AGNC - NASDAQ

Good morning, and welcome to the AGNC Investment Corp's. Fourth Quarter 2025 Shareholder Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.

Thank you all for joining AGNC Investment Corp.'s Fourth 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, everyone, and thank you for joining our fourth quarter earnings conference call. 2025 was an exceptional year for AGNC shareholders. AGNC's 11.6% economic return in the fourth quarter drove our impressive full year economic return of 22.7%. Even more noteworthy, AGNC's total stock return in 2025 was 34.8% with dividends reinvested, nearly double the performance of the S&P 500. This outstanding performance on an absolute and relative basis clearly demonstrates the value of AGNC's actively managed portfolio of agency mortgage-backed securities and associated hedges. Looking back, we were confident that AGNC was on the forefront of a uniquely positive investment environment as the Fed's unprecedented tightening cycle of 2022 and 2023, reached its conclusion. On our third quarter earnings call in 2023, we expressed our belief that a durable and attractive investment environment for AGNC was emerging as mortgage spreads began to stabilize at historically attractive return levels. That outlook proved to be correct. And in the 9 quarters since that call and despite several episodes of extreme market turbulence, AGNC has generated an economic return of 50% for its shareholders, comprised of a 10% increase in book value and monthly dividends totaling $3.24 per share. Moreover, during that same time period, AGNC shareholders have experienced a total stock return of nearly 60% or 23% on an annualized basis. And finally, since inception, AGNC has generated a total stock return of over 11% on an annualized basis with dividends reinvested, demonstrating the long-term benefit of investing in this unique fixed income asset class and the durability of our business model across a wide range of market environments. Turning back to 2025, the Bloomberg Aggregate Agency Index was the best-performing fixed income sector in the fourth quarter, and for the year, produced a total return of 8.6%. Also noteworthy, given the similar credit quality, the Agency Index outperformed the Treasury Index by 2.3 percentage points or 36% in 2025. As I discussed throughout the year, the favorable performance of Agency MBS was driven by a confluence of positive factors. First, the Fed shifted its monetary policy stance toward lower short-term rates and greater accommodation, a promising development for all fixed income assets. The Fed also transitioned its balance sheet activity from quantitative tightening to reserve management. Second, interest rate volatility trended lower throughout the year due to the shift in monetary policy, greater fiscal policy clarity and a stable supply outlook for treasury securities which included a greater share of short-term debt. Lastly, the uncertainty and potential risks associated with GSE reform that adversely impacted the agency market early in the year, gradually dissipated as the Treasury Department and other officials communicated and approached to GSE reform that focused on reducing the spread on agency mortgage-backed securities, maintaining mortgage market stability and improving housing affordability. Collectively, these factors, combined with the sizable purchase of MBS by the GSEs later in the year, caused spreads to tighten and drove the substantial outperformance of Agency MBS relative to other fixed income asset classes. As we begin 2026, these favorable macro themes remain in place and provide a constructive investment backdrop for our business. In addition, other positive developments are possible including further actions by the administration to improve housing affordability. The recent $200 billion MBS purchase announcement is a good example of the type of action that could result in tighter mortgage spreads and lower mortgage rates. The funding market for Agency MBS has also improved in response to the Fed increasing the size of its balance sheet and improving the functionality of its standing repo program. The Fed is also considering other actions to further improve the utility of the standing repo program, which if implemented would be highly beneficial to the Agency MBS market. Finally, the supply and demand outlook for agency MBS remains well balanced. At current rate levels, the net new supply of Agency MBS this year is expected to be about $200 billion. When combined with the Fed's runoff, the private sector will have to absorb about $400 billion of MBS in 2026, an amount similar to the previous 2 years. On the demand side of the equation, however, the investor base today is more diversified and positioned to expand with GSE purchases potentially consuming about half of this year's supply. At the same time, bank, money manager, foreign investor and REIT demand should all remain strong. Pulling this all together, the underlying fundamental and technical backdrop for Agency mortgage-backed securities continues to be favorable and supportive of our positive outlook. Moreover, as the largest pure-play agency mortgage REIT, we believe AGNC is very well positioned to generate compelling risk-adjusted returns with a substantial yield component for our shareholders. With that, I'll now turn the call over to Bernie Bell to discuss our financial performance.

Thank you, Peter. For the fourth quarter, AGNC reported comprehensive income of $0.89 per common share. Our economic return on tangible common equity was 11.6% for the quarter, consisting of $0.36 of dividends declared per common share and a $0.60 increase in tangible net book value per share driven by lower interest rate volatility and tighter mortgage spreads to benchmark interest rates. As Peter mentioned, our full year economic return was 22.7%, reflecting our monthly dividend totaling $1.44 per common share and a $0.47 increase in tangible net book value per share. As of late last week, our tangible net book value per common share was up about 4% for January or 3% net of our monthly dividend accrual. We ended the fourth quarter with leverage of 7.2x tangible equity, down from 7.6x at the end of the third quarter. Average leverage for the fourth quarter was 7.4x compared to 7.5x in the third quarter. In addition, we concluded the quarter with a very strong liquidity position of $7.6 billion in cash and unencumbered Agency MBS, representing 64% of tangible equity. Net spread and dollar roll income was unchanged for the quarter at $0.35 per common share, which includes $0.01 per share of expense related to year-end incentive compensation accrual adjustments. An important driver of our net spread and dollar roll income is the level of unhedged short-term debt in our funding mix as well as the composition of our hedge portfolio. As of the end of the fourth quarter, our hedge ratio was 77%, reflecting the level of swap and treasury hedges relative to total funding liabilities and was unchanged from the prior quarter. At the same time, during the fourth quarter, we opportunistically shifted our hedge mix toward a greater proportion of interest rate swaps. As a result, a meaningful portion of our funding remains short term and variable rate. This is consistent with the current more accommodative monetary policy environment and positions net spread and dollar roll income to benefit as additional rate cuts occur. Looking ahead, we expect that lower funding costs from the October and December rate cuts and anticipated future rate cuts increased stability in funding markets resulting from recent Fed actions to maintain short-term rates within their target range and the shift in our hedge mix toward a greater share of swap-based hedges, will collectively provide a moderate tailwind to net spread and dollar roll income. The average projected life CPR of our portfolio increased 100 basis points to 9.6% at quarter end from 8.6% in the prior quarter due to lower mortgage rates. Actual CPRs averaged 9.7% for the quarter compared to 8.3% in the prior quarter. Lastly, during the fourth quarter, we issued $356 million of common equity through our at-the-market offering program at a significant premium to tangible book value per share. This brought total accretive common equity issuances for the year to approximately $2 billion and delivered exceptional book value accretion for our common shareholders. And with that, I'll now turn our call back over to Peter.

Thank you, Bernie. Before opening the call up to questions, I would like to provide a brief review of our portfolio. Agency spreads to both treasury and swap rates tightened across the coupon stack, especially on intermediate coupons as interest rate and spread volatility remained low and the demand for MBS, particularly from the GSEs accelerated. Hedge composition was also an important driver of performance as swap spreads on 5- and 10-year swaps widened significantly during the quarter. This favorable move in swap spreads followed the announcement of the Fed's revised supplemental leverage ratio requirement and the Fed's actions to ease repo funding pressure. As a result, Agency MBS hedged with longer-dated swap-based hedges performed considerably better than positions hedged with treasury-based hedges. Our asset portfolio totaled $95 billion at quarter end, up about $4 billion from the prior quarter as we fully deployed our new capital that we raised during the quarter. The percentage of our assets with some form of favorable prepayment attribute remains steady at 76%, while the weighted average coupon on our portfolio fell slightly to 5.12%. Consistent with the growth in our asset portfolio, the notional balance of our hedge portfolio increased to $59 billion at quarter end. The composition of our portfolio also shifted toward a greater share of swap-based hedges. In duration dollar terms, our allocation to swap-based hedges increased to 70% of our portfolio from 59% the prior quarter. In light of our more favorable outlook for swap spreads, we will likely operate with a greater share of swap-based hedges in our hedge mix, particularly 1 short-term rates near the Fed's long-run neutral rate. With that, we'll now open the call up to your questions.

[Operator Instructions] The first question comes from Bose George with KBW.

Can you just talk about where you see spreads currently versus where you saw it in the fourth quarter? And then just help us walk through the dividend coverage. Spreads are obviously tighter, but you've got more capital with higher book value. Just help us do the math there.

Sure. Yes. Thanks for the question. I figured that would be one of the first questions. I'll start with the outlook in terms of ROE and spreads. Obviously, as you pointed out, spreads have tightened a lot. And I think maybe the best way to describe the current environment, and this is essentially what happened in the fourth quarter is that mortgage spreads, I think, have now sort of entered a new spread range. We broke through the range that we have talked about for a long time, really the range that has held for almost 3 years, which is really beneficial to our business and drove the outstanding results that we had in really the last 2 years and in 2025 in particular. But I would say, as we sit here today, Bose, when I think about current coupon spreads to a blend of swap and treasury rates, and I will give you the -- I usually think about things across the curve. I would say that the potential spread for current coupon to swaps is maybe in the 120 to 160 range. And right now, we're just sort of right in the middle of that range, maybe a little bit through it, so call it in the 135-ish type range. I don't know where exactly it is this morning. But I would say that's the potential new range for mortgages relative to swaps and on a current coupon basis to treasuries, I would say it's probably in the 90 to 130 basis point range. And today, I think the number is around 110 when you think about it across the curve. So taking that number and as I mentioned, we would -- we favor swaps in this environment. We have a lot more stability in swap spreads than we had as we start 2026 than we experienced in 2025, and that's really important it allows us to go back to sort of using swaps at a much more heavy pace than we were -- as I mentioned, we were at 70% and maybe going higher. But I would put it at maybe some of spread of around 130-ish, something like that and you look at the leverage that we typically employ, I would say that you could expect returns at the current spread range, maybe in the 13- to 15-ish type percent range, maybe a little bit maybe touch above that depending on the hedge mix. So that translates, I think, into ROEs that are really competitive and really aligned with our dividend, which -- and let me go to the next question, which is I think when you think about the dividend, there's a bunch of considerations. We always talk about the dividend and the sustainability from that perspective, that marginal return. And that is important because one of the factors that will drive our dividend over a long period of time is how we replace our portfolio and these new marginal returns will matter. But what's important about that is that will take an extended period of time to occur. Measured not in days, weeks or quarters but measured in years as the portfolio slowly runs off. The prepayment speed on our portfolio will drive that and also how we reposition the portfolio and how we grow our capital base. So that is something that's much more long term. When you think about the dividend coverage today, it's important to look at what is the return on our existing portfolio. And we obviously were able to put on a really attractive returning portfolio over the last couple of years at this spread environment. If you think about our net spread and dollar roll income, for example, I call it normalized for this quarter, it was $0.35, but there was -- it was dragged down by $0.01 due to some nonrecurring performance-related compensation. $0.36 -- and what is the ROE on that, think about the $0.36 relative to our book value of $8.88. That's about an ROE of 16%. And that aligns very, very well with our total cost of capital. Our total cost of capital, when you add up all the common stock dividends, the preferred stock dividends, our operating costs normalized, it was right at, I think, 15.8% for the -- at the end of the year. So our -- the point is the total cost of capital aligns well with the existing portfolio. The new portfolio still looks really attractive at mid-teens. Obviously, that will take time. And then there's a bunch of other factors that we talk about these all the time. But when you think about our dividend, this is a very dynamic environment. As I talked about, we're kind of shifting spread environments. There's a lot of new information that we will get over the next weeks, months, maybe quarters that will determine sort of the direction and stability of mortgage spreads, that will have implications for our leverage that we'll operate with. The hedge mix is going to be an important driver. And then there's always accounting considerations. Obviously, REITs have a dividend distribution requirement based on taxable income. That's also something that we'll have to factor into our thinking over time. So there's lots of factors, but I think all of that put together is our dividend is well aligned with the economics and the accounting of our business today.

Okay. Great. And actually, just -- so the existing portfolio, it seems like it covers the dividend well. The incremental portfolio, is it fair to say it's a little bit sort of whatever closer or on the coverage just given the incremental returns are more in the 13% to 15% versus the economic -- versus kind of the breakeven ROE which looks like it's like 15.5% or something?

Yes. I think that's right. And also, I think it's important when you think about the -- when you think about deploying new capital, if you raise capital, the required return on the new capital that we raised is not the total cost of capital. That's on the existing book of business. The new capital that you would raise, I think the right comparison from a dividend coverage perspective, is what is the dividend yield on your stock, which is around 12%. So when you think about deploying new capital, the returns today in the marketplace, as I've mentioned, sort of 13% to 15% are actually in excess of the dividend yield on our stock. So there's ample coverage from that perspective.

The next question comes from Doug Harter with UBS.

I appreciate the ranges for spreads you gave. Can you talk about how you're thinking about the risk or the potential benefit that could get you either to the high end or the low end of those ranges and how that informs your decision around leverage today?

Yes. Well, obviously -- yes, it's a great question. Obviously, the announcement at the -- I guess it was early in the year -- early this year that really pushed the current coupon spread into this new range was the announcement that the GSEs were going to essentially use all of their portfolio capacity. Now the market was monitoring. Obviously, I mentioned it, everybody knew that the GSEs were growing their portfolio. They have been doing so really since the second half of the year. I think for the year, they grew their balance sheet. This is as of November, they added about $50 billion of mortgages. And I think from the low point, they added about $70 billion. I think -- Freddie Mac, I think, just announced their MVS for December and they had added another $15 billion of MBS in loans. So the market was anticipating that they would use and grow their portfolios and use the capacity that they had. That announcement obviously made it very clear that, that is their intention. And that really caused spreads to tighten quite a bit. From here, what I would say is I think that maybe the most likely scenario is that they move sideways for some period of time and we have to wait and see what type of actions come next from the administration and from FHFA. There are certainly a number of actions that I think could push spreads to the tighter end of the range, I'll give you some examples that I think would be highly beneficial to the agency market in terms of spread tightening. Things like changing their cap on their portfolios. And these are things that I think can be done without congressional approval, so they might be appealing from that perspective. But changing the portfolio cap seems to be within their capacity. Maybe a change in the Fed's balance sheet with the potential of a new Fed Chairman in 2026. The Fed obviously now intends to run its portfolio off. So in a sense, the government through the GSEs, is buying $200 billion of mortgages and the Fed is essentially selling or running off $200 billion in mortgage. Perhaps that may change. That would be obviously something that's not priced into the market. Given the credit guarantee from the government on the GSEs, their explicit guarantee of support, perhaps there could be a rationale for changing the capital requirement, although I don't hear that being talked about very much. So I think there's a number of things that could be very positive. I mentioned the funding market, I think that's a new positive development and maybe there's more changes that the Fed makes with respect to standing repo program, which would bleed into, I think, in a positive way, the Agency market. On the negative side, and there are negatives, there are ideas out there related to, for example, streamlined refinance or G-fees or even the portability or a [ suitability ] of mortgages, those, I think, could have negative consequences, some of them significantly negative consequences. But they might -- some of those -- when you talk about accelerating prepayment risk, it is going to have some negative effect on mortgage spreads. So obviously, there are more convexes, more optionality, and that will cause mortgage spreads to widen. But putting all those together, I think the government has made it very clear it wants greater mortgage affordability and I think some of the changes they may make may just lead to sustainability at these new levels, which I think would be very positive. Obviously, as a levered investor, we're looking for spread stability. That's key driver of our ability to generate attractive returns. And I think that's the most likely environment. But I think there are actions that they still could take that could be positive for the market.

And then how do you think about what that means for leverage kind of given that are you kind of comfortable in the current range? It ticked down kind of during the quarter, but the average was flat. How should we think about that?

Yes. That's really key. We did -- we have let our leverage come down consistent with the spread tightening. And I would say, right now, we need to see more information in order to make a determination whether we're willing to operate with a different leverage profile. And the key input in that equation is how stable do we believe spreads will be? So what are the actions that the government may take? And will they lead to greater spread stability. So will the actions that they take said another way, be sustainable? Or will they just lead to, for example, a quick, short tightening in mortgage spreads. There's some actions that they take that cost mortgage spreads to tighten another 15 basis points. But if there is no follow-on action then spreads could actually widen back out. For example, if the GSEs were to use up their capacity quickly, mortgage spreads will be tight during that time period. But once they reach their cap, they will like -- mortgage prices will likely revert back to where they were prior to that action. And so what we're looking for is greater insight into what actions they may take. And will they lead to spread stability. And I think that's -- that would be the best benefit for the overall mortgage market from an affordability perspective is can they keep spreads at these levels, which are obviously more attractive from the homeowners perspective than they were a year ago.

The next question comes from Crispin Love with Piper Sandler.

Peter, as you mentioned, the administration is very focused on affordability, lower mortgage rates. But supply here may be the major issue to broader affordability easing. And you did mention in the prior question, some of the things that could be in the toolkit for the administration, FHFA that could be positive for spreads. But if you were in their shoes, what would you do to address the affordability questions.

Well, I think they've done a lot already. I think they deserve -- the administration, FHFA, the GSEs, they deserve a tremendous amount of credit for the actions that they took in 2025. Starting with the guidance -- that sort of the guiding principles that I mentioned and I have mentioned that for a number of times and the treasury in particular, has come out with those guiding principles. The Treasury Secretary continues to reference them. The fact that they are focused on mortgage spreads and the Treasury Secretary in particular, talking about taking actions that maintain spread stability or make them tighter is obviously a really key and one of the benefits of why mortgages tighten so much. So that sort of thinking is really, really important for the market because what it's doing is it's allowing other participants to come into the market. The greater spread stability that they can achieve will allow more and more investors into the market and create a more diverse bid for agency mortgage-backed securities, which will put less pressure on the GSEs to do that. But the combination of the guidance that they had, the actions of the GSEs, those were all very positive. I think they can do other things like the cap, I think, would be one in particular that would give them more capacity and allow spreads to remain at these attractive levels. So I think that's just the key from their perspective is they've got to continue to focus on the stability of the mortgage market, which they are doing a great job of.

Great. That's helpful. And then just one follow-up on the leverage question. Your view seems to be constructive on overall agency MBS investment environment, less rate fall and accommodative administration. Of course, there's always a risk of widening and something unforeseen. But how would you gauge your positivity on the investing environment right now for Agency MBS versus a quarter ago, 6 months, a year ago and how that might impact leverage? And if you do wait for something, could it be almost too late?

Yes. There's a couple of things that I've already mentioned, but I'll add to it because it's a good follow-on question. And that is that when you think about where the mortgage market is today versus a year ago or 2 years ago or 3 years ago, yes, we are in a lower spread environment today, but it's still a widespread by historical standards. So returns, when we're talking about returns in the mid-teens, low to mid-teens. Those are outstanding returns, especially compared to returns that you can get in the marketplace, for example, look at the performance of our stock versus the S&P 500 or even the NASDAQ last year. You can get outstanding returns. And even at these lower spread levels, returns are still really excellent from a shareholder perspective. The key differentiator, which is a very positive is that when you think back to where the environment we were maybe a year ago or 2 years ago, there was a lot more uncertainty about the upper end of the range. And I think what you can take away from the environment today, and this is the credit to the decision makers and the policymakers and the administration is that they are limited in the upside of the range. They are saying we want spreads to stay here or go lower. And I would think if mortgages did move to the upper end of the range, then you would see actions being taken that would push them back down into the range. And that's really an important development and a very positive development when you're a levered investor like we are, is that the range -- the upper end of the range is more certain today than it was certainly a year ago. And I would expect actions to be taken if there were some sort of exogenous event that caused spreads to widen materially.

The next question comes from Trevor Cranston with Citizens JMP.

You talked a bit about swap spreads and increasing the amount of swaps in the portfolio during the fourth quarter. I was wondering if you could give us an update on your view going forward if you think there's room for spreads to continue widening in the swap market and sort of where you think ultimately those settle out?

Yes. I do believe that swap spreads will stay -- certainly stay in this range, but I think there is potential for further widening as we go through the year. The Fed is changing it's balance sheet focus from quantitative tightening to reserve management. It was obviously a really critical pivotal change from that perspective. They ease some of the regulatory requirements that I mentioned, the market had anticipated that, that is very positive long run. It makes treasuries more friendly from a balance sheet perspective, which has led to some of the swap spread widening. But the overall funding market now is at a much better footing with the Fed growing its balance sheet, $40 billion a month. We'll see how long they do that, but they are adding reserves to the system. Reserves got below $3 trillion. Now they're back at $3 trillion or maybe even a little bit above. I expect that to continue. And I think, overall, that will put widening pressure on mortgage spreads. So I think from a hedge perspective, we'll be better off in a swap-based hedge and a treasury-based hedge for some period of time. And even if spreads just stay here, then obviously, we can pick up 25 or 30 basis points extra carry, as I mentioned, when you think about those spread environments, that's substantial leverage, 6x or 7x we're talking about another 1% or 2% of ROE. So I think the outlook is favorable for swap spreads.

Yes. Okay. That makes sense. And then on MBS spreads, you talked about the positive technicals in the market, which have been pretty strong. I guess the other thing that's obviously helped MBS performance over the last several months has been volatility continuing to drop. So I was curious if we could get your thoughts on volatility going forward, if you think that continues to come down or what your thoughts are around that?

Well, you're absolutely right. I mean that was a key driver of the outperformance of our asset class in 2025 was the decline in interest rate volatility. So we all know anytime interest rate volatility increases, it's bad for people who own mortgage-backed securities because it changes the optionality profile from a borrower perspective. And when interest rate volatility declines like it has, it's obviously a positive from a mortgage bond perspective. Just look at the sort of range of the tenure that we've been in, in the fourth quarter, I think it basically traded in a 25 basis point range. So hardly any movement in any given day. And when you look back over the year, I think I look back to -- so really from February on of last year, we traded in about a 50 basis point range. And again, this is to the credit of the administration and the treasury part of the stability that we're seeing, particularly in long-term rates is because of the focus of the Treasury Secretary and administration on keeping longer-term rates stable. The 10-year in particular, has been an area of focus. So I believe they will continue to approach their issuance from a perspective that will be beneficial to the 10-year rate. Now we've been sort of trading in this 4 to 4.25 range. As we go forward, I think spread yield volatility or interest rate volatility will continue to be generally low maybe not as low as it has been, but generally, though, because there are some more geopolitical sort of risks in the market for sure today. But I think from the treasury's perspective, I think the direction of interest rates is more likely lower than higher given their focus on affordability. But I do believe it to be a slower grind lower if the tenure does go down to 4 or maybe break through 4 a little bit. But I think the volatility environment is going to be positive for Agency MBS in 2026 based on what we know today anyhow.

The next question comes from Jason Stewart with Compass Point.

Just 2 quick follow-ups. One on capital activity today. Could you give us an update on equity issuance?

You mean quarter to date? This quarter to date?

Correct.

None. No issuance.

Okay. And then in terms of your comments, maybe just tie in sort of expectations for ATM issuance? I mean, obviously, 2025 was a big year with your ROE profile, give us some two cents on that.

Yes. It was a great environment, a sort of a confluence of positive factors because we could obviously issue it very accretively and we could deploy it at really attractive return levels. Now we can still issue it accretively, and so that's a positive factor going forward. But obviously, the return profile is not quite as attractive as it was. But as I mentioned, it still exceeds the threshold. So it's something that we will continue to do. But I would also say sort of that we're certainly very comfortable with our size and our scale and our liquidity. Also there's no urgency on our part to feel like we need to grow. The decision to issue capital will be just based solely on the economics that we see in the environment. So we're certainly very happy with our size and scale and liquidity and like where we are today.

Okay. Got it. That makes sense. And then in terms of the MBS market, we've talked a lot about demand from the GSEs. But outside of the GSEs, when we think about traditional buyers, banks, as rates are going down, and there's been a little bit more mixed activity in terms of foreign demand. What's your take on how those 2 buyers evolve over the course of the next 12 months?

Yes. When you look at the market, I talked about the supply outlook. And again, the supply outlook really is going to be very similar, at least at today's levels. Now obviously, if rates come down and we have more refinance activity, these numbers will change. But again, from a supply outlook, it's about $400 billion that will have to be consumed by the private sector. And we know that the GSEs -- $200 billion, obviously, is very meaningful. So they could consume quite a bit of that supply, which would be very positive. But taking the GSEs out of it, I think what's also important, and this is a differentiator of the market today versus a year ago or two years ago, where the market was really dominated by money managers. When we look at the demand for mortgages today, I see a more diverse investor base, and that's really positive for the overall market. When you look at what money managers have done given where returns are in the equity market, given the administration's focus on long-term interest rates, I think bond fund inflows will continue to be very sizable. Last year, I think it came close to about $500 billion of inflows. The year before that, it was $450 million. So I would expect bond fund inflows to remain strong in the environment -- in the current environment, which would translate to money managers buying -- is probably somewhere between $100 billion and $200 billion of mortgages. So money managers and GSEs could consume a lot of the production. Then we have banks, which we know are growing their position, but at a very gradual pace. But I do expect the regulatory changes that will come in 2026 will be positive for MBS and mortgage risk in general. So I expect banks to buy more than $50 billion, which is, I think, most people's projections. Foreign demand has been stable but I expect that could also have a little bit of upside because I think the environment is a little bit better versus the last couple of years. And then REITs, again, they were a big contributor to the mortgage market in 2025. And I would expect that REIT demand can continue to be strong given all that we're talking about here this morning. So when you add up all the demand, I think you could credibly come up with a scenario where demand is outpacing the supply in 2026.

The next question comes from Rick Shane with JPMorgan.

I need to buzz in one question before Jason. He really covered my topics. But just one quick clarification. It sounds like you guys are slowing issuance given the incremental return on deployed capital, which makes sense. You also said in response to Jason that you hadn't issued any equity through the ATM quarter-to-date. I am curious was that actually by choice? Or are you blacked out on the ATM until you issue earnings just so we understand really how much you're dialing back if it was a function of what you're allowed to do versus what you've chosen to do?

Well, that's a good clarification. I would say 2 things that I would describe my answer to the future issuance as being opportunistic and driven not by any desire to be larger or have greater scale, but just driven by the economics of the opportunity in terms of the value to our existing shareholders. And then from a quarter-to-date perspective, most companies, I think you will find in a blackout period from the end of the previous period to sometime around their earnings call. So that would be a typical pattern for companies to not know......

Perfect. That was the clarification I was looking for.

Yes. Good follow-up.

The next question comes from Eric Hagen with BTIG.

I just want to get your perspective on prepayment speeds, maybe at what level for mortgage rates do you think really gets the refi market moving? And would you guys modify the hedging in any way or take off some of the longer-dated hedges, if it looked like refis were really going to accelerate?

Say that last part again, Eric, please?

Would you adjust any of the hedges or take off some of the longer-dated hedges if it looked like the refi market was really going to accelerate?

So let me start with a couple of questions -- a couple of points, and then we'll -- then you can ask me some follow-ups. Obviously, prepayment risk is greater today and certainly, I think it's greater given the direction of the administration. So composition of the portfolio, I think, is going to be a real key in terms of mortgage performance going forward. I think it's going to -- the story will not -- even though in a tighter spread environment, asset selection becomes a much more critical factor on a go-forward basis. And it's -- what are the assets that you're choosing and what are the assets that you're avoiding choosing, which is really important. Coupon composition is going to be really important. And the type of characteristics you have in your pools is going to be really important. When I look, for example, just to give you a couple of numbers on the coupon distribution. I think this is really important. When I look at our position of 5.5 and above, when I think about the moneyness of mortgages and what that 5.5 means with a mortgage rate, 6.5 or something there, about 48% of our portfolio is in 5.5 and above. But what's important of that population, 87% of that population has some form of underlying attribute or characteristic that we believe will make those cash flows potentially more stable. And so that's really what is really important when you look at the underlying characteristics, whether they're -- the channel they came through or the credit or the geography, all those Fed loan balance, all those things, what's happening with the GSEs in terms of their pricing, how do they all fit together? They could be very significant drivers of performance on a go-forward basis. So the specified pool characteristics are going to be really important. Chris and I were just actually looking at some numbers this morning, which I just thought were interesting. When we looked at, for example, our 6.5 population, which is only 5% of our portfolio, the cheapest to deliver cohort in the 6.5 population today is paying at a 52% CPR. Our population is trading at just less than half of that from a CPR perspective. So the underlying characteristics matter a lot. The coupon composition will matter a lot. It will be the key driver. We also, from an interest rate perspective and from a hedging perspective, as you point out, I think it's also going to be important to operate with a positive duration gap because obviously, as rates go down, it will be more challenging for mortgages and it will affect the supply outlook. So a positive duration gap will be important. And you'll also notice, and we did this last quarter, but it's still there today. We also have actually a fairly substantial receiver swaption position, which will give us some incremental protection. So all the combination of how do we position the portfolio from a hedge perspective, the duration gap using option-based hedges and in particular, avoiding the worst pools and selecting pools that we think have really attractive characteristics should benefit us in this rising prepayment environment.

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

So as we look at the composition of the mortgage market, it's more barbelled today versus what it was over its history. And in the context of the PAR coupon being close to 5%, the coupons at 4% and 5%, there's less outstanding there versus in higher coupons and lower coupons. And then also, it sounds like from the messaging from the administration, GSE purchases are going to come in at those PAR coupons. How is that environment sort of affecting your ability to, first off, pick pools in this environment where there's less outstanding at the coupons you favored and then also deploy capital into those coupons?

Yes. I think I got all that. I would say you're right. I mean one of the things that we have talked about and focused on is the fact that I would expect the GSEs to -- first off, I would expect the GSEs to make decisions based on the economics of the mortgage market, but I would expect their focus of their purchases to likely be around the PAR coupon because that will have the greatest impact on the primary mortgage rate, which is what they're trying to affect. And that's why when you -- for example, when you look at the performance across the coupon stack even quarter-to-date, that 5%-ish coupon is probably 15 basis points tighter. But the rest of the coupon stock on average, for example, our portfolio, and Bernie mentioned our returns quarter-to-date, are more consistent with about 5 basis points on average because all the other coupons didn't move nearly as much. So -- but from an overall perspective, I mean, that's not particularly challenging from our perspective. We certainly have a lot of liquidity in all of these coupons. Obviously, the largest cohorts are the lower coupons and you mentioned sort of those intermediate coupons. But there is ample liquidity. When you think about the $9 trillion market, there is ample liquidity for us to move into various coupons, into 4s, 4.5s. We have a sizable position in those coupons today. So there's plenty of liquidity for us to position the portfolio anyway we want from an overall coupon distribution perspective. And I would expect the current coupon to be the area that has the most focus from an external perspective.

Got it. That's helpful. And then maybe on the duration gap, you touched on this a little bit. It's been growing for the past few quarters, and it adds that downgrade protection in an environment where prepayment risks are elevated. How should we expect that to evolve over the coming quarters? And then what's the boundaries around that, that we should be thinking about?

Yes. You're right. I mean, I think we ended the quarter, our duration gap was like [ 0.3/10 ] a year or something like that. It's larger than that today because the 10-year has backed up. So right now, we have about a half a year -- that was 0.4 at the end of last quarter. I think it's just a little higher than that, maybe 0.5 this morning. Because the 10-year now is up about [ 420 ] or a little bit above. So to the extent that the 10-year rate stays here or maybe moves a little higher, I would expect our duration gap to widen even more because I think the risk to lower rates would obviously increase. I don't expect the 10-year to move very much above, say, [ 435 ] and I expect there to be some risk that it gets back down closer to 4%. So our duration gap probably in this neighborhood where we'll operate from a historical perspective, just to give you some guidance. I mean, I would say in the half year-ish type range, somewhere between 1/4 of year and 3/4 of the year would be typically where we would operate.

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

Great. Thank you, operator, and thank you, everyone, again, for participating. We're obviously very pleased to be able to deliver outstanding results for our shareholders in 2025, and we look forward to 2026 in the environment that we're in and look forward to speaking to you again at the end of the first quarter. Thank you.