread environment by raising accretive capital during the quarter and opportunistically deploying a portion of that capital in attractively priced assets. Over the last 2 months of the quarter, most financial markets retraced the April losses, and in some cases, set new record highs. For example, the S&P 500 Index rallied 25% from the April low and ended the quarter about 10% higher. Investment-grade and high-yield debt also performed well with spreads tightening 10 and 50 basis points, respectively. The one notable performance exception was Agency mortgage-backed securities as the current coupon spread to a blend of treasury and swap benchmarks ended the quarter 7 and 14 basis points wider, respectively. Although the Fed and treasury have indicated that beneficial regulatory reforms are forthcoming, bank demand for MBS still appears to be constrained. Similarly, foreign investor demand may be hindered by U.S. dollar weakness and geopolitical risk. Looking ahead, we expect banks and foreign demand for Agency MBS to grow. In addition, as we enter the third quarter, the seasonal supply pattern for MBS issuance should improve. We expect the net supply of new MBS will be about $200 billion this year, the low end of most forecasts. Since quarter end, MBS spreads have tightened slightly and are showing signs of stabilization. As a levered and hedged investor in Agency mortgage-backed securities, AGNC's return profile is most favorable in environments in which mortgage spreads are wide and stable. Our favorable outlook for Agency MBS was further improved in the second quarter by the very positive message from key decision-makers related to the potential recapitalization and release from conservatorship of the GSEs. The White House, the Treasury Department and FHFA affirmed the government's commitment to maintaining the implicit guarantee for Agency MBS and also indicated that they are taking a do-no-harm approach to GSE reform. Specifically, President Trump made an unprecedented statement in late May regarding the GSEs and the ongoing role of the government in the housing finance system. He said, our great mortgage agencies, Fannie Mae and Freddie Mac, provide a vital service to our nation helping hard-working Americans reach the American dream of homeownership. I am working on taking these amazing companies public, but I want to be clear the U.S. government will keep its implicit GUARANTEES. Treasury Secretary Bessent also made several important statements regarding the GSEs during the quarter. The one that stood out the most to us was when he said, the one requirement of this privatization is that they are privatized in such a way that mortgage spreads do not widen. And in fact, is there a way that we can make the spread between the risk-free rate and mortgages tighten as Freddie Mac and Fannie Mae are privatized. Finally, Director Pulte weighed in with similar positive statements saying our #1 thing is to do no harm and keep the implicit guarantees intact. We cannot have any disruption to the mortgage market. There cannot be any upward pressure on the mortgage rate, and I am very confident that the mortgage market will be safer and sounder as a result of any option that the President takes. These statements individually and collectively clarify the administration's approach and more importantly, should provide investors greater confidence that the credit quality of the $8 trillion of outstanding Agency mortgage-backed securities as it is understood to be today, will not be impaired by actions associated with privatization. In fact, given the explicit statement of credit support made by the President of the United States that the implicit guarantee of Agency MBS will be preserved, investors could reasonably conclude that the credit quality of the outstanding stock of Agency mortgage-backed securities has never been stronger. These statements also make it clear that maintaining stability in the mortgage market and lowering mortgage costs are 2 important guiding principles of GSE reform. This is a very positive development that should lead to tighter mortgage spreads over time. With that, I'll now turn the call over to our Chief Financial Officer, Bernice Bell, to discuss our financial results in greater detail.

Thank you, Peter. For the second quarter, AGNC reported a comprehensive loss of $0.13 per common share. Our economic return on tangible common equity was negative 1%, consisting of $0.36 of dividends declared per common share and a $0.44 decline in tangible net book value per share as mortgage spreads ended the quarter moderately wider. As of late last week, our tangible net book value per common share was up about 1% for July after deducting our monthly dividend accrual. Quarter end leverage increased slightly to 7.6x tangible equity compared to 7.5x at the end of Q1. Average leverage for the quarter rose to 7.5x from 7.3x in the prior quarter. As of quarter end, our liquidity position totaled $6.4 billion in cash and unencumbered Agency MBS, representing 65% of tangible equity, up from 63% as of the prior quarter. As Peter noted, we were able to navigate the substantial financial market volatility in April with our portfolio intact as a result of our risk management positioning and ample liquidity entering that period. Additionally, during the quarter, we opportunistically raised just under $800 million of common equity through our at-the-market offering program at a significant premium to tangible net book value. As of quarter end, we had deployed slightly less than half of the proceeds, and we have continued to deploy the remaining capital post quarter end. In utilizing the ATM, we attempt to maximize both the accretion benefit associated with the stock issuance premium and the investment returns on acquired assets. However, the optimal timing for stock issuances and capital deployment may not fully align. As a result, our investment of the new capital may lag the issuance as it did this quarter as we evaluate market conditions and wait for favorable entry points. Net spread and dollar roll income declined $0.06 to $0.38 per common share for the quarter, primarily due to the timing of deployment of the new capital raised over the quarter with moderately higher swap costs also contributing to the decline. Our net interest rate spread decreased 11 basis points to 201 basis points for the quarter, largely due to higher swap costs. Our treasury-based hedges contributed additional net spread income of approximately $0.01 per share for the quarter, which is not reflected in our reported net spread and dollar roll income. Lastly, the average projected life CPR of our portfolio declined to 7.8% at quarter end from 8.3% as of Q1, consistent with higher mortgage rates. Actual CPRs averaged 8.7% for the quarter, up from 7% in the prior quarter. And with that, I'll now turn the call back over to Peter for his concluding remarks.

Thank you, Bernie. I'll provide a brief review of our portfolio before taking your questions. Trade, fiscal and monetary policy uncertainty caused Agency MBS spreads to widen across the coupon stack with higher coupon MBS performing slightly better than lower coupon MBS. MBS performance also varied considerably by hedge type and maturity as the yield curve steepened significantly during the quarter and swap spreads tightened 5 to 10 basis points. As a result, MBS hedged with longer-dated treasury-based hedges performed materially better than MBS hedged with short- and intermediate-term swap-based hedges. Our asset portfolio totaled $82 billion at quarter end, up about $3.5 billion from the prior quarter. The mortgages that we added were largely higher coupon specified pools with favorable prepayment characteristics. As a result, the percentage of our assets with some form of positive prepayment attribute increased to 81%. Our aggregate TBA position remained relatively stable at about $8 billion, consistent with our preference for specified pools in the current environment. With both our pool and TBA activity concentrated in higher coupons, the weighted average coupon of our asset portfolio increased to 5.13% during the quarter. The notional balance of our hedge portfolio increased to $65.5 billion at quarter end. In duration dollar terms, our hedge portfolio consisted of 46% treasury-based hedges and 54% swap-based hedges. In summary, despite the second quarter volatility and elevated geopolitical and government policy risk that still remains, we continue to have a very positive outlook for Agency mortgage-backed securities. In fact, we believe the outlook actually improved in the second quarter due to 4 factors. First, MBS supply appears to be manageable as seasonality factors turn more favorable and the mortgage rate remains high. Second, the demand for MBS appears poised to grow as a result of anticipated regulatory changes and relative value attractiveness. Third, agency spreads appear to be stabilizing at historically cheap levels. And lastly, key policymakers appear to be taking a cautious do-no-harm approach to GSE reform while reaffirming the government's ongoing role in the housing finance system. Collectively, we believe these positive developments create a very favorable investment outlook for Agency mortgage-backed securities as a fixed income asset class. With that, we'll now open the call up to your questions.

[Operator Instructions] The first question comes from Doug Harter with UBS.

Just kind of digging into the last comments you made about the attractive environment. As you look at that environment and you look to continue to take advantage of that, do you think that, that comes in the form of looking to raise additional capital? Or is increasing leverage from kind of this area where you've been for the past couple of quarters a consideration as well?

Sure. Well, I appreciate that question. And as you mentioned, our outlook really is favorable as we sort of start the second half of the year given some of the developments of the second quarter, particularly related to the GSEs. I think it sets up a strong backdrop for Agency mortgage-backed securities. But what we're seeing now is really some stabilization. And I do expect spreads to move sort of gradually tighter, but it doesn't seem to be a big catalyst for them to move sharply lower over the near term. And I say that because that's important. As Bernie mentioned, we haven't -- we've sort of taken up a patient measured approach to the deployment of capital that we raised in the second quarter. She mentioned that we deployed a little less than half of that. So from that perspective, we still have capacity to deploy those proceeds at what are still very attractive levels today, Agency mortgage-backed securities current coupon to a blend of swap rates is at about 200 basis points. That's about the upper end of the range over the last 4 years. And then, of course, to the extent that we have capacity at some point during the quarter to raise accretive capital and deploy those proceeds, we would certainly look to do that as well as a way of generating incremental value for our shareholders. But we can -- we feel like we're in a good position now to deploy capital at a sort of a patient measured pace. And I think these opportunities are going to be with us for a little while, but we could certainly also have the capacity to operate with slightly higher leverage. Bernie mentioned that our unencumbered cash position at the end of the quarter was at $6.4 billion or 65%. That's 2% higher actually than it was at the end of the first quarter. So despite all the volatility, despite growing our portfolio by $3.5 billion, we still have actually more unencumbered cash as a percentage of our equity at the end of the second quarter. So we're in a good position, Doug, essentially to do everything that you just described. We'll let the market dictate the pace of that and then the levers that we pull as we see mortgage spreads develop. And we see the backdrop of some of this still ongoing political uncertainty get resolved, which hopefully will get resolved over the next couple of weeks with respect to government policy and tariffs. And then, of course, we have a little bit of uncertainty still ongoing with monetary policy, but those should be resolved really over the next month or 2. So we have a lot of capacity and a lot of flexibility to be opportunistic in this environment.

The next question comes from Crispin Love with Piper Sandler.

Peter, can you speak to your views on the core earnings trajectory and what that means for the dividend level? Core returns are high, spreads are pretty wide, swaps continue to roll off. But curious what you view to be the run rate for earnings and core returns over the near to intermediate term?

Yes. We've talked about our net spread and dollar roll income for a lot of quarters now in terms of it coming down to be more aligned with the economics of our portfolio as we see it. And obviously, there's a lot of considerations when you're looking at net spread and dollar roll income in terms of the way accounting works for asset yields and for hedge costs. And it doesn't reflect necessarily the long-term ongoing economic earnings power of your portfolio. It's a current period earnings measure. So you have to look at it in that context. But that said, it has come down more in line with the economics of our portfolio today, and I'll share with you a couple of points. One, if you look at that $0.38, that $0.38 in terms of a return on equity is, I think, in the 19.5% type range. I don't know exactly what that number, but something in the 19%, 19.5% range. I point that out because if you look at where mortgage valuations are today, that rough -- that number I just talked about with current coupon to a blend of treasury rates and a current coupon to a blend of swap rates, current coupon to treasury rates right now at about 160 basis points, a blend of rates across the curve from 3 years to 10 years and 200 basis points to swaps. So you're looking at about 180 basis point return spread in the current environment. Leverage the way we leverage our portfolio, that translates again to about a 19-or-so percent ROE for marginal investments. So I would say that the environment that we're in right now, given where spreads are, I would call it in the high teens, somewhere between 18% to 20% returns. That aligns with our net spread and dollar roll income. But there's going to be period-to-period volatility in that number. Bernie mentioned it came down this last quarter because of the slow pace of deployment primarily of the proceeds of the capital that we raised. And obviously, as we deploy that, that will sort of eliminate that drag that we were -- that we saw in the second quarter. But also, there will be a continued drag from our swap hedges rolling off. We had about $5 billion roll off in the second quarter. We replaced $2.3 billion of those. So over time, our swap cost will go up. I expect our repo cost to come down over time, particularly as the Fed eventually gets back into easing. And I expect our asset yields to gradually rise. They're still below market. So there's a bunch of different factors, but I would say our net spread and dollar roll income should stay generally in the kind of range that we're seeing, maybe high -- mid- to high $0.30s to low to mid-$0.40s range. I gave you a lot there. I hope that answers your question.

Absolutely. No, that was very helpful, Peter. And then just following up on Doug's issuance question and comments you've made about deployment. You raised accretive capital, deployed about 50% of that in the second quarter. I believe that was a comment or it might be 50% to date. But can you just share where you stand today? How much more have you deployed since quarter end? And then just where are the best opportunities, coupons, investments, et cetera? And then just given the outsized issuance in the second quarter, would you expect issuance in the third to come down versus historical levels?

Say that last part again, the issuance?

Yes. Just given the issuance that you did in the second quarter, more elevated with -- and just with what you have to still deploy, would you expect lower issuance compared to historical levels?

Yes. I'll start with that one first, and then we'll go back. You gave me a lot there. Again, it's going to be opportunistic. And I think we're in a good position to be patient with respect to our raising of capital. We really like the opportunity in the second quarter, particularly because there was so much volatility, and we were able to raise it accretively. It gave us a lot of additional liquidity, if you will, to withstand further disruptions should they have occurred and then also allowed us to deploy that -- those proceeds. So I wouldn't say that the second quarter is indicative of future quarters. We'll have to just take those as they come. Tell me -- repeat the first part of your question for me.

Yes. So you talked about deploying 50% of the capital. Just the timing of that, was that in the second quarter or to date? And I'm just curious where you are right now...

Yes. No, Bernie -- according to Bernie, it was in the second quarter, but she did mention that we have continued to deploy. We purchased about $1 billion worth of mortgages earlier this month. So we still like the market. We are still deploying capital at a very sort of disciplined measured pace. And in terms of where we like, as I mentioned, we continue to really favor the sort of upper coupons, particularly in specified pools with higher coupons, call it, in the 5% to 6% range, specified pools with some form of favorable prepayment characteristic. We like the yield profile there, and we like the prepayment protection we can buy with certain characteristics.

The next question comes from Trevor Cranston with Citizens JMP.

Another question on the capital raising. Peter, obviously, for the last several quarters, you guys have been able to do a decent amount at pretty accretive levels. And obviously, there's a lot of benefits to being able to issue so accretively. I guess big picture, can you kind of give us an update on your thoughts as to how you think about kind of the optimal size of the company and particularly if you continue to be able to issue accretively for the foreseeable future?

Yes. That's a great question, and it's one that we've talked about periodically. I would start by saying we're not growing for the sake of growing. We're growing because we can raise this capital accretively to the benefit of our existing shareholders and deploy those proceeds in a way that's supportive of our dividend. And to the extent that we can continue to do that, we would certainly look to continue to take advantage of that opportunity. And further, I would say that there are significant benefits of the scale that we operate. So first, if you look at our operating costs this last quarter, it was 111 basis points. So I think we're the lowest operating cost in the industry, but that's certainly very compelling. So that's one point. The other is that I think you're also seeing tremendous liquidity in our stock, which is also really valuable for shareholders. We are obviously now concentrated our portfolio in agency or agency-like securities. So investors who want to get this exposure have a way now to buy our stock in a very liquid form. Our market -- our common equity is over $8 billion. So we have a lot of liquidity in our stock. It's very easy for investors who want this fixed income exposure in their portfolio to buy our stock in a very liquid way. So that's also very beneficial. And then the last point with respect to size, from a positive perspective is that clearly, as we grow in size and our outstanding market cap, if you will, grows in size, it does make us more accessible for other indexes to add us as we grow in size. So there's that sort of virtuous benefit of growing in size and having more liquidity and being added to more indices and so forth. So those are the positives that we look at. On the negative, I would say that there are market capacity constraints, if you will, that we're very cognizant of in terms of size. The liquidity in the fixed income market, as I've talked about a lot in the past, is not as good today as it was 10, 15 years ago, pre-great financial crisis. So we are very cognizant of the size of our asset portfolio, the ability to transact both in the hedge market and in the asset market. And those are considerations on the other side of that equation. So we're trying to find that perfect efficient frontier, if you will, between all of those various points, but there's a lot of benefits [ to it ] and I think investors now are seeing it in size and scale and liquidity, but we're also cognizant that there's a limit to how big we will be.

The next question comes from Bose George with KBW.

First, just given the level of swap spreads, how do you see the appropriate balance between swap hedges and treasury futures? And then when you gave the ROE number at 19% plus is that kind of reflect the mix that you guys currently have in the portfolio?

It does. When I did that calculation on the ROE, I came to 180 basis points because I used a 50-50 blend. And that's probably the right blend for us we think long term meaning that there's a lot of diversification benefits that we like about having sort of an equal mix of treasuries and swaps. But that said, we are a little overweighted swaps still on aggregate. And if you look at the way we hedged our purchases in the second quarter, about 2/3 of the hedges were in swap-based hedges. So we're a little more overweight. As we go forward in the current environment, I would say at the margin, we would probably favor a little bit higher percent of swaps than the long-term 50-50 average because I do expect stability in swap spreads to sort of develop over time, and I do expect some downward pressure -- I should say, upward pressure, meaning swap spread should widen which will be beneficial to us as the supplemental leverage ratio reform actually takes place, likely by the fourth quarter, but maybe even in the third quarter. And when you really look at what happened in the swap market in the second quarter, that was really one of the sort of the most important points about mortgage performance. I mean the move we saw in swap spreads with longer-term swap spreads moving almost 10 basis points narrower was really dramatic, and it's indicative of sort of the balance sheet constraints that still exist in the market today, swaps versus treasuries. We do expect that balance sheet pressure to ease as bank regulation is implemented and particularly the supplemental leverage ratio has changed. So over time, I think we'll benefit from having this overweight right now on swaps. But 50-50 is probably the right long-term mix going forward.

Okay. Great. And then in terms of your CPR, so it looks like the lifetime CPR declined. Does that just reflect the market expectation on rates?

Exactly right. And particularly, you look at what happened in the second quarter with respect to the yield curve steepening. There was -- when you look at what happened at 10-year, 10-year was almost unchanged over the quarter. I mean I think it was up 2 or 3 basis points. We had a big rally, 17 basis point rally in 2 years. But the back end of the yield curve was really the story and that was a particularly sort of negative event for mortgage portfolio. I tried to point that out in my prepared remarks because the 20- and 30-year parts of the curve moved higher, the 30-year moved higher by 21 basis points and mortgages do have key rate duration out there, and the propagation of mortgages is affect -- mortgage rate -- the propagation of mortgage rate is affected by that 30-year move. So in a sense, forward mortgage rates were pushed higher in the second quarter by that movement in the 20- and 30-year part of the curve. And so that's what led to the lifetime CPR change. So that's something to watch because most portfolios ourselves included, don't typically hedge the very long cash flows in a mortgage. We hedge really, as you well know, predominantly, in the intermediate part of the curve, maybe out to about 15 years. The back end is so idiosyncratic, it's -- and it's difficult to hedge from a mortgage perspective. So most of our hedging is concentrated in the 10-year part of the curve to cover that long duration. So to the extent that the 10s, 30s curve moves significantly, that could be a driver of mortgage performance.

The next question comes from Jason Weaver with Jones Trading.

Peter, despite the relative value implications we mentioned, I know we've been talking about the level of MBS spreads for quite a while now, just given the wideness. Would you say this that -- would it be fair to say that spreads have entered just a bigger secular trend over time just given that the level of [ vol has ] come down, but we're still here at 200 over on swaps.

Yes. Yes and no. Clearly, we have, I believe, established a new trading range. And certainly, over -- when you look back at mortgage spreads, I looked over the last 4 years, so taking out the actual COVID event, but since COVID, if you will, we are at the sort of high end of the range. And we sort of broke out barely in this last episode of that range, and we got the 220 basis points on the -- as a closing mark versus swaps. But we are -- that range is still intact. So I would say that range for mortgages versus swaps is probably in the 160 to 100 -- to 200 basis point range. And I would say that range versus treasuries is in the, call it, 160 to maybe 120 basis point range. I think that's the new norm. And I think in the current environment, we're going to stay maybe in the upper half of that range because of the geopolitical and the fiscal policy and the monetary policy uncertainty. But I don't see a lot of catalysts for us breaking out of that range. And that, I think, is the important development over the second quarter. Clearly, there was significant tariff-related market stress that we got through, that's important. But also the one other big catalyst that could have sort of redefined the trading range, Jason, was GSE reform because there was so much uncertainty as to how that may play out. I think the key policymakers did a really, really good job of explaining their thought process and their approach and what was meaningful to them in terms of preserving the very special attributes that the market has today. And I think that takes some of that upward spread pressure out of the equation. So I think you're right, we're in a new range, but I think we're at the top of the range. And I don't expect it to continue up, I expect it to stay in this range and move lower.

Got it. That's helpful. And then just another one on the capital deployment progress in 2Q and even currently. How are you looking at relative value within the specified pool product just among the different sort of warehouses there?

Yes. Well, I gave a measure in my prepared remarks that about 81% of our portfolio has what I call some form of positive prepayment attribute. And in one of our tables, I think at the beginning of our presentation on the asset portfolio, we have another called high-quality specified pools that's about 41%, I believe, the number was. The point is that we believe there's lots of attributes out there beyond just the typical high-quality attributes like low loan balance that can translate to really good mortgage performance and more stable cash flows. They include characteristics like FICO and LTV and other geographies where taxes are recording or LTV characteristics or house price characteristics, loan type, whether it's primary residents or a second or an investor. So we think there's a whole bunch of other characteristics. So that's why we like adding specified pools, particularly the higher coupons, as I mentioned, where there's a significant yield pickup, but also we know we're taking a more -- there's more convexity risk there. But by buying some of these characteristics, particularly in the current environment where house prices are sort of stabilizing and maybe moving lower in particular areas, we think there's a lot of value to adding those specified pools or pools with those kind of characteristics. The other thing I would say is in the current environment, and we saw this in the second quarter, there is some specialness, some benefit to TBA position in terms of the role -- implied role, implied financing levels, particularly for certain coupons in Ginnie Mae securities that make up most of our long position. But there isn't a lot of benefit for conventional TBA positions right now. There's no real funding advantage there. So given that, we prefer to have these higher coupon specified pools rather than a TBA position in the current environment.

The next question comes from Jason Stewart with Janney.

So it appears to us like the curve steepener trade is a pretty crowded trade. And we've talked about hedges, but could you go through a little bit more on the asset side? I think you started in response to Jason's question. In a post steepener trade, how do you position the -- and is there enough flexibility? How do you position the asset side of the balance sheet in terms of coupons, et cetera, to optimize returns going forward?

Yes, there's certainly a lot of flexibility. I mean -- and you see us shifting our coupon position quite significantly quarter-over-quarter. There's lots of liquidity and capacity to do that, shifting between TBAs and specified pools. The characteristics that we talked about change our profile. So there's lots of ways on the asset side for us to do that, particularly if we have a TBA position, we could do that. We can move from TBAs to pools and different coupons. So as the yield curve changes, we can certainly change the asset side of our equation. And as you point out, it's really going to be driven by hedge location. That's really critical, and we have a lot of capacity to do that. But most of our hedges are concentrated in the, call it, 7- to 12-year range. I think about 83% of our hedge duration is greater than 7 years. And what that tells you is that when you think of our asset key rate duration profile and then you overlay our hedge profile, given that concentration, one could conclude that we have positioned our aggregate portfolio to benefit when the yield curve steepens 2 years to 10 years. And so we have benefit and will continue to benefit. If 2-year rates come down and 10-year rates either stay the same or go higher, our aggregate portfolio, given our asset composition and our hedge composition would benefit in that scenario. And we do expect that steepening -- that curve steepening to continue, particularly in light of all of this pressure that we're seeing with respect to the Fed. The 2-year to 10-year part of the curve right now today, I think, is at about 52 basis points. And that's about 50 or 60 basis points flatter than the 25-year average. So I expect the 2-year to 10-year part of the curve to steepen over time, and I expect our portfolio to benefit from that.

Got it. Okay. So perhaps too early to think about post steepener trades. And then I apologize if I missed this in the comments or the questions. Did you give an updated estimate for book value quarter-to-date in 3Q?

Yes. Bernie mentioned at the end of last week, it was up about 1%.

Nothing since then, end of last -- yes, okay. Got it.

The next question comes from Eric Hagen with BTIG.

Just one for me in the repo market. I mean do you see the government budget deficit being a risk to the repo market? Assuming it means the government is going to be issuing a bunch of longer-term debt, how do you think that might trickle down to driving spreads for wholesale funding and other repo venues that you guys are active in? And then, I mean, maybe most importantly, if we assume the Fed has the tools to control repo volatility, all else equal, I mean, does that support higher range for your leverage versus where you've operated historically?

Yes. There's a lot there. So you might have to reask some of those questions. But first, I would say that I don't expect the treasury issuance or the deficit, certainly over the near term to have any impact on the repo market. And the Treasury Secretary has been really clear, and I think it's been really beneficial to the market for them to really give stability in the refunding announcement. And it's not going to change. I think they continue to say for several quarters. But I do expect the composition of their issuance to change. I do expect them to issue more shorter term and less long term. They're very focused on the 10-year part of the curve in terms of that rate. And so there could be a little bit of crowding out of those bills get issued and some of that money comes out of the repo market. But I don't expect that to have any material really impact on pricing. There's plenty of liquidity in the markets. There's $7 trillion of money in money market funds. There's plenty of liquidity there. The other thing that I would point out, and this is really important with respect to the Fed, they continue to make really positive changes to the repo market. And I expect -- one, I expect quantitative tightening to essentially end relatively soon, although it may likely go through the end of the year. But it's clearly a topic of discussion. It was in the minutes last meeting, so I expect it to be ongoing, and I expect them to stop the runoff of their balance sheet. But they also made some changes -- positive changes to their standing repo facility that may or may not be understood. One of them was at quarter end, they increased the number of operations, they added an operation in the morning, which is beneficial to the market. But the big change that the Fed is considering that has not yet been implemented is that it's likely that the Fed will, in a sense, join the FICC for transactions on its -- on the standing repo facility. And if they do that, that would eliminate the balance sheet constraints that currently exist and make that program less effective. So if they join the FICC and they've written about this widely, I think they are considering and it takes time, that would really enhance the liquidity associated with the standing repo facility. So that would be a really positive development. And I suspect they'll be doing that in conjunction with the changing of the bill issuance. So I don't know if I covered all your questions, you can ask me again.

Yes, that was really helpful. I mean the second half of the question was just whether it -- the whole dynamic allows you guys to take more leverage or how you feel about your leverage, just given the support the Fed has for the repo market in general?

It's certainly a consideration that doesn't make us feel like we got to take our leverage lower, I'll put it that way. Yes, I think that's what's unique about our asset class. It is -- I think it's the only fixed income asset class that lends itself to a levered investment strategy because of the liquidity and pricing transparency of our security. But most importantly, as you point out, where the repo market is today versus where it was pre-2019 is so dramatically different, this asset class from a funding perspective. Clearly, the treasury and the Fed in particular, is focused every day on the liquidity in the repo market for treasury securities and for mortgage-backed securities. And when they talk about balance sheet and ending their quantitative tightening, they are looking at that market every single day to determine whether or not reserves have hit the ample level or not. And so they are keenly aware of any repo pressure, and they will adjust as soon as they see that repo pressure, which makes us very confident in our funding. In addition, we, of course, have our captive broker-dealer and almost 30 individual counterparties. So we love that diversification as well.

Great perspective. I appreciate that. Actually, a follow-up here. I mean some changes to the credit scoring at the GSEs, FICO, VantageScore. I'm sure you guys are up on that. Do you see that driving or changing the prepayment environment in any way? Like does it support lower mortgage rates for some borrowers who may have not had access under the prior scoring regime?

Yes. It's funny. From our perspective, this seems to be getting more attention than it's really worth from an investor perspective. We -- obviously, this has been discussed, the Vantage alternative, the name -- that's the name of the alternative has been discussed, I think, for 10-plus years. From our perspective, yes, it will likely lead to borrowers having the capacity for a better, higher credit score, which ultimately could increase their capacity and lead to higher -- slightly higher prepayments, if you will. But from our perspective, as an investor perspective, it's not that significant and not that complicated. What we would need to know as an investor is; one, we need to know the source of the data, the GSEs given us FICO or Vantage. And then two, we need to have sufficient time to implement so that we can then quantify the impact. And we'll all adjust it for -- we'll all adjust for the difference in speeds once we have sufficient data between the 2 data sources. It's also worth pointing out on that one. The VantageScore I think, has some benefit over FICO in that it includes rent payment history, whereas FICO did not. So I think it could provide investors sort of a more comprehensive picture on credit.

The next question comes from Rick Shane with JPMorgan.

Look, historically, the bear case in the space is always higher rates, but as you know well, the existential risk is actually sharply lower rates and rapid repayments. The mortgage industry is evolving. Strategically, it's evolving. From a technology perspective, it's evolving. You have borrowers. I think there's an evolving cohort of borrowers with a lot of pent-up demand for refi. You guys talk about your prepayment protection. Is there a risk that there's been enough of a change in terms of the underlying factors that speeds in a -- and we saw this in December where speeds picked up very quickly based on a brief movement in rates, that the thesis behind the prepayment protection doesn't actually provide as much protection as you're assuming?

Sure. There is a risk of that. And again, there's a lot there. So I think what you're describing is in a sense that market is becoming much more efficient. The technology, all the access, all those things are happening. In a sense, it's making the prepayment curve, if you will, more steep, the S-curve is more steep today than it was 5-plus years ago, pre-Covid certainly. And you're right, we have seen episodes where the mortgage rate has dropped very briefly into the windows, down around 6%, and we had a little bit of spike in prepayments. But it's also important to think about where the market is in aggregate. Today, with the mortgage rate at 6.75%, there is only about 5% of the universe that has a 50 basis point incentive. And from our portfolio's perspective, as I mentioned, our average weighted average coupon is 5.13%, call it. That's 60 basis points out of the money still. So you need a significant move in the mortgage rate to get a significant amount of prepayments. Another point here, the mortgage rate would have to drop from 6.75% down to 5%. So you're talking about a dramatic movement in interest rates. In order for the market to have -- I think, at that point, we would have -- about 27% of the universe would be refinanceable. So it sort of bookends the issue for you. You're right, as we move down in mortgage rate and if we get down to 6%, there is a population of pools, particularly the post-2022 pools will prepay the high 7% -- those will prepay very fast. But in order for you to have a really significant sort of market-wide refinance event, you're looking at a dramatically lower mortgage rate, which is hard to envision. It's not impossible, but hard to envision in the context of all the other questions we had this morning where you're talking about deficit spending and pressure on interest rates and if the Fed were to ease and the Chairman Powell were to change and the yield curve steepened, all those things should keep the mortgage rate may be higher than it otherwise would be. But you're right, there's certainly that risk. And you're also right that there are characteristics that we believe are going to give us protection that may not give us protection. But you'll have to wait and see. And you also have to wait and see what happens with the GSE. This is the other important point over time. The GSE sort of footprint, if you will, may change. They may change their mortgage -- the mortgage capacity to various borrowers. They may curtail some of the business that they can do today may get curtailed over time as they shift toward -- more toward sort of a profitable -- profitability objective. And so that may limit borrowers' capacity to refinance that have a capacity today. Those loans may not be GSE eligible in a future state. We don't know that, but we do know that there is some attention toward shrinking that capacity. And also, it's also important to point out that house prices seem to be topped -- topping, certainly slowing nationally. But at the regional level, there's real variation. And that, again, is going to translate into a change in the refinance capacity for borrowers. So there's a lot that you'll have to consider as we go to lower rates.

Peter, thank you so much for quantifying that. It's really helpful. And look, we've both done this long enough. You know it's not the punch you're looking for that hurts you, it's the one that you're not looking for that does the damage.

Agreed.

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

Just thinking through one more on leverage. As we think back to maybe early April, leverage sort of drifted up just by virtue of market price changes to -- call it, high 7, 7.9. And then perhaps rebalanced throughout the quarter to end basically where -- at Q1 levels. How are you thinking about leverage, right? Are there certain sort of rebalancing triggers that you're looking at in shock scenarios? Is it preserving that unencumbered assets that you talked about? And then maybe if we look ahead in the, call it, near to intermediate term, given you have more certainty in spread volatility, given all the positives on GSE reform, et cetera. Could you -- would you be more comfortable with letting leverage drift up today than maybe a quarter ago?

Yes, a lot there. So first, I would say, when you refer to rebalancing in the quarter, you're right, the biggest driver of the leverage, obviously, is the change in our book value in the second quarter and that's going to put upward pressure on our leverage. And what's important, though, and I pointed this out in my prepared remarks and this is key for a levered investment strategy, that's why I mentioned that we were able to navigate the quarter and not having to sell assets. So we rebalanced, if you will, our risk position by raising capital accretively and deploying that at a slow pace. And over time, as conditions change and we become more confident in the macroeconomic outlook, we can have more confidence and deploy all of those proceeds. But importantly, what we didn't have to do is you didn't have to sell assets. You didn't have to rebalance the asset side of our balance sheet, if you will, by selling assets when spreads were really wide. And doing that, you crystallize those losses. If you hold all of those assets and our existing shareholders will get the benefit of the recovery over time whenever that may happen. That's really important from a risk management perspective and from a levered investment portfolio perspective. And that's why I pointed it out in my prepared remarks this time is that making sure that we have capacity to withstand those spread moves, gives us the ability to gain back that value by not having to sell assets. And you're right, over time, as the market sort of evolves, we look at today's environment and where we stand today. And what I was trying to communicate is that I'm more confident about the outlook today than it was in April. And that's important because we're at wide spreads. I don't think spreads -- while they could certainly widen, I don't think that they will stay wider if they do move wider for some macroeconomic reason. And over time, I think they can go lower. And that does inform us about our leverage, and it does give us more confidence. To the extent that we get more and more confident that mortgages are going to stay in a range or not break out to the upside of the range gives us more and more confidence that we could operate with higher leverage. But all that being said, if you look at our portfolio today, let's just say at about 7.5x leverage, we are able to generate really attractive returns that are consistent with our dividend and give us a lot of unencumbered liquidity and risk management capacity. And that's sort of the perfect combination of the 2 and we look to optimize those 2 things.

We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.

Again, we appreciate everybody's time and participation on our call today, and we look forward to speaking to you all again at the end of the third quarter.