Katie Wisecarver - Investor Relations Gary Kain - Chief Executive Officer Peter Federico - Executive Vice President and Chief Financial Officer Chris Kuehl - Executive Vice President Aaron Pas - Senior Vice President Bernice Bell - Senior Vice President and Chief Accounting officer.

Steve Delaney - JMP Securities Rick Shane - JPMorgan Doug Harter - Credit Suisse Bose George - KBW Dan Kelsch - UBS George Bahamondes - Deutsche Bank.

Good morning and welcome to the AGNC Investment Corp Second Quarter 2017 Shareholder Call. All participants will be in listen-only mode. [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, Phil and thank you all for joining AGNC Investment Corp second quarter 2017 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 forecast 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 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 August 10 by dialing 877-344-7529 or 412-317-0088, and the conference ID number is 10110075.

To view the slide presentation, turn to our website, agnc.com, and click on the Q2 2017 Earnings Presentation link in the lower 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 today’s call include Gary Kain, Chief Executive Officer; Peter Federico, Executive Vice President and Chief Financial Officer; Chris Kuehl, Executive Vice President; Aaron Pas, Senior Vice President; and Bernice Bell, Senior Vice President and Chief Accounting officer. With that, I will turn the call over to Gary Kain..

Thanks, Katie and thanks to all of you for your interest in AGNC. We were pleased with AGNC’s solid performance during the second quarter and continue to have confidence in the outlook for our business going forward.

During the second quarter, the key themes from Q1 remains in place with sustained strength in equity and credit centric fixed income products and very limited interest rate volatility.

As we noted on last quarter’s call, we believe the diminished probability of near-term fiscal stimulus, coupled with benign inflation and ongoing geopolitical concerns was likely to keep rates within a reasonable band.

The year-to-date decline in interest rates is consistent with this view and market participants today are clearly pricing in a lower probability of any meaningful increase in bond yields.

Agency MBS spreads were relatively stable during the quarter despite clear communication from the Fed that they plan to begin tapering their MBS and treasury purchases at some point in 2017.

The stability of MBS valuations in the face of relatively hawkish communication from the Fed is clear corroboration of our view that the MBS market had already largely priced in the reduced support from the Fed.

Against this backdrop, levered returns and agency MBS continue to look attractive as the funding picture remains supportive with agency repo spreads to LIBOR remaining on the low end of the post-crisis range. Additionally, given the relatively flat curve investment returns are considerably less dependent on a large duration gap.

With this in mind and given the year-to-date decline in interest rates and implied volatility, we chose to further reduce our aggregate interest rate exposure, largely through the purchase of swaptions. Peter will discuss this in greater detail in a few minutes.

With that as the introduction, let me turn to Slide 4 and quickly review our results for the quarter. Comprehensive income totaled $0.40 per share. Net spread income, which includes dollar roll income and excludes $0.04 per share of catch up amortization increased to $0.67 per share from $0.64 in the first quarter.

Tangible book value per share was essentially unchanged at $19.25 as of June 30. Economic return on tangible book was positive 2.5% for the second quarter. Turning to Slide 5, our at-risk leverage remains essentially unchanged at 8.1 times tangible book with our portfolio increasing to almost $64 billion as of June 30.

Additionally, we raised approximately $500 million in new common equity during the quarter. Importantly, this capital was accretive to tangible book, enhanced our scale and common stock liquidity and further improved our already industry leading operating cost structure.

Inclusive of the fee income for managing MTGE, AGNC’s all-in operating expenses are expected to be approximately 70 basis points of equity. For comparison, the 70 basis point figure is about one third of the average operating expense for the 5 other mortgage REITs with over $3 billion in equity.

Alternatively, on a gross asset basis, AGNC’s go-forward expense structure is expected to be less than 10 basis points, which is in line with low cost bond ETFs. It is important to note that these ETFs are passive, un-levered and completely un-hedged and they clearly do not have access to the broker dealer financing that AGNC enjoys.

At this point, I would like to turn the call over to Chris to discuss the market and our agency portfolio..

Thanks, Gary. As you can see on Slide 6, both interest rates and agency MBS spreads were relatively stable quarter-over-quarter, with 5 and 10-year swap rates ending the quarter lower by 11 and 12 basis points respectively.

Option adjusted spreads on agency MBS were slightly wider during the quarter despite continued tightening in residential credit, CMBS and investment grade corporate debt. Over the last three quarters, agency MBS have materially underperformed other fixed income sectors in anticipation of the Fed tapering reinvestments later this year.

For perspective, agency MBS option adjusted spreads have widened around 20 basis points, while investment grade corporates and CMBS have tightened 15 to 20 basis points. The underperformance of agency MBS versus residential credit is even more dramatic with spreads on CRT more than 100 basis points tighter over the same period of time.

As such, levered returns and other fixed income sectors are being squeezed, while spreads on agency MBS remain attractive and are supported by favorable fundamentals, including low interest rate volatility, which reduces the cost of hedging an MBS portfolio, a benign prepayment risk environment, which will likely remain so, unless we rally to new lows in rates in which case Fed tapering maybe pushed further out.

And finally, the funding backdrop for levered investors that agency MBS has improved materially over the last several years.

And so against this backdrop, while we do expect that the Fed will begin tapering investments later this year, the schedule as described following the June median provides for a well-controlled and gradual process that in our view makes it unlikely that spreads will widen materially. Let’s now turn to Slide 7.

Our investment portfolio increased to $63.8 billion as of June 30, while leverage was more or less unchanged consistent with the $500 million increase in equity during the quarter.

The capital raised during the second quarter was invested primarily in TBA MBS as the combination of a benign prepayment environment and favorable dollar roll financing continues to drive attractive risk-adjusted returns.

Moving to the chart on the top right of the page, you can see that prepayment speeds on the portfolio remain well contained given the composition of our holdings as well as the low percentage of borrowers facing a compelling incentive to refinance at today’s rate levels. I will now turn the call over to Peter to discuss funding and risk management..

Thanks Chris. I will start with our financing summary on Slide 8. The 22 basis point increase in our repo cost over the quarter reflects the Fed’s rate increase on June 14. This higher cost however was largely offset by a lower cost on our pay fixed swap portfolio.

As a result our aggregate cost of funds rose only marginally while our net interest margin actually increased. Here are the numbers for both of those measures.

Our aggregate cost of funds which includes the implied funding cost on our TBA position and the net interest expense on our pay fixed swap portfolio increased modestly during the quarter to 131 basis points, up from 126 basis points in the prior quarter.

This increase was driven by two factors; first, repo rates relative to LIBOR deteriorated somewhat during the quarter given the Fed’s rate increase and as dealer balance sheets were a little more constrained this quarter.

Second, as I will discuss shortly, we increase the size of our swap position during the quarter which resulted in slightly higher cost of funds.

Turning to our net interest margin, despite the Fed raising short-term rates 50 basis points so far this year, our net interest margin actually improved to 155 basis points in the second quarter, up from 151 basis points in the first quarter.

The stability in our cost of funds and net interest margin reflects the benefit of operating with very high hedge ratio in an environment when short-term rates are increasing. In fact since December 2016 the Fed has increased the Federal funds rate by a total of 100 basis points.

Over that same time period our aggregate cost of funds increased just 16 basis points, while our net interest margin improved 10 basis points. For your reference, we provide a history of these numbers on Slide 20 of the presentation. Turning to Slide 9, I will highlight a few changes to our hedge portfolio.

As Gary mentioned we have reduced our interest rate exposure during the second quarter by increasing the size of our pay fixed swap and swaption portfolios. In total these changes increased our overall hedge ratio to 98% of our funding liabilities, up from 90% in the prior quarter.

This high hedge ratio reduces our net asset value sensitivity to interest rate fluctuations and provide stability to our net interest margin. We increased the size of our swaption portfolio in the second quarter as the price of these hedges declined to levels experienced on only a few occasions over the last 20 years.

The price of these options and the low absolute level of interest rates made an ideal time to add more swaptions to our hedge mix as an insurance policy against an up-tick in volatility or an unexpected increase in interest rates.

While we don’t necessarily see these moves occurring in the near-term, the low cost of this additional production allows us to continue to generate very attractive returns despite meaningful reduction in our aggregate interest rate risk profile. The impact of these changes can be seen on Slide 10.

As shown in the center column of the table, we reduced our current duration gap to 0.4 years as of June 30 from 1.1 years at the end of the prior quarter. The column on the right side of the table shows our expected duration gap after an immediate 100 basis point increase in rates.

Given the swaptions that we added during the quarter our expected duration gap in this upgrade scenario is more muted at only 1.4 years.

So to summarize given our high hedge ratio and the changes we made to our hedge mix, our cost of funds has remained relatively stable and our need for significant rebalancing should interest rates increase is relatively low.

In fact it is quite possible that we would not need to do any duration rebalancing even in a scenario where interest rates increase by a full 100 basis points. And with that I will turn the call back over to Gary..

Thanks Peter. And at this point I would like to ask the operator to open up the lines to questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Steve Delaney with JMP Securities. Please go ahead..

Good morning everyone and congratulations on a strong quarter.

Gary it’s kind of hard to overlook the increasing contribution of dollar roll income, so $0.27, 40% of total earnings, help us understand the practical constraints there – obviously there is relative attractiveness and our roles and I think I heard Chris or Peter indicate that the – much of the $500 million was actually put into the dollar roll trade, so help me understand sort of your internal band of TBAs to settled MBS or to the total portfolio and as part of that, does the 40 Act exemption and the whole pool test, is that tied into your thinking as you choose between those two asset types? Thank you..

Thanks Steven and it’s a very good question.

The first thing I want to point out just with respect to dollar rolls and the contribution of to aggregate net spread income is that in some ways the way we reported over states the dollar roll contribution because all of the hedges of which some of them relate to the dollar roll position are attributed to the - on balance sheet assets whereas the dollar role income is really just the next – the net spread or income from the asset less the implied funding costs.

So that’s one thing you ought to keep in mind..

Got it..

The other thing to keep in mind is that dollar roll specialness has really been let’s say 15 basis points to 20 basis points over the last couple of quarters. It’s not outsized, but so there isn’t this great exposure on the part or the income front.

Two, a decrease there I mean that’s literally the floor that you can lose, because at some point if dollar roll levels were to get worse you are just going to take them on and add them you will take in assets and add them to the on balance sheet portfolio. Now, let me address your other point which was the size of the dollar roll position.

And what I would say is, we absolutely do – there are a number of considerations that go into how we size that position. I would not say that it’s at a max at this point, but I would say it’s on the higher end of the range in terms of the percentage of the total assets.

And it is less let’s say the whole pool to have certainly not in today’s environment. But we have to consider the need to reposition our assets over a range of different scenarios. One, where our interest rates fall 50 basis points to 100 basis points, where interest rates rise 50 basis points to 100 basis points.

And against that backdrop, if we have too large of a TBA position then it puts a lot of pressure on pool selection if you were to take that in over a relatively short period of time one of the factors being potentially in that scenario whole pools.

So the short answer is I think that the TBA position is on the higher end of the range we would look for on a percentage of the portfolio, it’s not a max. But and there is a range of things that factor into it and it’s really the ongoing position management across a range of scenarios that we are thinking about..

Great. I appreciate that color. Thanks Gary..

Thank you..

The next question comes from the line of Rick Shane with JPMorgan. Please go ahead..

Good morning guys. Thanks for taking my question. Hey, can we talk a little bit about the impacts, both in terms of swaps gains and losses and NIM flattening of the curve and when we think about this in terms of our own models where in the curve should we be focused in terms of any benchmarks..

Well, yes, this is Peter. Just in general in terms of our hedging activity our hedges are focused more from the 3 years to 10 years to 15 years part of the curve, certainly we think about the overall curve exposure from an all-in business perspective and often use our hedge portfolio as a hedge against a flattening of the yield curve.

Said another way, to create a hedge portfolio that will likely benefit somewhat in a flattening of a yield curve environment to offset some of the earnings impact.

But the other I think key point is that in general a curve flattening is not that significant to us from an overall business perspective, because we essentially hedge out our exposure across the yield curve and that’s evidenced not only by our flat duration gap, but just by the fact that our hedge ratio is so high and spread out across the curve.

So, in general, we don’t have very much exposure. Gary, you want to add to that..

No, I think that’s a good point. I would say that most – when you think about changes in the curve, flattening will have much less impact on book value than a steepening of the curve generally is what we have seen and what’s consistent with our modeling of the portfolio.

And as you have seen with a flattening yield curve, when you are relatively fully hedged, you don’t see the earnings impact that everyone kind of expects when you think about a portfolio that’s just short funded or whatever. So, I think those are the key considerations..

Got it.

And what about from a book value perspective?.

Again, just from a book value perspective, flattening generally is less impactful to book value than steepening. So, our hedges do tend to be a little frontloaded and so Gary, just in either direction whether it’s a bull flattener or a bear flattener, flatteners tend to be less of a factor..

Great. Thanks, Gary..

And your last question comes from the line of Doug Harter with Credit Suisse. Please go ahead..

Thanks.

I was hoping you could talk about the relative cost of adding the swaptions in this environment?.

Yes, sure, Doug. This is Peter. Yes, when I mentioned it to be in my prepared remarks, it was that what we have really observed over the last several quarters and in particular in the second quarter is a fairly pronounced drop in the price of interest rate options in part because of the low volatility environment that we are in.

And as I mentioned really the price of these options have hit levels that we really have only seen on really probably two occasions over the last 20 years. So, if you think about it, we are buying options right now at low prices historically.

From a carry perspective, if you think about it, we are buying options 1, 2 and 3 years predominantly on 10-year swaps. If you thought about the cost of that premium amortized over the option period, it’s very similar to the cost of carry on a 10-year swap if you just did that trade out right.

So, there is not a lot of difference in the cost profile, but obviously the payoff profile is very different on the option.

If you put a 10-year swap on today, it might have the same cost, but obviously it has a very different exposure to interest rate increases and interest rate decreases whereas in the swaption, we obviously have a limited downside should rates fall. So, we like the idea of adding that optionality to the portfolio.

It’s not meaningfully more costly than putting on other hedges. In fact, historically, it’s at very attractive levels. We like the strike price of them. And it essentially gives us a lot of protection against big upright moves in rates.

And again, it’s a fairly low probability, but we thought it was prudent to add that sort of out of the money option protection to our portfolio given the level of prices..

What I would just add is that if you think about our business, we used to use a lot of swaptions kind of go and one of the things that helped us going into 2013 was the size of our swaption portfolio.

Over the course of the last 4 years, we really haven’t felt the need and we thought we were not – we didn’t think volatility or implied volatility was that fairly priced. So we have kind of let that portfolio shrank to the point where it hasn’t been that material.

And given the declines in volatility across the board, we have chosen to kind of build that portfolio backup some, but what I want to make sure – we want to make sure we point out is we still think we are in a low volatility environment.

We still think that’s going to help our earnings as we are going to have low convexity cost, but you should think of this as our general business is to be short volatility and that’s been a good position to be in. And maybe what we are doing right now is covering 20% of our short is in volatility and that’s a good way to think about it.

It’s not a bet that we think volatility is going to pickup, it’s a realization that it’s come down a lot and that our net business model 10 is really one where we are always short. And this is a time given pricing where we should be short less of it. It helps us with convexity management.

It also would help us to the extent that we wanted to increase leverage over time and helps again allow us to manage kind of shocks in that environment..

I guess on that last point about leverage sort of your commentary of spine in the market relatively attractive given the backdrop.

What are your thoughts about willingness to increase leverage or look to raise some other form of additional capital to continue to take advantage of the opportunity?.

I put the two separate. I mean capital raising and capital activities, we tend to look at from the perspective of we can adjust leverage in the agency mortgage market very quickly.

So, whether we – so in a sense, our leverage targeting so to speak is generally outside of a week or two independent of capital transactions, but what I would say around the leverage issue is consistent with what I have said over the last couple of quarters.

As we have brought more of our financing into Bethesda Securities or internal broker dealer, our haircuts have declined pretty meaningfully. We expect to continue to do more business there. We actually expect haircuts probably to decline kind of over the next few years as more cleared repo solutions come into the market.

So, I mean practically speaking, we could increase leverage a turn or two without reducing – meaningfully reducing the amount of unencumbered equity we have. And so I think practically speaking, I think the industry as a whole will move to higher leverage. Now, what I would say is we are going to be opportunistic.

I think the trend is again over the next few years is going to be towards operating with noticeably higher leverage, but on the other hand, we are going to be opportunistic. We understand in a world where kind of most spread product is pretty tight.

Agency MBS are sort of an exception, but we do expect some spread volatility over the next year in a given kind of the Fed’s kind of balance sheet trajectory. And if we get some of that, then we will view those opportunistically. So, again trend just a higher leverage, what we are looking for our catalyst to kind of implement that position..

I guess, Gary in that world where leverage trend is higher, do you think about – do you think you need to tighten the duration gap or run less interest rate risk to sort of manage the overall risk profile or how do – how does that risk side change with higher leverage?.

I mean, look you have to manage risk appropriately with 8 times leverage and the onus goes up a little more if you are at 10 times leverage. So, that’s absolutely the case. I would say right now, we are running with a low enough interest rate risk position that we would be comfortable moving higher in leverage without necessarily adjusting that.

But yes, I think it’s very – I think it’s true that when – as you start moving to higher leverage positions running things like 2-year and 3-year duration gaps like some people in the space do, I think is not prudent. But we are usually not in that position.

So, I don’t think from our perspective we don’t feel like we would have to tighten up our interest rate risk from where it is today to run lower – to run higher leverage..

Okay, it makes sense. Thank you, Gary..

And our next question comes from the line of Bose George with KBW. Please go ahead..

Hi guys, good morning. Pete can you talk about incremental spreads and ROEs on 30-year fixed that you are buying now.

And also just in terms of incremental spreads, can you just talk about OAS versus nominal spreads just how we should think about that?.

Sure. Thanks. So yields on 30-year are 3.5%. For example right now are around 3%, 5-year swap rates around 190 basis points, so the spread differential between those two was about 110 basis points. Now we wouldn’t actually hedge them quite that long and that also doesn’t include any specialness or financing advantage versus LIBOR.

And so gross spreads on 30s are closer to 125 basis points and so with 3% asset equity funded yield and a spread of 125 basis points they get you to gross ROEs still in the low double-digits before [indiscernible] cost..

Okay, great.

And then just the OAS versus nominal spreads, I mean you guys said OAS widened about 20 basis points, so just how should we think about how that translates into the incremental investment opportunity since I guess you guys would think about the level of which you are hedging as well?.

I think if when you think about the OAS widening option adjusted spread by its definition is the spread after you take out the option costs associated with prepayments and so one of the key inputs into the option adjusted spread is the level of volatility.

And so as volatility drops that tends to help option adjusted rather tends to at the same static spread an option adjusted spread would be wider.

And so I think what we are – what you can actually if you wanted to think about putting together this discussion with the one earlier on swaptions, what we are doing right now is more in a low volatility world where we are taking out a little of that sensitivity to volatility by hedging more of the option component.

But big picture, Chris gave you the static environment which is more to what we have hedged in terms of the spreads and they are just not that different from what we have been talking about six months ago. And again I think the key distinction is that’s not the case in other products where you are seeing dramatic spread tightening.

So when you think about fundamentals for the agency mortgage markets, it’s not about credit obviously, but it is about volatility and volatility coming down and feeling like it’s going to stay here was a big fundamental positive for the agency market. And I think sometimes that gets lost in terms of how favorable this backdrop is..

Okay, it makes sense. Thanks.

And then if you just going back to your comments earlier on in the returns on the TBA dollar roll and where the hedge cost was being allocated, just how should we think about the incremental benefit from the TBA dollar roll position just on an kind of an economic basis?.

So rolls trading currently in that one production coupons combines in the call it 10 basis points to 20 basis points through mortgage repo, so that’s kind of how I would think about the advantage. It’s not that different than where they averaged during the second quarter.

So and again as Garry mentioned earlier, these are not extremely rich levels of specialness by historical measures. So we think they are going to continue to trade in this range for the foreseeable future..

Okay, thanks.

And then actually one more just a follow-up on your earlier discussion on leverage, just when we think about the leverage going forward is it fair given your commentary that leverage probably ticks-up a little bit over time on your portfolio?.

Yes. I think that’s a fair assumption. I think that’s definitely the message we are trying to send. But I wouldn’t – I just I wouldn’t think of it as a straight line. I think it’s going to be more opportunistic.

There may be periods where the quarters where it could come down, but it’s like if you – as we see the environment 2 years or 3 years from now, I think we see a world where we are operating at a higher leverage and generally – and hat’s the general trend.

But again I wouldn’t just expect to see it a quarter return higher every quarter or something like that..

Okay, great. Thanks..

The next question comes from the line of Dan Kelsch with UBS. Please go ahead..

Hi, good morning. Thank you for taking my question.

I want to see if you guys have given any thought to I guess in terms of raising more capital even going back out to the preferred equity market, we have just seen a few other names sort of in the broad space come in, whether it’s Hanley, Two Harbors, etcetera, I am just seeing if you guys have given thought to that being just sort of another pocket of capital you would go to particularly cheapen up some of the rate you have in your existing preferred that I think it’s callable now?.

Yes. Look, we certainly look at the activity that occurs in the space on all fronts. And I would say up until maybe the last say a few months, I don’t think the preferred market was that interesting to us, but levels have improved. And so it is something we would we certainly will consider.

And look we have a fundamental – a key fundamental advantage in terms of as we raise equity, there is no incremental cost to – operating cost to shareholders or it’s negligible. There is no incremental management fee versus the other people that you mentioned.

So for us the equation is generally better than it is for our peers both in the preferred market and the common market and so that’s the aggregate picture or something that we certainly will look at..

And just to clarify I guess you are seeing that you guys are not an externally managed, which is why you don’t have that incremental cost to shareholders at the time punitive?.

That’s correct. And again given the nature of our business if we were to raise equity we are not generally hiring more people in our operating expenses. And even my transaction costs and clearing and things like that the changes are negligible to the bottom line.

So yes essentially you can think about it is if we raise new capital there is essentially no management fee or no operating cost of capital, so it brings down your overall cost of capital..

And I am sorry to bother you one last time on that is it with some of those preferreds that have come to market there has been a change in structure whereas a lot of folks I think for probably six months ago you could still get sort of fixed for life and then just continues to be a shift to a lot more sort of fixed to float, did that influence how you guys would think about accessing the market just knowing that after a 5-year, 7-year, 10-year period you might have a floating exposure as opposed to just kind of having you fixed to life?.

Yes. I mean we obviously understand that the change in structure and what our business is managing interest rate exposure and converting fixed at floating and managing those kinds of exposures generally.

So it’s something that’s relatively straightforward for us to price and factor into our capital structure, especially to the – when it’s a very small percentage of your overall capital and AGNC has one of the lowest percentages of preferred kind of existing preferred to our peers. And so there is plenty of room to kind of manage that exposure..

Great. Thank you..

Thanks a lot..

And your last question comes from the line of George Bahamondes with Deutsche Bank. Please go ahead..

Hey guys, good morning.

Just a question on repo costs, I was wondering if repo costs have remained relatively unchanged in the third quarter to-date?.

Well, George, this is Peter. They actually have improved so far this quarter from where they were at the end of the last quarter. As I mentioned the second quarter and was fairly tight in terms of repo funding and there was some deterioration in the spread of repo costs relative to LIBOR.

Just to give you a sense on regular deliverable repo towards the end of the quarter it was probably LIBOR plus 5 basis points to 10 basis points for the repo that we were doing through our broker dealer, it was close to LIBOR flat. Those levels have improved 5 basis points to 10 basis points since quarter end.

So we were funding through LIBOR by about 5 basis points to 10 basis points through the FICC into the third quarter here. And about LIBOR flat to plus 5 or so for regular delivery repo, so we expected to continue to improve as we go through the quarter, but not meaningfully form here maybe 5 basis points or so basis points..

Okay, great.

And just a high level question here, how do you expect the Fed’s balance sheet unwinding to impact TBA market and dollar roll specialness?.

I think that’s a good question. We have addressed it kind of on some prior calls as well as the topic of the balance sheet has come up. I think a couple things to keep in mind.

One is that well before the Fed even had a mortgage portfolio dollar roll specialness existed and the number one driver of dollar roll specialness is the fact that mortgages are originated a couple of months out and the originators Wells Fargo and Jason quick and there – they are hedging their pipeline by selling mortgages forward.

And because they are being produced a couple of months forward then there is a natural discount associated with kind of that hedging process and that’s the number one driver of why there is consistently specialness. Now, I don’t want to discount the value of the Fed. The value that the Fed has brought is there a current month bid and a large one.

But the bigger value has been that they absorb some of the cheapest to deliver pools or some of the faster prepaying pools and where that becomes very relevant is in a low rate higher prepayment environment.

So where the Fed not being a player let’s say 2 years from now would be a bigger issue on dollar roll specialness, would be in a very low rate high prepayment environment. Now, one might argue that if we got in that environment, the Fed may actually not continue to roll off its balance sheet or might actually institute another QE.

So they might not even disappear in that environment. But in the other environments where rates stay around here or go up, the prepayment environment is pretty benign and the Fed’s influence therefore is muted.

And then over the next year it’s important to point out that what Chris mentioned that even in a tapering of reinvestments environment there is still going to be buying over $100 billion in mortgages probably more like $150 billion.

And again and in that kind of environment for the next year they are still going to be absorbing a fair amount of weaker pools out there. So short answer is it’s a factor there are couple of scenarios in a low rate environment, where it would be a much bigger factor.

But I think it’s very manageable and not likely to have that big of an influence in most others scenarios..

Got it, okay. That was extremely helpful. Thank you..

Thank you..

We have now completed the question-and-answer session. I would like to turn the call back over to Gary Kain for concluding remarks..

I would like to thank everyone for your interest in AGNC and we look forward to talking to you again next quarter..

The conference has 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 August 10, by dialing 877-344-7529 or 412-317-0088 and the conference ID number is 10110075. Thank you for joining today’s call. You may now disconnect..