Katie Wisecarver – Investor Relations Malon Wilkus – Chairman and Chief Executive Officer Samuel A. Flax – Executive Vice President and Secretary John R. Erickson – Chief Financial Officer and Executive Vice President Gary D. Kain – President and Chief Investment Officer Christopher J. Kuehl – Senior Vice President, Mortgage Investments Peter J.

Federico – Senior Vice President and Chief Risk Officer Bernie Bell – Vice President and Controller..

Steve Delaney – JMP Securities LLC Douglas M. Harter – Credit Suisse Securities LLC Arren Cyganovich – Evercore Partners Joel J. Houck – Wells Fargo Securities LLC Richard Shane – JPMorgan Eric Beardsley – Goldman Sachs.

Good morning and welcome to the American Capital Agency’s Third Quarter 2014 Shareholder Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (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, Paul, and thank you all for joining the American Capital Agency’s third quarter 2014 earnings call. Before we begin, I would 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 the Risk Factors section of AGNC’s periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC’s website at www.sec.gov.

We disclaim any obligation to update our forward-looking statements unless required by law. An archive of this presentation will be available on our website, and the telephone recording can be accessed through November 12 by dialing 877-344-7529 or 412-317-0088 and the conference ID number is 10054108.

To view the slide presentation turn to our website, agnc.com and click on the Q3 2014 Earnings Presentation link in the upper right corner. Select the webcast option for both slides and audio or click on the link in the Conference Call section to view the streaming slide presentation during the call.

Participants on the call include Malon Wilkus, Chair and Chief Executive Officer; Sam Flax, Director, Executive Vice President and Secretary; John Erickson, Director, Chief Financial Officer and Executive Vice President; Gary Kain, President and Chief Investment Officer; Chris Kuehl, Senior Vice President, Mortgage Investments; Peter Federico, Senior Vice President and Chief Risk Officer; and Bernie Bell, Vice President and Controller.

With that I’ll turn the call over to Gary Kain..

Thanks, Katie, and I want to thank you all for your interest in AGNC. Before reviewing our third quarter highlights, I want to briefly discuss some of the recent changes we witnessed with respect to the global economic landscape and to interest rates.

At the beginning of the year the 10-year treasury was at 3%, and there was a clear consensus that rates were only headed higher and global economic growth would continue to improve.

As we sit here today however, the opposite has clearly occurred, the 10-yearhas rallied about 75 basis points and the yield on the 30-year treasury has declined by almost 100 basis points during 2014. At the same time, the global economic growth picture has slowed and inflation expectations both abroad and here in the states have fallen.

This was clearly not what market participants were expecting when we started the year.

Against this backdrop of falling interest rates and a flattening of the yield curve, agency mortgages have performed surprisingly well, in fact this strong performance was in sharp contrast to the consensus view at the beginning of the year, which is that spreads would widen as the Fed reduce their mortgage purchases.

QE3 is essentially done at this point and the mortgage market remains well supported with many investors still significantly under invested in the product. The key take away from all of this is that investors should always question the consensus and the conventional wisdom.

As a manager of a levered MBS portfolio, environments like we serve is an important reminder that we have to be prepared for a wide range of possible scenarios and not obsess about one particular outcome.

Moreover, they reinforce the value of an active portfolio management philosophy that stresses the need to reevaluate and adjust our assets and hedges in light of an ever changing interest rate and mortgage market landscape.

So what does this new environment mean for AGNC? I would describe the current environment as being well suited to our asset selection and hedging strategies and that the risk profile in today’s market is more balanced. At a high level, the trade-offs between prepayment risk and extension risks are now more evenly weighted.

The same can be said for expectations around interest rates as the positive momentum in the U.S. has to be weighed versus significant headwinds aboard a stronger dollar and considerably more benign inflation expectations. I generally prefer environments like these, because relative value opportunities tend to be more frequent.

For example, prepayment expertise is obviously more valuable today than it has been recently. This is true with respect to evaluating the sectors where market pricing creates opportunities and also knowing what sectors to avoid. As such this environment has a potential to be more like 2010 and 2011 than what we have seen over the past couple of years.

With that as the introduction, let me quickly touch on a few highlights on Slide 4. In the third quarter MBS spreads gave back a small percentage of the out performance they enjoyed in Q1 and Q2. As such book value was down 2.7% and our economic earnings were essentially flat for the quarter and still around 15% year-to-date.

Comprehensive income totaled a loss of $0.07 per share comprised of $0.54 of net income and a loss of $0.61 in OCI.

Net spread income inclusively of dollar roll totaled $0.85 per share as we discussed last quarter dollar roll specialness continues to supplement our returns, but even if this funding advantage disappeared our total net spread income would still exceed our $0.66 quarterly dividend run rate.

I do want to reiterate one thing that we mentioned at our Investor Day earlier this month which is that we currently expect all of our 2014 dividends to be characterized as ordinary income while our dividends will likely exceed our tax flow income they will not exceed our tax flow earnings and profit and therefore will not include any return of capital for shareholders.

Turning to Slide 5, our portfolio decreased slightly to just under $70 billion during the quarter. Our at risk leverage was down slightly to 6.7 times at the end of the quarter. With that let me turn the call over to Chris, to discuss how our mortgage portfolio is currently positioned..

Thanks Gary. Turning to Slide 6, I’ll start with the brief review of what happened in the markets during the third quarter and given extreme move in rates in early October I’ll touch on the fourth quarter to-date as well.

As you can see in the top two panels, both treasury and swap rate curves continued to flatten during the third quarter with five-year swap rates selling off 23 basis points and 10-year swap rates essentially unchanged as of September 30.

Mortgages generally underperformed hedges, but against the backdrop of a strong performance in the second quarter the move was relatively small. So far into the fourth quarter, rates have rallied materially with five-year and 10-year swap rates lower by approximately 20 basis points.

Mortgages initially lag the move lower in rates, but quickly recovered given the combination of manageable supply, Fed reinvestment, demand from a range of investors and no sustainable secondary selling. Let’s turn to Slide 7 to review our investment portfolio composition.

As Gary mentioned at risk leverage was down from 6.9 at the start of the quarter to 6.7 as of September 30 given a slight decrease in our investment portfolio to $69.5 billion.

During the quarter we continued to reduce our 15-year MBS position given the combination of a flatter yield curve, limited extension risk in our aggregate portfolio and are overall comfort with interest rate and basis risk exposure of 30-year MBS.

As of September 30, our 15-year position represented 30% of our total portfolio down from 38% at the start of the quarter and 51% at the beginning of the year. Our 30-year MBS positioned increased during the quarter by approximately $4.5 billion.

In the tables at the bottom of Slide 7, we added a column showing the percentage of our on balance sheet pools that are backed by loans with lower loan balances and loans that were originated through the HARP program. As you can see this represents more than 70% of our on-balance sheet holdings.

Given the sharp move lower in rates since the end of the third quarter, we do expect the prepayments speeds will pickup on certain segments of the mortgage market.

However, it’s important to recognize that higher overall origination cost and borrower burnouts will likely limit the extents of the Refi response relative to the response experienced at similar rate levels in prior years.

From a valuation perspective, our fundamental difference today an compared with 2012, and early 2013 is that the quality of tradable flow in most coupons is considerably better given the Fed ownership of a significant portion of the worse to deliver bonds.

In other words prepayment differences on TBA deliverable bonds versus call protected pools will be smaller even in a move to lower interest rates. The corollary to this is that we expect dollar rolls to also hold up better into lower rates than in 2012 and 2013 given that investor expectations of carry erosion will be less severe.

With respect to our TBA position in today’s rate environment, we are not concerned about prepayments speeds on 30-years 3s, 3.5s, 15-year 2.5s and 3s. Increases in prepayments speeds will likely be concentrated in coupons with a significant incentive to refinance such as 15-year 3.5s and 30-year 4.5s.

TBA 30-year 4s do have some exposure and move to lower interest rates. However, it is critical to maintain a balance between current income and performance in both raising and falling rate environments.

As we’ve discussed in the past, we manage our portfolio to perform across a range of potential environments, and while the moving rates specify into the fourth quarter was in our best case, we are well positioned for it. With that I’ll turn the call over to Peter to discuss funding and risk management..

Thanks Chris. I’ll start with our funding activity on Slide 8. Our financing position continues to be very strong with good access to longer term funding and significant excess capacity. In fact our total Repo funding capacity at quarter end was about double our outstanding Repo position.

The significant excess capacity gives us the flexibility to take delivery of open TBA position or grow our portfolio opportunistically. On the next slide, we provide a summary of our hedge positions. At quarter end our hedge portfolio totaled just over $48 billion and covered 76% of our debt in TBA position.

Even the sell off in shorter term swap rates during the quarter, the market value of our swap portfolio increased $94 million. The fair value of our treasury hedges on the other hand fell by $52 million given the longer maturity of these hedges and the flattening of the yield curve that occurred during the quarter.

When hedging the market value of agency MBS it is imperative to have hedges across the yield curve. To this point, given the composition of our portfolio the market value of our assets is more sensitive to longer term interest rates than shorter term interest rates.

Turning to Slide 10, we provided summary of our quarter end duration gap as well as what our duration gap would be after various interest rate shocks both up and down. At quarter end, our current duration gap was long one-year unchanged from the prior quarter.

In addition, we also provide an estimate of how our duration gap changes in response to various interest rate shocks and assuming no rebalancing actions. We provide this measure of duration risk to help investors better understand our exposure to both prepayment risk and extension risk.

As shown in the table if interest rates drop by 100 basis points, our duration gap will naturally shrink by almost two years, leaving us with the duration gap of negative 0.9 –years. Conversely if interest rates increased by 100 basis points our duration gap will naturally extend by one year, leaving us with the duration gap of two years long.

As you can see the movement in our duration gap in the down rate scenario is about double the movement in our duration gap in the up rate scenario. Our decision to operate with a positive duration gap in the current environment is driven in part by the fact that our assets face more contraction risk than extension risk.

Another important factor in our decision to operate with the positive duration gap is our assessment of the correlation between interest rates and mortgage spreads. In the current environment, we expect mortgage spreads to widen as interest rates fall and tighten as interest rates rise.

This correlation is opposite to what we experienced in 2013, if mortgage spreads do indeed move in this way, our aggregate exposure to rising rates inclusive of both interest risk and spread risk will be less than what is implied by our duration gap or NAV sensitivity tables. With that I’ll turn the call back over to Gary..

Thanks Peter. As a remainder and as we discussed at our Investor Day on October 1, AGNC is now paying a monthly dividend instead of a quarterly one. We believe this make sense for a couple of reasons. First of all, our assets pay interest and principal monthly, so the income is generated on a monthly basis.

Secondly, we typically just invest this cash in for the quarter in short-term funds which pay very little interest, because it is not prudent to leverage that cash when you know you have to pay it out in two more months. In other words, we believe our investor should get the money sooner and be in a position to invest it or use it as they please.

The first monthly dividend of $0.22 was declared on October 16, and will be payable on November 7. In addition, we will be disclosing estimates of our month end book values beginning in mid-November, which we’ll relate to our October 31 NAV.

The monthly dividends and NAV disclosers are designed to further enhance our transparency and improve the value proposition for our shareholders. With that let me stop and ask the operator to open up the lines for questions..

We will now begin the question-and-answer session (Operator Instructions) And our first question comes from Steve Delaney with JMP Securities. Please go ahead..

Thank you Gary, before I ask my question I just want to congratulate you and the team on an excellent Analyst Day October 1, I hope you’ll do it again next year. Obviously rolls continue to be very important and I wondered if you could talk a little bit about how these rolls – this is very simple question Gary.

How rolls become more or less special given an absolute move in rates. I guess what’s running through my mind is that if rates move higher and prepay risk is reduced then maybe the generic have less risk rather than the spec pools.

Is it too simplistic to think about it that way and I guess the conclusion I’m drawing is if we are down 25 basis points to 30 basis points from September rates to the current. Then I’m sitting here with the assumption that rolls are probably a little less special today than they were in September. Thanks..

Steve, look first of thank you very much for the comments on the Investor Day, we obviously took that very seriously and we do plan to do it again in the future.

With respect to the dollar roll question and it’s a very good question, but I want to breakout two things, one is what you mentioned is the specialness and the other piece is the absolute dollar roll level.

And so kind of implied by your question the absolute dollar roll level typically would decline as prepayment estimates for an underlying coupon pickup.

So if I used 30-year 4% as an example if the kind of prepayment estimate for 30-year 4s goes from 8 CPR to 15 CPR and those are just hypothetical numbers, then the carry on, an on balance sheet positioned right, if you just put that on Repo would drop, because you have a faster prepayment speed.

In theory, the dollar roll level should also decline to adjust to kind of a faster expectations on the underlying pools.

However that often is not the case in that what can happen is as those changes are happening if things like the availability of float in the underlying coupon changes or if there are short positions that need to roll those positions then there is no kind of specific need for that theoretical adjustment to take place.

So what I would say is you are absolutely right in assuming that absolute dollar roll levels will have a downward tendency if prepayment estimates in higher coupons where prepayment estimates are picking up, but that doesn’t always or sometimes takes a while to factor through, but with respect to specialness right, which is sort of the incremental value at a new prepayment speed.

I think you should assume that’s much, much less correlated with interest rates and actually in kind of the first move down its very possible for the specialness to actually increase..

Okay that’s helpful. I appreciate it. And I guess the message there is we always have to watch the technical as well as the fundamentals in the marketplace.

Gary I don’t know if you are paying a lot attention to Mel Watt at the FHFA, I suspect you are, because the press kind of does that work for us, but I have been really surprised by the more aggressive posture that is being the regulators taking with respect to the GSEs.

At this point in terms of credit risk, 97% LTVs may be doing away with long level pricing adjustments et cetera, et cetera all driven towards affordability.

So this is a pie in the sky question, but given that Congress has really not passed any legislation with respect to the GSE, is there any scenario with the Fed backing away and as you concluded with taper and maybe eventually with reinvestment.

Is there any scenario under which you could see the regulator actually opening up the GSEs trading activity and allow them to once again play a more active role in the MBS market? And thanks for the time..

I appreciate the question, so first off I just want to mention that our take on Mel Watt’s comments and the move on the part of FHFA is just is maybe we’ll called it a little more balanced in terms of kind of conservatorship objectives and housing market objectives.

We expect the changes on that are implied in those announcements to be very much at the margin and not wholesale in nature and not really something that’s going to materially impact the mortgage market anytime soon. Now with respect to your comment and question around the GSE portfolios.

The shrinkage of the GSE portfolios is mandated by the preferred stock agreements and we see almost no chance that those would be adjusted. So while the GSEs guarantee business could adjust over time and will adjust over time.

We actually see the GSEs moving much more in both case, in both the portfolio case and on the credit risk retention side toward laying off risk to the market as a whole.

And I think one of the key things it’s not getting enough attention at the GSEs is the quantity of credit risk that they are starting to layoff and we discussed that at the Investor Day. So in terms of risk retention at the GSEs, we feel like they are still going in the other direction..

Got it. Thanks for the time Gary..

Thank you, Steve..

The next question comes from Douglas Harter with Credit Suisse. Please go ahead..

Thanks.

Can you talk about kind of how you view the range of the 10-year and sort of how you are going to position your duration gap sort of around those levels?.

Well, first I want to thank you for not having asked me that last quarter, so I could have new information before, no I’m just kidding before having to answer it.

Look we feel that one of the advantages of our portfolio and this is implied by the duration gap sensitivity that Peter reviewed earlier on the call and at the Investor Day is that even with 25 basis point, 30 basis point moves in either direction, our duration gap still remains relatively stable and still remains in kind of a range that we’re very comfortable operating in.

And so what I would say is our requirement or need to as they say in the mortgage market delta hedge is pretty low even though we’re at a somewhat sensitive kind of level of interest rates.

Now with respect to kind of just our views on interest rates in the near-term, I mean look we respect the market action, we respect the international kind of factors that are impacting kind of the global economy, but also global interest rates.

And it seems difficult to fight that in the short run and for that reason our mindset is that we are sort of in a newer rate range at this point. That rate range is probably 25 basis points to 30 basis points lower than kind of the 260ish area we were bouncing around in two or three months ago.

And again, those are big picture factors and forces and we certainly respect them. I don’t know Peter if you want to add anything..

Well, I’d just add when you look at sort of the way we set our duration gap this year, as Gary mentioned at the beginning of the year when rates were 3%, our duration gap was about a year and a half long and increases in rates from there would have only put us with the duration gap of around two-year.

So a very manageable position, when you look at in a down rate scenario given the way we set our duration gap, in the down rate scenario our duration gap gets close to zero if not negative when rates pass through around 2%.

So for example the other day when we had the significant rally intra day, our duration gap was probably negative at that point when rates hit their low. So we feel like our duration gap is well suited for the range that we are – the wide range of 10-year interest rates that we’re currently in..

Got it, thank you and can you talk about the volatility that you saw intra quarter of dollar roll spread?.

Hey, Doug thanks. Yes, so I mean roll implied financing rates were widened early in the third quarter, they did better towards the end of the third quarter.

Just to give you kind of a few points I mean 30-year 3.5 roll is currently trading around negative 50 basis points at 6 CPR, the 4 roll has cheapened up a little bit, but even at 8 CPR it’s around negative 30 basis points. So generally speaking rolls are still trading extremely well relative to on-balance sheet Repo financing..

Yes, so I mean just at a very high level for the year rolls richened a lot in the second quarter, early in the third quarter they weakened significantly, but from very rich levels. And really over the last month or two they’ve improved again from the lows we’ll say in July and early August. So again that’s the big picture trajectory..

Great, thank you..

The next question comes from Arren Cyganovich with Evercore. Please go ahead..

Thanks, my question is around the duration I guess you say prepayment risk exceed extension risk which you can clearly see in your duration table, but how that relates to the portfolio, if you look at the sensitivity stuff to book values you have later in the slide deck it shows still more risk to higher rate and book value.

Is the prepayment risk more on an earnings perspective for the portfolio, is that what you’re talking about there?.

I’ll start and either Chris or Peter may want to chime in, but the way you should of interrupt that comment is contraction risk in our duration, the duration of our assets or our portfolio is greater than the risk of extension in the portfolio, as such our duration gap extends only a year whereas it can contract two years for those that example a 100 basis point moves.

So contraction risk is bigger, we don’t want to give the wrong impression that the current environment creates prepayment challenges only for a couple of coupons which we have very small positions and so we are not worried about the current prepayment environment from the perspective of earnings or the impact on our positions.

But what we’re saying is that to the extent that we get a 25 basis point or 50 basis point move in either direction. The impact on our duration gap or the overall interest rate sensitivity as a portfolio will be bigger – that change will be bigger in a 50 basis point decline that it would be in a 50 basis point increase..

Yes, this is peter. Just to add to that when you look at the sensitivity tables that we put in the back of our presentation.

In my comments at the beginning part of our decision to operate with the positive duration gap is our belief that mortgage spreads will tighten in a sell off and widen in a rally, so in a sense we are using our duration gap to give us some incremental hedge protection against the mortgage basis widening against this in a sell off.

So if you look at our NAV sensitivity table in an up 100 basis points scenario where we estimate that our loss to portfolio value will be negative 12%. We don’t expect it to be that negative, because we expect mortgage spreads to tighten in that scenario. So really we expect some benefit from the table below..

And what is interesting is the contrast to that and the reason if you remember and we’re very explicit on calls in the middle of last year, the corollary last year was that when interest rates rose mortgage spreads widened and so those two factors sort of worked in the same direction and that’s why there was so much volatility and book values during the middle of last year.

And again given that we’re reasonably confident and what we’ve seen year-to-date and even quarter-to-date in this latest move is that mortgage spreads definitely seemed much better supported or tend to tighten when rates go up and tend to widen when rates go down.

And that provides in a sense much less interest rate sensitivity then what would be implied by the models alone..

That’s helpful.

Actually, if you just touch on that why, what drives that in this environment whenever you see spread tightening as rates rises or anything technical that’s driving that, could you help me better understand that?.

Yes, there is two – there are couple components to that, one is that reasonable first off there is the expectation around supply and origination, and the realities around origination. As interest rates – when interest rates were there around 250 on the 10-year or higher the amount of the new production.

The refinancing activity is very low, purchase activity has been subdued for a while now and in that kind of rate range mortgage origination activity is very low. At the same time when you are at higher rates yield oriented buyers and this include oversees investors and U.S. Depository Institutions are probably the two biggest.

The demand from these yield oriented buyers picks up. So the combination, you have a combination of both lower supply and more yield base buying and that drives kind of the tighter spreads in higher rate environment so to speak or when rates are headed higher.

And conversely the same thing is reversed at least temporarily the yield oriented buyers typically back away from the mortgage market if there has been a 20 basis point rally. And wait hopefully for higher yields before they sometimes adjust their boogies.

At the same time the refinancing activity picks up and so the supply picture in the mortgage market also increases, while some of that is temporary it’s enough to certainly impact spreads for some period of time. But those are the drivers of that directionality that we talked about..

Thanks. That was very helpful..

The next question comes from Joel Houck with Wells Fargo. Please go ahead..

Thank you.

Maybe just a standard topic, what is the more normal environment in terms of the relationship between spreads and rate, is that the tightening spread environment when we try there is that what we saw last year?.

It actually – this is the more normal environment. Generally speaking you know there is a bias for mortgage spread to widen some when rates are dropping and prepayment risk is increasing supply is picking up. On the other hand, I would say this is the current environment is certainly more those moves are larger than they would typically be.

The environment last year, is really consistent with when you are at very, very low levels of rates and mortgage durations are as short as they can be. Then you have this issue where extension risk and convexity issues tend to push things in the other direction.

So I mean there is no one – as we are talking about these things move around, but the more normal environments is one where mortgage spreads tend to be pushed a little wider as rates fall, but clearly there are times when that’s not the case..

All right that’s actually very helpful. Now does it also follow that in this environment with persist most of the time at the volatility of your book value would be less, just simply because you are getting offsets one way or other as oppose to or nothing like we saw last year..

Yes, absolutely I mean and this is why we have tried throughout the year and even when we to Peter’s point we were running a one and a half year duration gap at the end of 2013, what we’ve tried to stress and what we try to stress on the calls last year was given that both spread moves wider and interest rate increases were happening at the same time it forced us to be incredibly defensive.

We really weren’t wiling to operate with much of a duration gap, we has purchased a lot of option, we were forced – we had moved to 15 years, we had do a lot of things, because you couldn’t feel comfortable running a duration gap, when you knew not only would you loose on that duration gap if interest rates went up, but you would loose on spreads.

You fast forward that to today and to Peters point when you loose – if you loose some money when rates are going up due to the interest rate component or duration component, that’s an environment where spreads are – if that is an environment where spreads are actually tightening then you are actually making money on your spread exposure which then reduces materially at times the amount of money or the performance – improves the performance of your aggregate portfolio quite bit in a rising rate environment, conversely while you might initially think you are going to make a lot of money on a long duration position the spread widening impacts can offset that as well.

And so to your point, this is and this is something that we mentioned earlier on this call, Peter highlighted this, this is a much more comfortable environment for us, because of the fact that aggregate risk to our NAV is lower, because of this spread relationship and the environment we saw last year was something that forced us to be extremely defensive..

Yes, if I recall correctly, so I assume your best quarters when rates where raising presumably because you saw that spread tightening, but maybe just to switching gear here a little bit and I guess this is one maybe if you don’t want to answer that’s fine, but the conventional wisdom here this week obviously is the QE is going to end, how would you.

handicap given everything is going on globally. The likelihood that the Fed have to come in next year and restart QE. I don’t know if you want to put a probability percent on or just punt the whole thing with just the [indiscernible]..

Well, I would always prefer a punt but I won’t. Now the year, when we look at we absolutely expect the Fed 2 and QE3. I guess its tomorrow and you know we feel the market expects that it’s completely priced in.

And clearly the markets are the bond market is much more forward thinking than sometimes you know investors give a credit for and what I would say is you know that the end of QE3 didn’t create the dislocations you know look at 2014 that some people expected.

I would – what I would say is what we think is the more given the global weakness that we’re seeing given issues with exchanges rates and price of oil and so forth. We absolutely expect the inflation picture to be benign and inflation kind of globally but also in the U.S. to you know remain well below the Fed’s target.

And where we see that coming into play is less likely with respect to QE4. Okay but we’re not going to rule it out.

But we’ve put that as a relatively low probability, but I think what is growing in probability and what explains to the move in interest rates is that the Fed is potentially on hold for a lot longer than what the market have been pricing in. Instead of kind of a baseline assumption of, the first rate hike being in September of next year.

The probability that it’s materially later not three months, but lets say a year or two later has increased.

And I think that’s what you are seeing in the markets and that’s what we expect again we are not willing to operate and run our portfolio based on the assumption that the Fed will never raise interest rates and they might put another QE4 in place, but we also have to operate our portfolio understanding that there is a greater probability that the Fed is now going to be on hold for multiple years.

And the reasons is that there are very few periods in history or I don’t know if there is one where you’ve seen any kind of tightening kind of moves by a Central Bank when they are significantly missing on their inflation objective. So that’s kind of how we’re thinking about the world at this point if that helps..

Yes, thank you very much..

The next question comes from Rick Shane with JP Morgan. Please go ahead..

Hey, guys thanks my questions have been asked and answered..

Thanks Rick..

The next question comes from Eric Beardsley with Goldman Sachs. Please go ahead, its last question..

Hi, thank you. Just back on the topic of spread winding if you have lower rates and spread tightening when you have higher rates, how much does that color in your view how much duration rest you are willing to take..

Yes, hi, this is Peter. It’s a very significant component of our decision making with regard to our duration gap. Obviously, we always look at our duration gap in both directions and look at how much it will move it all depends on the level of rates.

And where you are in terms of the convexity profile of the mortgage market and obviously that convexity profile changes and if we are at a particular point where we face significance amounts of convexity risk then that too will color our decision, but the spread component factor is a very significant driver of how we think about our duration gap, because as Gary mentioned earlier what we don’t want to put ourselves in a position is where spreads and rates are moving against us.

We as an investor in mortgage securities face two key risk, interest rate risk and spread risk and spread risk and when we think they are going in the same direction, we will do everything we can to take our interest rate risk component down such that we’re left with the inherent risk of our business which is mortgage spread risk and when we think they are offsetting each other then we’ll manage our position accordingly.

So that is the really key driver..

Got it.

Now is there any risk that if we do have rates move up with significant volatility that you could have spread widening or you think that’s less likely?.

It could. And a lot will depend on the timing, right. So for example, if you have a very sharp move in interest rates and it’s indicative of something else that’s happening, you could have a sort of short-term widening in mortgages as investors try to understand what’s happening.

Or for example ,like in 2013 we had some periods in the middle of the year when it appeared like that other managers of other spread product were using mortgages as a hedge against widening of credit spreads and high yield spreads, because of the ability to short mortgages so they gave some protection. So you could have some short-term dislocations.

But I think the longer term trend in a rising rate environment is the point that Gary made earlier which is the fact that supply will come down significantly, investors are already underweighted and so the longer term fundamental I think will win out over time..

One thing I just want to add to that is that look to Peter’s point yes you can have a situation where mortgage spreads widen again in a rising rate environment, but even in that scenario I really want to contrast if rates went up quickly today versus what we saw in 2013, and there are some huge differences between the environment today and the environment back a year ago and I view it as very, very unlikely that we see a repeat.

First and most importantly, the origination volumes last year were to the tune of about $150 billion a month of mortgages that were being produced at the time versus something like $80 billion now and headed lower as you go into the winter, which tends – which those volumes, what happens when rates go up, borrowers lock the new rates, there’s a huge you know flush of originations as mortgage bankers who have only half hedged their pipeline sell all of these mortgages into the market.

At the same time durations were at their absolute lows and they extended significantly which kind of puts pressure on people to hedge, to deal with the larger duration. They are not in a position to add mortgages.

You throw in the fact that money managers were seeing significant redemptions and bank capital was changing and all of those things were occurring at exactly the same time. So what I would like to stress is even if we’re wrong, and the environment changes and mortgage spreads don’t tighten in a backup.

We do feel that a repeat of 2013 next to none of the conditions that were in place then are in place today..

Got it. That’s helpful thanks.

And then just lastly you touched on this earlier, but what is changing your outlook over the past couple of quarters that led away from the shift of 15-years?.

So part of the challenge with 15s given in the moves in rates year-to-date is that a lot of the realized volatility and expectations for volatility going forward are on the short to intermediate part of the curve, which partially offsets some of the benefits of a lower risk 15-year position.

And as I mentioned earlier, given our overall comfort level with the 30-year mortgage basis we thought that there was also relatively limited upside in certain 15-year sectors such as higher coupon, TBA like season 15s which were prepayment speeds are going to start to become an issue..

All right. Great, thank you..

We now thank….

I want to thank everyone for their interest in AGNC and look forward to talking to you again next quarter. .

The conference is now concluded. An archive of this presentation will be available on AGNC’s website and a telephone recording of this call can be accessed through November 12 by dialing 877-344-7529 using the conference ID 10054108. Thank you for joining today’s call. You may now disconnect..