NLY - NYSE

Good morning, and welcome to the Q1 2023 Annaly Capital Management Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Sean Kensil, Director of Investor Relations. Please go ahead.

Good morning, and welcome to the First Quarter 2023 Earnings Call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our first quarter 2023 Investor Presentation and First Quarter 2023 financial supplement, both found under the Presentations section of our website. Please also note, this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Deputy Chief Investment Officer and Head of Residential Credit; V S Srinivasan, Head of Agency; and Ken Adler, Head of Mortgage Servicing Rights. And with that, I'll turn the call over to David.

Thank you, Sean. Good morning, and thank you all for joining us on our first quarter earnings call. Today, I'll review our performance during the quarter, provide an update on the macro landscape and then discuss our portfolio activity and positioning within each business. Serena will then provide further detail on our financial performance, and we are also joined by our other business leaders who can provide additional perspective during Q&A. Now beginning with our performance. As we noted on our last call, our outlook was optimistic but cautious given the potential for further volatility over the near term. Our conservative approach was validated as we generated an economic return of 3% during what proved to be a very challenging quarter. We were deliberate with respect to our asset selection and hedging strategy, which I'll discuss in more detail, and we continue to maintain our defensive posture with economic leverage roughly unchanged on the quarter at 6.4 turns while outearning our rightsized dividend by $0.16. Now on the macro environment, few anticipated the bank liquidity management would be among the first victims of the Fed's rapid hiking cycle. The SVB induced turbulence led to questions about the outlook for the banking system, the economy and monetary policy. Moreover, it compromised the notion of calmer markets resulting in some of the highest levels of realized and implied fixed income volatility since the financial crisis. The situation remains fluid given events this week, and we view the main implication of the banking turmoil is creating an overhang of assets that need to be absorbed by private market participants. The SVB and Signature portfolios are currently being sold, adding to MBS supply. And even if other banks do not sell securities, most market participants had penciled in about $100 million in MBS demand coming from banks at the start of the year. However, instead of this demand, we will more likely see bank holdings of MBS decline. And with the Fed in continued runoff mode, in addition in net issuance, the market will be further reliant on money managers to absorb roughly $500 billion in aggregate supply. Now spreads are sufficiently attractive for this to occur, though the potential for spread tightening is more limited going forward. Now a second implication of this episode is that it illustrates the banks will likely opt to preserve capital in turn curbing lending activity. Credit availability was already reduced and lending standards were tight before March, but the events over the past few weeks suggest further contraction is possible in turn slowing economic growth. Now the U.S. economy remains on solid ground with the labor market still recording nearly 350,000 jobs per month this quarter, and U.S. inflation readings staying above the Federal Reserve's target measure. Although the banking situation increases risks of a meaningful slowdown, the Fed will likely hike 25 basis points next week and aim to keep interest rates unchanged for the rest of the year, in line with their forecasts. Now shifting to our portfolio activity during the quarter. Within agency, mortgage performance diverge meaningfully each month given interest rate and spread volatility. In January, MBS spreads tightened significantly driven by the decline in implied [indiscernible] and strong inflows into fixed income funds. Performance softened, however, in February, as yields rose despite manageable levels of MBS supply. And this ultimately gave way to a more meaningful cheapening in March on the news of SVB and Signature Bank entering FDIC receivership. In total, mortgage option-adjusted spreads widened approximately 5 to 15 basis points across coupons on the quarter. And we modestly grew our agency portfolio commensurate with the accretive common equity raised early in the quarter while maintaining prudent leverage. We continued our gravitation higher up the coupon stack. And at quarter end, only 5% of our portfolio was in 2s and 2.5s, down from 34% a year ago, and thus we were better protected from the widening that occurred in lower coupons as a result of the FDIC portfolio [indiscernible]. Also to note, over 50% of our portfolio is in what we define as intermediate coupons, 3.5s to 4.5s, which remain more insulated from potential bank sales while avoiding the supply pressure higher up the coupon stack. This dynamic drove investors to shift into these coupons, leading to marginally positive hedge performance within this portion of our portfolio despite headline MBS spreads widening over the quarter. Looking forward, we continue to favor these intermediate coupons, and we'll also opportunistically invest up the stack into 5s and higher as these assets provide historically attractive nominal spreads. In addition to our balanced positioning across the agency market, our duration management and hedging decisions were critical in helping us navigate the volatility in March. Over consecutive trading sessions beginning on March 9, the 2-year note moved in excess of 20 basis points per day. And throughout this period, our portfolio was well positioned and we were able to take advantage of the outside moves by adding short-end hedges at attractive levels, which replaced swap runoff experienced over the quarter. And furthermore, we continue to rotate hedges out of treasury futures in the SOFR swaps, which we see as a more efficient hedge and more closely tracks our repo funding costs. Shifting to residential credit, performance was mixed across products, both benchmark credit risk transfer securities and expanded credit whole loans were 10 to 15 basis points tighter on the quarter, while AAA non-QM securities were 30 to 40 basis points wider from year-end. Our resi portfolio ended Q1 at $5.2 billion in market value, up approximately $200 million quarter-over-quarter, currently representing 18% of capital. This increase in market value was driven by retention of OpEx assets generated through securitization and opportunistic purchases predominantly investment-grade CRT -- we remained active in expanded credit whole loans, purchasing $645 million in loans in the quarter, of which 80% was sourced directly through our correspondent channel. Our loan quality remains high as Q1 settlements had a 743 weighted average FICO, 70 LTV with an aggregate mortgage rate of 8.79%. And despite challenging market conditions, we ended the quarter with a robust loan pipeline of $555 million. Our excess warehouse capacity and liquidity management allowed us to be selective in accessing the capital markets via our OBX securitization platform. We conducted 3 transactions in the first quarter, totaling $1.1 billion, including 2 non-QM transactions and a jumbo partnership deal, all completed in the first 2 months of the quarter prior to the onset of spread volatility in March. And also to note, as volatility subsided to begin the second quarter, we priced our third non-QM securitization of the year just last week. Now lastly, within our MSR portfolio, consisting with recent quarters, we were disciplined adding just 1 whole package, and our portfolio is currently comprised of $1.8 billion in market value and $130 billion UPB, a very low-note-rate high-credit quality MSR with an attractive risk profile and stable cash flows. And this is evidenced by recent portfolio prepayment speeds, trending below 3 CPR, and serious delinquencies remain less than 50 basis points. Now in terms of the sector more broadly, despite widely publicized supply introduced into the market and interest rates declining roughly 40 basis points during the quarter, the strong performance of low WAC MSR drove an increase in valuations, which is reflected in a modest expansion of our portfolio multiple. Now to briefly touch on our outlook, we feel good about our positioning across our 3 businesses and believe we are appropriately levered for the current environment. And our careful approach to leverage and liquidity has been beneficial where fundamentals have improved, but technical headwinds persist. That being said, as outlined in our investor presentation, we do see attractive new money returns for each of our businesses with Agency remaining our preferred avenue for incremental capital deployment over the near term. Residential credit and MSR do offer appealing low to mid-double-digit returns and provide a diversification benefit to enhance the stability of our risk-adjusted returns. And out the horizon, we will look to grow these strategies to represent roughly 50% of our dedicated capital collectively, but we continue to be patient and measured with respect to further diversification. Now finally, before I hand it off to Serena, I wanted to welcome back V.S. Srinivasan, who we're very pleased to have with us on the call this morning. Srini has returned to lead our agency effort and having worked with him extensively over the years, I am fully confident in his ability to navigate the agency market, and we're very happy to have him back on the team. Now with that, I will hand it over to Serena to discuss the financials.

Thank you, David. Today, I will provide brief financial highlights for the quarter that ended March 31, 2023. Consistent with prior quarters, while earnings release disclosures GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. Despite the challenging market David referred to earlier, our book value per share for Q1 was relatively unchanged from the prior quarter at $20.77. Our investments gained across the board with increases in valuation on our agency resi and MSR portfolios contributing $2.54 to book value for the quarter. These gains were offset by losses on our derivative positions of roughly $2.75, predominantly related to our swap portfolio, which comprised 82% of the losses on our hedging book. After combining our book value performance with our first quarter dividend of $0.65, our quarterly economic return was 3%. We generated earnings available for distribution of $0.81 per share for the first quarter. The $0.08 or 10% reduction in EAD compared to last quarter is primarily attributable to the continued rise in repo expense with interest expense up 20% or approximately $135 million compared to the prior quarter. Largely mitigating the increase in repo expense is a higher net interest component of swaps as the average receive rate climbed 66 basis points, resulting in a 35% or $99 million increase in swap income quarter-over-quarter. TBA dollar roll continued to decline, offsetting the benefit to EAD of higher yields on the spec pools experienced during the quarter. In previous earnings calls, we communicated our expectation that earnings would moderate as demonstrated this quarter. And the driving factors that we had referenced previously still hold. That is the continued increase in financing costs, swap runoff, the decline in the specialness of rolls and the mismatch between economics and earnings related to futures. Therefore, we expect some further moderation of EAD in the near term, but continue to be comfortable with our current dividend level, given the economic earnings of the portfolio, all things equal. Average yields ex PAA were 14 basis points higher than the prior quarter at 3.96% as we continue to rotate up in coupon this quarter, with 56% of our agency portfolio now in 4.5% coupons and higher. The factors that impacted EAD are also illustrated in NIM for the quarter with the portfolio generating 176 basis points of NIM ex PAA, a 14 basis point decrease from Q4. Net interest spread does not include dollar roll income. Therefore, the decline in NIS was less than NIM, 9 basis points down quarter-over-quarter at 1.62% versus 1.71% in Q4. The continued rise in repo rates and higher average balances impacted our total cost of funds for the quarter, rising by 23 basis points to 234 basis points in Q1, and our average repo rate for the quarter was 462 basis points compared to 372 basis points in the prior quarter. However, as previously mentioned, swaps positively impacted cost of funds during the quarter by approximately 58 basis points. Now turning to details on financing. Funding markets remain a bright spot amongst all the volatility in the financial markets with funding for our agency and nonagency security portfolios remaining resilient and ample. Consistent with most of 2022, liquidity is concentrated in shorter-term markets after Fed meeting dates. In saying that, a core tenet of our funding philosophy is diversification, both counterparty and term. And as such, we have sought to extend approximately 10% of our agency repo books. In this vein, during Q1, we opportunistically entered into 6- and 12-month floating rate trades at attractive rates. As a result of this positioning, our Q1 reported weighted average repo days were 59 days, up from 27 days in Q4. Since the beginning of the year, we increased our dedicated financing for our credit businesses, upsizing an existing resi credit facility by $200 million and adding $500 million in new warehouse facilities for resi credit and MSR combined. Our deliberate approach to diversifying financing for our credit businesses has resulted in a combined $3 billion of capacity with leverage levels substantially unchanged from Q4 and substantial unused capacity for both resi credit and MSR of over $2 billion. Our securitization platform continues to be a core part of our resi credit strategy. As of the end of Q1, 86% of our GAAP consolidated whole loan portfolio was funded through securitization at a weighted average cost of funds of 3.78%, approximately 215 basis points below the non-QM balance sheet cost of funds for the quarter. In addition to the below-market financing rate of our securitized debt, 96% of the debt is locked in at a fixed rate. Our OpEx to equity ratio for the quarter was unchanged from full year 2022 at 1.4% as we've realized most of the cost savings from our internalization and divestiture of MML and ACREG businesses. Operating expenses may rise modestly as we continue to invest in resources for growth in our resi credit and MSR platforms. Our liquidity profile remains robust with unencumbered assets of $5.7 billion, including cash and unencumbered agencies of $3.8 billion for the quarter. The approximately $600 million decrease in unencumbered assets primarily came from the pledging of assets to our new MSR facility in Q1, which remains undrawn and slightly higher leverage of agencies and whole loan positions at quarter end. Now that concludes our prepared remarks, and we will now open the line for questions. Thank you, operator.

[Operator Instructions]. Our first question will come from Bose George with KBW.

Actually, can I get an update on book value quarter-to-date?

Sure, Bose. So as of weeks in, we are off roughly 1%. The last couple of days have been a little bit choppy, nothing to write home about, and there's still long ways left in the quarter.

Great. And then just in terms of that and your outperformance versus the market and agencies in the first quarter as well, is it largely attributable to the positioning where the lower coupons are not as much a part of your portfolio?

Look, Bose, there's a lot of factors. We kept things very steady in the first quarter. Most importantly, I think we have the right capital allocation to keep us nimble. Each of the 3 businesses generated a positive economic return, but the fact of the matter is that diversification enabled us to navigate the market much better. We gravitated up in coupon, which helped. We didn't get whipsawed in the January rally and Feb sell-off because of the fact that agency is 2/3 of the portfolio, and it's much easier to manage rate risk when it's a smaller portion of your capital allocation. And then into March, we had the right positioning. When the bank crisis evolved, we had a steepener on and we were along the market, and we ultimately reduce that when the front end got very low, well inside of 4% on a 2-year note. And so we ended the quarter in what we think to be a very conservative position with leverage roughly unchanged, a very moderate amount of duration and responsible level of leverage and capital allocation. And that's effectively what helped us navigate the quarter.

Okay. Absolutely good job on the book value. And then actually, just on spreads. So you noted that you thought that spread tightening is not that likely. So just curious what your thoughts are on just longer-term spreads, like do you think -- where you think things could kind of settle out?

Sure. The agency market is priced appropriately for the current environment, Bose. The fact of the matter is it is difficult for agency to tighten considerably when banks aren't involved. So we are relying on money managers. And we anticipate that spreads will remain range bound. But the fact of the matter is they are on a longer-term basis, to your point, very inexpensive. And we do like them. But over the short term, we could see localized dislocations given the volatility in the market, and that may occur, and we're perfectly prepared for it. But generally speaking, we like agency, we're cautious on volatility. And over the long term, we think they're great assets.

Our next question will come from Trevor Cranston with JMP Securities.

You guys talked about the failed bank portfolio sales coming and the changing outlook for bank demand in the agency market. I was curious if you've seen or if you can say if you've seen any material amount of sales of other assets, non-agency assets or whole loans out of banks or if you expect to see that over the coming months and how do you think that could impact the non-agency market?

Sure, Trevor. Well, obviously, this week, the market is talking about First Republic Bank, which does hold roughly $100 billion in residential loans. And that potentially could hang in the balance as well as other residential credit assets. When we look at that particular portfolio, those are very high-quality performing loans. And there is value to the relationship. So we do think that there will be ultimately a home for those loans should they be sold. Mike can expand on this, but over the intermediate term, we do think we're a very good fit for this type of asset, particularly that portfolio given over 50% of it is IO and should go through the securitization channel. Our brand and our shelf is obviously quite strong. We have the ability to take the risk retention on the IO. And we do have an appetite for subordinate securities of high-quality collateral. And so we'll see how things play out. But ultimately, this will be handled responsibly, we believe. And Mike, feel free to expand on that.

Yes, I think we would just add that the GSEs have set precedence in terms of having large loan sales in the context of $2 billion to $5 billion per each auction. And we think that to the extent that, that portfolio came out in that size, it could be digested pretty easily through the market. In terms of just the banks stepping away from lending and tightening underwriting standards, we have not really seen that in terms of leading to supply on prime jumbo. We still see bank rates on prime jumbo, 5.5%, 5.75%, where we think that the cost to securitize new origination loans probably need to be in that 7% area north of 7%. So volume at this point from new origination prime jumbo is not going to the secondary market and to securitizers.

Got it. Okay. That's helpful. And you mentioned that you had a curve steepener on, which helped with your book value performance in March. Can you talk in general kind of your thoughts around the rate outlook and how you think the shape of the curve kind of plays out over the near term?

Yes. So first of all, with respect to the rate outlook, our view is very conservative with respect to rate exposure. I think if you look at the first quarter, we saw 3 very different markets. In January, we saw a rally driven by disinflationary sentiment ultimately leading to cuts, which was very good for risk assets and particularly Agency MBS. Then all of a sudden, in February, you get a pickup in economic data, stronger inflation data and a meaningful sell-off and a flattening bias on the curve, which obviously was not good for agency. And then March, you end up in a crisis scenario where it was completely flight to quality and a meaningful steepener, which, to your point, we were prepared for. And we ultimately flattened out our curve exposure. And currently, right now, we're running at about half a year, inside of a half a year of duration and we're relatively agnostic on the curve, and I'll tell you why momentarily. But the fact of the matter is, in terms of the outlook, we don't think any of those 3 scenarios are going to repeat themselves. We'd love to see January occur again, but we don't think that's the case. We think that ultimately, you will have a steady progression of weaker economic data and a slowdown in inflation, and that will leave the Fed ultimately to be more accommodative. We do expect the Fed to hike next week, and we think that will be bad. We're not as optimistic on cuts, three cuts this year as the market is pricing in. And so as a consequence, we don't have the bet of the steepener on any longer. And the fact of the matter is it's a very expensive trade to have on. The curve is already priced to steepen roughly 85 basis points over the next year. And so if you do have that bet on and it doesn't steepen by that amount, you lose money. And so we're respectful of where the market is pricing in terms of cuts, but it's not something we're willing to go all in on and we're staying relatively agnostic with respect to the curve and very conservative on the duration front because the fact of the matter is we get enough spread in our assets to where we don't need to make meaningful bets right here on rates. We want to keep enough duration. Should there be a flight to quality, we have some protection. But again, if the inflation data doesn't calm down, and we do get a sell-off like we're seeing a little bit of this morning, we want to be protected from that standpoint as well. Does that help?

Yes, very helpful.

Our next question will come from Doug Harter with Credit Suisse.

Can you talk about how you're balancing kind of the longer-term goal of 50-ish percent equity allocation to credit and MSR versus higher relative returns you see in Agency today?

Yes, that's exactly it. Like the relative value equation does modestly favor agency. The fact of the matter is, Doug, is that if we wanted to add both more MSR and more resi, we could toggle pricing very modestly, we do that, but we want to play conservative with respect to credit, given the risk of an economic downturn and how well agencies should do under that environment, and we're playing it relatively conservative. We want to maintain very tight lending standards on our resi corresponding channel and get the quality assets that we've spoken about. And then on MSR -- we do expect this supply of MSR secondary market MSR to continue throughout 2023. So we do expect to episodically grow that portfolio, but we're going to be responsible about it, and there has been a lot of competition when it comes to packages that have traded in the market, and we're going to pick our spots. But ultimately, the objective is to get to 50% of our capital allocated to both resi and MSR, and we will get there, but we're going to be quite patient. And right now, the relative value equation does favor agency, which is why we're overweight.

And then can you just talk about to the extent that it's either on loans or MSR, if there's kind of larger attractive opportunities that come about the ability to kind of add leverage to the portfolio to take advantage of that versus kind of raising capital, kind of how you would weigh those sources of liquidity to fund any large acquisitions if they come along.

Sure. And as we talked about, we do have considerable warehouse capacity that is unused. For example, in MSR, we have virtually no leverage on that portfolio. And when we look at the MSR we own and what's available in the market and how deep out of the money those loans are, it is a somewhat benign asset relative to current coupon MSR. So for example, if you do have a turn of leverage on 297 gross WAC MSR like ours, it should exhibit less price volatility for rate moves than current coupon MSR that's unlevered. So we feel like we certainly have the ability to lever and should the opportunity for even larger trade occur, we could be perfectly ready for it, and the warehouse lines are available. And then on the resi side, we talked extensively about our warehouse capacity and our unused capacity, and we can do the same on that front as well. But the fact of the matter is the securitization market in resi is perfectly liquid. And so it's kind of been -- and as you go, we buy loans, we keep meaningful stock in the portfolio, and we securitize when the opportunity is there, as we've obviously done 4x already this year. But we could take a meaningful size and warehouse those loans as well should the opportunity arise. Another point, Doug, we're underlevered relatively on resi as well. I think if you look at our overall leverage at just over 6 turns, the fact of the matter is there's virtually no leverage in MSR and very little leverage in resi. So there is capacity.

Our next question will come from Vilas Abraham with UBS.

Can you expand a little bit on your hedging strategy? Specifically, how are you thinking about your swap position versus your treasury futures position evolving from here? I mean it sounded like you may be trying to wind down those treasury hedges.

Sure. And not entirely wind it down. In the first quarter, we did convert a lot of hedges from treasuries into futures, and that was predicated on what we consider to be very tight spreads out the curve. And in the negative mid-30s thereabouts on 10-year swaps, for example, which was a good trade and it worked well right up until the banking episode and then it came back a little bit. It's still in the money. But the fact of the matter is the conversion is a function of a better fit for our financing given its SOFR as well as what we think to be relatively tight spreads out the curve on swaps compared to treasury futures. And we still hold 16%, 17% of our hedges in futures. It is -- when we trade TBAs and do basis trades, it's oftentimes versus future. So we're always going to maintain futures position, but for our longer-term cash flows and our pools, swaps tend to be a better fit.

Okay. That makes sense. And then just maybe shifting gears, I was curious, could you talk about the behavior of your funding counterparties through the quarter? I mean, it sounds like it was business as usual. But was there any anxiety at any point given some of the volatility.

Vilas, it's Serena. We would say no. Like I said in my script, the funding markets have been and have continued to be a port in the storm, for want of a better word, they are robust and fulsome and we've had no issues with being able to roll repo. We've actually, like I said, also I have been able to opportunistically get term on some trades where it makes sense for us. And I would say also, even with haircuts and things like that, we have not seen any meaningful increase at all in haircuts even through the volatility. We did see repo spreads modestly widen through the end of the first quarter. But post quarter end, those spreads have actually tightened and I would say that repo spreads are consistent with historical spreads at this point in time.

One thing I'll just add, Vilas, is that even in credit, we didn't see a disruption in March. Securitization markets kind of went on hold, but the financing through short-term warehouse or otherwise was in repo for securities was perfectly liquid and ample as well.

Also, as illustrated right there by the fact that we've added capacity during the quarter and post quarter end for our credit portfolio. So I think that is also illustrative of the access and the banks' appetite for warehouse and repo.

Our next question will come from Richard Shane with JPMorgan.

Thanks everybody for taking my question this morning and I apologize if some of this was covered, we're bouncing around between calls. I'd just like to talk a little bit about supply and demand in the space. And in particular, with production capacity coming out of the space throughout -- on the origination site throughout the year, how you think that impacts pricing and then supply from some of the [indiscernible] sellers as well.

So you're talking about production at the origination level coming out?

Yes, exactly. Does that actually have any impact for you guys in terms of pricing? Because presumably, what will happen is you will start to see wider origination spreads, better margins there. I'm wondering how that impacts your securities?

On the agency side, correct?

Yes, exactly. Yes...

Yes. So look, the primary and secondary spread is relatively wide given the level of rates, around 125, 130 basis points, which is elevated. Certainly, you would expect with limited origination, it would have been tighter, there would have been more competition, but there's a lot of volatility in the market and other factors, which have kept it wide. There's plenty of capacity in the origination industry. We're well above in terms of employment 2018, '19 levels. I think it's around 350,000 still employed in the market. So should rates rally, you're going to see those folks go to work, and it's going to impact most recently issued higher coupon MBS, which is why we're certainly cautious on, for example, 5.5s and 6s because it won't take much of a rally to get those borrowers refinanced, and we're paying for protection in current production coupon bonds and it's well worth it. So we'll see. But generally speaking, production, organic growth of the agency market is expected to be around $200 billion this year, which is perfectly manageable. The majority of the supply to the second part of your question, first coming from the Fed, another couple of hundred billion or thereabouts. But the banking sector, we have $100 billion between SVB and Signature. And as I said in my prepared remarks, we expected net demand to come from banks later in the year to the tune of around $100 billion, and now we have net supply coming. As we look at other banks in the regional banking level, for example. We don't expect a lot of selling, but we certainly expect runoff without reinvestment and very little buying. So you go from expecting $100 billion in net demand from the banking sector to -- on the headline with SVB and Signature $100 billion in supply that's imminent And then that runoff from the bank sector could be between $150 billion and $200 billion on the year that would have been reinvested and we really don't expect it to. So it's net about a $300 billion decline plus less the $100 billion we thought they'd buy. So it changes the dynamics.

Got it. Okay. That's very helpful.

[Operator Instructions]. Our next question will come from Jason Stewart with Jones Trading.

David, I would like to just follow up on Rick's question in where you think the most opportunistic investments are if it includes credit? Or where in the capital structure you'd like to be?

Sure. like we can talk about both credit and then agency, but let's actually start with agency and Srini will talk a little bit about what we're thinking in terms of agency and investments.

In the agency space, I mean, for a government-guaranteed asset that finances at SOFR spreads are pretty wide somewhere in the cash flow spreads to SOFR on the $150 million to $180 million range. And we like the belly of the coupon, which gives us some protection to immediate rallying rates. We are willing to pay up for spec pools, higher up the coupon stack. And if you look at where rates are -- where spreads are right now, you are with 8x leverage, even if you assume at the low end of the range, you easily get to your mid-15 yield bogey. So agencies look pretty attractive right now. The problem is the last 10 years have been dominated by fed and banks and they are somewhat out of the market right now. But what also happened over the last 10 years is a lot of private money kind of did not flow into the agency MBS sector or less the sector, and we fully expect that with these attractive spread levels, some of that private money will come back to the sector, but that takes time. It takes its organic growth, it takes some time. So over time, we see that private money coming in, which will help the supply-demand imbalance that we are seeing right now.

And on the credit side, we would say that it's probably a continuation of last quarter. We've allocated to credit risk transfer. We think that there is support of both positive short-term and long-term technicals. CRT M1b, which is the BBB bond. They're low mid-300s, they're 250 basis points of NIM, given our cost of financing. The M2, which is below IG, that's low mid-500s. So that's 400 basis points of NIM. That's a low mid-teens ROE on 1 turn of leverage. We've seen the GSEs be reactive to market conditions, potentially pulling deals just given where spreads are. So we do think that, that is limited in terms of new originations. There's been $15 billion of tenders, 2 tenders already announced this year. So we feel pretty good in terms of our portfolio there and continuing to allocate and then also a continuation of the correspondent channel and buying loans through OBX. So whole loans right now, non-QM home loans, the 102 rates, probably 8% to 8.25%. We'll call it a 7.25% to 7.50 % unlevered yield. And we think in securitization, you're achieving mid-teens ROEs on that asset class.

Yes, this is kind of -- on the MSR side, I mean -- our existing portfolio, we can gross that up and add more given the state of the mortgage industry. As you highlighted about the primary and secondary spreads and origination, there's so much of this available. We're seeing the volumes of several hundred billions a quarter still trading. And the characteristics of the cash flows are unprecedented for the mortgage servicing rights industry to be able to buy contractual cash flows 250, 300 basis points out of the money with double-digit yields is an unprecedented opportunity that, as Dave mentioned, we'll continue to lever into.

Okay. Two final questions. Where do you think the MSR multiples end up at, number one? And then two, what do you think the best capital opportunity is on the investment side? Is it on the loan side or in [indiscernible] side ?

Well, on the MSR multiples. I mean, it really is a discounted cash flow approach. So it is certainly dependent on interest rates. So for the deep out of the money where we've been focusing our portfolio, it's a very simple analysis because the cash flows have so much certainty. And as prepayment speeds have slowed down, they've improved in quantity. The reason it's been such a great opportunity is because the required selling by the mortgage industry has not allowed those multiples to rise with their theoretical values that there would ordinarily occur. So we're happy to see those multiples not go higher because we're continuing to allocate capital. So -- and we don't expect they will go much higher. And we're certainly happy about that given our capital allocation and our long-term approach to the asset class.

And Jason, in terms of credit, whether loans versus securities, we have the ability to flex into both. I would say our preferred approach remains purchasing loans. We control the product, we control the strategy, our partners. We control pricing where on third-party securitizations you obviously don't have that level of control. So going into a little bit of a more uncertain economic environment, we certainly want to have that control and dictate all aspects of the strategy.

That makes sense.

This concludes our question-and-answer session. I would like to turn the conference back over to David Finkelstein for any closing remarks.

Thanks, Anthony, and thank you, everybody, for joining us today. Good luck, and we'll talk to you next quarter.