AGNC (AGNC) Q3 2025 Earnings Call Transcript

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DATE

Oct. 21, 2025 at 8:30 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Peter Federico
• Chief Financial Officer — Bernice Bell

TAKEAWAYS

• Economic Return -- 10.6% for the quarter, combining a $0.36 dividend per common share and a $0.47 tangible net book value increase per share, attributed to declining rate volatility and tighter mortgage spreads.
• Comprehensive Income -- $0.78 per common share, with net spread and dollar roll income at $0.35 per common share, down $0.03 due to decreased swap income and timing mismatch in capital deployment.
• Leverage -- Ended at 7.6x tangible equity, with average leverage of 7.5x, both unchanged from the prior quarter.
• Liquidity Position -- $7.2 billion in cash and unencumbered agency MBS, amounting to 66% of tangible equity at period end.
• Hedge Ratio -- 77% for swap and treasury-based hedges, leaving 23% of funding liabilities as higher-cost, unhedged short-term debt with a 4.43% average repo cost.
• CPR Metrics -- Projected life constant prepayment rate (CPR) increased 80 basis points to 8.6%; actual CPR averaged 8.3%, down from 8.7% last quarter.
• Capital Raising -- $345 million in fixed-rate preferred equity issued, the sector’s largest preferred since 2021, plus $309 million in common equity via the At-the-Market program; preferred priced significantly below levered returns on capital.
• Asset Portfolio -- Rose to $91 billion, with TBA position at $14 billion, following complete capital deployment over the past two quarters.
• Prepayment Protection -- Share of assets with favorable prepayment attributes declined to 76% as new production MBS were added; historical operating level has been 80% or above for higher coupon assets.
• Weighted Average Coupon -- Portfolio coupon increased slightly to 5.14%, with concentration now between the 4.5%-5.5% range for enhanced prepayment protection.
• Hedge Portfolio Composition -- Notional balance stable; duration dollar terms for swap-based hedges rose to 59% of total portfolio, with $7 billion in receiver swaptions added for downgrade protection.
• Dividend Sustainability -- CEO Federico stated, "I think those 2 things are still well aligned right now today," referring to ROE and dividend coverage, noting a 17% total economic breakeven rate now aligning with portfolio ROEs.
• Demand Drivers -- Bond fund inflows reached $180 billion in the quarter, pacing for $450 billion annually, with additional demand expected from regulatory-driven bank participation post-Basel Endgame.
• Preferred Equity Mix -- Preferred accounts for approximately 18% of AGNC's total capital post-issuance, with historic peaks up to 22%-25%.
• Liquidity Update -- Bernice Bell reported, "our liquidity is largely unchanged since quarter end" through October.

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RISKS

• CEO Federico identified that "if something changed significantly in fiscal policy, for example, that flowed through to inflation outlook that those would be not priced into the market," with a material inflation rise or renewed Fed tightening viewed as key risk factors to spreads and MBS stability.
• Rapid mortgage rate declines and technology-driven refinancing could accelerate prepayments, as "there does appear to be some anecdotal evidence that they are getting mortgage borrowers to refinance with something less than a 50 basis points incentive."
• MBS spread direction is sensitive to volatility and monetary policy; delay or reversal of anticipated Fed easing could stall projected tailwinds to net spread and dollar roll income.

SUMMARY

Management reported a 10.6% economic return for the quarter, combining dividend income and a significant increase in tangible net book value per share. AGNC Investment (NASDAQ:AGNC) fully deployed newly raised preferred and common equity, expanding the investment portfolio to $91 billion and increasing the TBA position to $14 billion. Money manager demand drove bond fund inflows to $180 billion in the quarter, with rising expectations for further bank participation pending implementation of new capital regulations. The hedge portfolio shifted to a higher share of long-duration swaps and $7 billion in receiver swaptions, aligning with anticipated Fed accommodation as short-term debt costs remain elevated. Operating leverage remained steady, while liquidity at $7.2 billion and a 66% equity coverage ratio signaled ongoing financial flexibility.

• Management attributes the higher funding-cost drag to 23% unhedged short-term debt, which is expected to provide incremental earnings as future Fed policy lowers repo rates or allows for terming out swaps.
• New asset additions focused on newly originated production coupon MBS, with a systematic rotation into pools offering improved prepayment protection as market opportunities arise.
• Spread tightening led to tangible net book value growth, but if spreads remain at current lows, future book value could stabilize while dividend yield on book value and portfolio ROE moderate accordingly.
• The current coupon index initiative aims to enhance market transparency for retail and professional investors by focusing on production coupons near par, separate from legacy mortgage indices.
• Preferred equity issuance at 8.75% coupon opens further capital structure flexibility, providing incremental carry for common shareholders within established preferred mix parameters.

INDUSTRY GLOSSARY

• TBA: “To-Be-Announced”—forward contract for agency mortgage-backed securities whose exact underlying loans are specified just prior to settlement.
• CPR: Constant Prepayment Rate, annualized measurement estimating the percentage of a pool of loans expected to be prepaid in a year.
• Receiver Swaption: An option granting the right to enter into an interest rate swap as the fixed-rate receiver, typically used to hedge against declining interest rates.
• Dollar Roll: A transaction involving the simultaneous sale and forward purchase of a TBA security, used for managing funding and hedging exposures.
• Specified Pool: Agency MBS pool with detailed loan-level characteristics selected to mitigate prepayment risk.
• Convexity Hedge: Risk management tools that mitigate sensitivity to changes in interest rate volatility impacting prepayment expectations and MBS pricing.

Full Conference Call Transcript

Peter Federico: Good morning, and thank you all for joining our conference call. In the third quarter, the Federal Reserve's pivot to a less restrictive monetary policy stance and the easing of fiscal policy concerns drove robust financial market performance and a significant improvement in investor sentiment. Agency mortgage-backed securities were one of the best-performing fixed income asset classes during the quarter and have now outperformed U.S. treasuries for 5 consecutive months, a sequence of outperformance that has not happened since 2013. In this favorable investment environment, AGNC generated a very strong economic return of 10.6%, comprised of our attractive monthly dividend and book value appreciation.

At its September meeting, the Fed lowered the federal funds rate as expected and signaled further monetary policy accommodation with the possibility of rate cuts at the October and December meetings. On the fiscal policy side, the passage of the tax bill early in the quarter and several positive tariff developments eased some of the concerns that dampened the investment outlook in the second quarter. These investor-friendly developments led to a material decline in interest rate volatility and contributed to the outperformance of Agency MBS. As we have discussed, a number of emerging factors support our constructive outlook for agency mortgage-backed securities. The first relates to the improved spread environment for Agency MBS.

Over the last 4 years, the spread range between agency securities and benchmark rates has become increasingly well defined with incremental investor demand consistently emerging when spreads trade near the upper end of the range. In addition, the administration has begun to focus on mortgage spreads as a means of improving housing affordability. In an interview in late September, the Treasury Secretary reinforced this view when he said, "The really important thing is that we either maintain mortgage spreads or narrow them further to help the American people." This focus on spreads by the administration is good for Agency MBS and good for our business. Second, the supply and demand dynamic for agency mortgage-backed securities continues to be well balanced.

With the primary mortgage rate persistently above 6%, the net new supply of Agency MBS this year will be about $200 billion, the lower end of initial expectations. At the same time, the demand outlook has improved. Bank demand for Agency MBS has been relatively muted this year, but should increase as regulatory reforms get implemented. The money manager community is another important source of demand for Agency MBS. Demand from this sector increased meaningfully in the third quarter, as the favorable shift in monetary policy led to $180 billion of bond fund inflows, which are now running slightly ahead of last year's pace. Third, the financing market for Agency MBS remains strong.

With bank reserves just under $3 trillion, the Fed will likely end balance sheet runoff within the next few months. Importantly, the Fed is also considering joining the FICC for purposes of the standing repo facility and using a repo-based measure as its primary target rate. If adopted, these changes would be highly beneficial to the repo market for U.S. treasuries and Agency MBS, particularly during times of stress. Fourth and finally, the potential path of GSE reform continues to move in a favorable direction. The Treasury Department has taken a leadership role in the reform process, holding a series of roundtable discussions with a wide range of housing and mortgage market participants to gain insight into potential reform actions.

This careful approach demonstrates the treasury's commitment to maintaining mortgage market stability. To that end, the treasury has emphasized 3 important guiding principles for GSE reform, maximize taxpayer value, lower the mortgage rate through stable or tighter mortgage spreads and do no harm to the housing finance system. The mortgage market has responded well to this approach. Collectively, the 4 factors that I mentioned are currently pointing in a favorable direction for Agency MBS. Moreover, given the treasury's thoughtful approach, it is possible the agency market emerges from this reform process with a stronger and more durable structure.

In this evolving investment environment, we believe AGNC as the largest pure-play levered agency investment vehicle is well positioned to generate attractive risk-adjusted returns for our shareholders. With that, I'll now turn the call over to Bernie Bell, our Chief Financial Officer, to discuss our financial results in greater detail.

Bernice Bell: Thank you, Peter. For the third quarter, AGNC reported comprehensive income of $0.78 per common share. Our economic return on tangible common equity was 10.6%, consisting of $0.36 of dividends declared per common share and a $0.47 increase in tangible net book value per common share, driven by a significant decline in interest rate volatility and tighter mortgage spreads to benchmark rates. As of late last week, our tangible net book value per common share was unchanged to slightly up for October. We ended the third quarter with leverage of 7.6x tangible equity and average leverage of 7.5x, both unchanged from the prior quarter.

Our liquidity position remained very strong with $7.2 billion in cash and unencumbered Agency MBS at the end of the quarter, representing 66% of tangible equity. Net spread and dollar roll income declined $0.03 to $0.35 per common share for the quarter, driven by lower swap income due to the maturity of $4 billion of legacy swaps and a timing mismatch between the issuance and deployment of new preferred and common equity capital. Another important driver of our net spread and dollar roll income is the amount of unhedged short-term debt in our funding mix as measured by our hedge ratio.

As of the end of the third quarter, our hedge ratio was 77%, representing the amount of swap and treasury-based hedges, excluding option-based hedges relative to our total funding liabilities. This hedge portfolio positioning reflects our expectations for an accommodative monetary policy environment and positions our net spread and dollar roll income to benefit from rate cuts as they occur. Looking ahead, we expect that lower funding costs from the September rate cut and widely anticipated future rate cuts, along with the full deployment of recently raised capital and a shift in our hedge mix toward a greater share of swap-based hedges will collectively provide a moderate tailwind to net spread and dollar roll income.

The average projected life CPR of our portfolio increased 80 basis points to 8.6% at quarter end from 7.8% the prior quarter on lower mortgage rates. Actual CPRs averaged 8.3% for the quarter compared to 8.7% in the prior quarter. Lastly, during the third quarter, we issued $345 million of Fixed-Rate preferred equity, the largest mortgage REIT preferred stock offering since 2021 and $309 million of common equity through our At-the-Market Offering program at a significant premium to our tangible net book value per share. Notably, the preferred issuance carries a cost significantly below the levered returns available on deployed capital, which is expected to further enhance future earnings available to common shareholders.

And with that, I will now turn the call back over to Peter for his concluding remarks.

Peter Federico: Thank you, Bernie. Before opening the call up to your questions, I want to provide a brief review of our portfolio activity. Agency spreads to both treasury and swap rates tightened meaningfully across the coupon stack in the third quarter as interest rate volatility declined sharply. Intermediate coupons performed the best driven by strong index-based buying from money managers. Higher coupons also generated positive excess returns, but to a lesser extent, as the sizable inter-quarter rally in long-term interest rates, increased prepayment concerns associated with these coupons. Hedge composition was also a driver of performance in the third quarter as swap spreads widened 2 to 5 basis points across the curve.

Our asset portfolio totaled $91 billion at quarter end, up meaningfully from the prior quarter as we fully deployed the capital that we raised in the second and third quarters. As is often the case when we deploy new capital, the mortgages that we added were largely newly originated production coupon MBS. Over time, however, we optimized our asset composition by rotating into pools with favorable prepayment characteristics as opportunities arise. Consistent with the growth in our asset portfolio, our TBA position increased to $14 billion at quarter end. As a result, the percentage of our assets with favorable prepayment attributes declined to 76% in the third quarter. The weighted average coupon of our portfolio increased slightly to 5.14%.

The notional balance of our swap and treasury-based hedges remained relatively stable during the quarter, but the composition of our portfolio shifted to a greater share of longer-dated swap-based hedges. In duration dollar terms, our swap-based hedges increased to 59% of our overall portfolio. Lastly, given the convexity profile of our assets and the large decline in interest rate volatility, we opportunistically added $7 billion of receiver swaptions during the quarter as an additional source of downgrade protection. With that, I'll now open the call up to your questions.

Operator: [Operator Instructions] And the first question will come from Crispin Love with Piper Sandler.

Crispin Love: Spreads have tightened materially over the last few months and just looking at your results, core earnings were $0.01 below the dividend. Can you just discuss expected ROEs? Have they shifted at all just given the spread tightening and then just touching on the sustainability of the current EBITDA?

Peter Federico: Sure. Yes, I appreciate that question. First, from -- you're right, from a spread perspective, we had a really nice move in spreads, and they're moving. As I talked about in my prepared remarks, I talked about that 4-year range. When you think about, for example, current coupon to the blended swap curve, that range has been about 160 to 200 basis points generally over the last 4 years. And we are now trading closer to the lower end of that range, maybe about 170 basis points.

And you take where mortgages are versus swaps, where they are versus treasuries, you think about that from an ROE perspective today, I would still say mortgages are in the, call it, the expected ROE range of -- for current coupon somewhere between 16% and 18%, which aligns really well with our total cost of capital. So when you think about dividend sustainability, I always like to go back to looking at that measure. And that's the important breakeven, obviously, that we're trying to achieve. That's the payment of all of our common stock dividends, our preferred stock dividends and our operating costs over our equity base.

And that dropped as you would expect, as our equity base increased, that dropped about 1% quarter-over-quarter. So now it's at about 17%. So it aligns with the economics of where mortgages are trading today. And there was some noise Bernie talked about, and I'm sure we'll talk more about this on the call, but there was some noise with our net spread and dollar roll income dropped to $0.35. And she talked about the drivers that drove that. Some of those were largely temporary drivers, the expiration of some of our short swaps and the hedge ratio -- swap hedge ratio was lower this quarter and day count. And a lot of little things contributed to that.

But she also talked about the fact that we're probably at a low point or near a low point for that measure and that there's reasons to believe that, that measure of earnings is going to improve. But overall, you're right, spreads have tightened a lot. There's lots of factors that we'll talk about over the call that could drive them even tighter. But from a dividend sustainability perspective and from a return perspective, I think those 2 things are still well aligned right now today. I'll pause and let you follow up.

Crispin Love: All really helpful. And then just -- you mentioned it in your prepared remarks, but decreased the hedge ratio meaningfully in the quarter. Can you discuss that a bit further? What drove that? Are you taking more of a near-term rate outlook view here, specifically decreased rate fall? And then what do you see as the key risk just given the lower ratio and do those receiver swaptions -- you mentioned these risks?

Peter Federico: So there's a couple of important things happening with the hedge ratio. And we talked about -- I mentioned the receiver swaptions, I'll get to those at the end of this question. And then Bernie also talked about our overall hedge ratio. Because we added receiver swaptions, we kind of gave you 2 hedge ratios this time. If you look at our overall hedge portfolio, it dropped to whatever the number was, 60% -- 68%, I think.

The number that I look at, though, that I think is important when you think about our net spread and dollar roll income, this is important for -- the reason why net spread and dollar roll income has been under a little additional pressure and why we think we probably hit a trough and there's some upward momentum in our net spread and dollar roll income. Our hedge ratio when you think about our swap-based hedges and treasury-based hedges, which are the hedges that we use to convert our short-term debt to synthetic long-term debt. That hedge ratio was 77%, as Bernie mentioned, at the end of the quarter.

What that means is we have 23% funding in our funding mix, 23% of short-term debt. Think about where short-term debt costs are versus all other costs. The average repo cost on short-term debt last quarter was 4.43%. It's the highest cost mix in our funding mix, 23% of our funding liabilities, short-term debt at the highest cost. That cost will come down over time as the Fed eases. It will already come down after the first ease, we expect further eases. So we will get the benefit of that. Just to quantify that, that amount of short-term debt in our mix, having it funded at 4.43% versus, for example, where swap rates are in the 3- to 5-year sector.

That's about 100 basis points of additional cost. Over time, that's about a $0.05 improvement that we should get as short-term rates come down. So we positioned the portfolio that way from a hedge ratio perspective to get the benefit of this Fed pivot to a more accommodative monetary policy and it looks like the momentum for rate cuts is actually increasing. So I expect that benefit to show up over the next couple of quarters.

We also made some changes to your other point about the composition of our portfolio because of the rate environment that we're in and the fact that the administration is so focused on longer-term rates, we do have to be more cognizant today versus a quarter or 2 ago about the risk of lower long-term rates and an uptick in prepayments and mortgages. With the decline in volatility and our concern for wanting a little bit more down rate protection, we do that through asset selection, but we also can do that through options. In this last quarter, we actually added $7 billion of receiver swaptions that will give us some additional down rate protection.

But because that's a receiver position, it kind of throws off that hedge ratio calculation. That's why I wanted to explain that and break that up for you. But -- so there's two things going on in our hedge composition both of which are important. One, to understand our net spread and dollar roll income and that incremental drag that we're seeing right now, which should reverse over time and then just wanting additional down-rate protection.

Operator: Your next question will come from Terry Ma with Barclays.

Terry Ma: Maybe just touch on your comments around incremental demand for MBS from money managers in the quarter. Was that kind of episodic or do you think that appetite will be sustained going forward?

Peter Federico: Well, yes, it's really fascinating. And it's to be expected, the shift in monetary policy really can't be underestimated. I mean it was a significant change, particularly for just fixed income broadly, and you really saw that. We've been -- we collectively, the fixed income market has been waiting for the Fed to pivot, and there's lots of uncertainty around tariffs. And now we got the pivot and actually, it looks like the pivot, in my opinion, sort of gaining momentum.

But when you look at what happened to bond fund flows, it was $100 billion of bond fund inflows in the first quarter, $50 billion in the second quarter, so $150 billion in the first half of the year and then a huge uptick to $180 billion in the third quarter. And as I mentioned now, on a per day basis, I think it's a little over $8.5 billion a day of inflows. Right now, we are on pace for having bond fund inflows in the $450 billion range this year, and I don't think there's any reason to believe from what we've already seen this month, I think the inflows are continuing at that same sort of weekly pace.

So I expect bond fund inflows to remain robust, particularly given the Fed move, obviously, the market expects them to ease at the next 2 meetings. I expect them to ease at the next 2 meetings. And you also have sort of a deteriorating, if you will, or less optimistic equity outlook in the current environment. So lots of money is still on the sidelines in money market funds, maybe the equity market because it's at all-time high. There might be some rotation out of there. So I expect bond fund flows to remain robust. And that, I think, will continue to support, particularly the lower and middle coupons into the end of the year.

And then the other important driver of demand, which is still uncertain, but I do think it's pointing in a very favorable direction is what's going to come from banks. Banks have added only about -- I say only, but it's still significant, but they've added about $50 billion of mortgages this year. But they've also added interestingly $200 billion of treasuries. So the question is, as these bank reforms become a reality, and I think that they will become a reality, I think, for the new Basel Endgame, I think it's looking like it's going to be in the first quarter.

But from everything that we are understanding, that's going to be, I think, a positive for bank capital, particularly as it relates to mortgage credit just generally. And so I think that there could be an uptick in bank demand for mortgages and maybe some rotation out of treasuries into mortgages once that bank regulation becomes clear. So from a demand perspective, I think the outlook is certainly stable, if not improving.

Terry Ma: Got it. That's helpful. And then just a follow-up. I appreciate all the color on net spread and the dynamics around that. But I guess, to the extent that Fed easing gets delayed or pushed out or maybe doesn't even materialize. Do you still expect a near-term tailwind to the net spread when you kind of factor in just, I guess, capital deployment and then also just swaps rolling off?

Peter Federico: Yes, I do. I mean -- so again, there's kind of a confluence of things that have dragged it down maybe $0.01 or $0.02 more than one might have expected. Bernie mentioned just timing mismatches between our capital raising. And we talked about this at the end of the second quarter when we raised, I think, [indiscernible] in the second quarter, we were slow to deploy those proceeds. We did that intentionally. So we ended the quarter with a little bit of excess capital that we ultimately got deployed. So when you do that, it can be a drag on our earnings, and we saw the kind of effect of that.

But as I mentioned and as Bernie mentioned, all those proceeds have now been sort of fully deployed. So we got that headwind behind us and that's really important. And the other with respect to -- this is kind of a nuanced answer, but it's an important one with respect to short-term debt. What's important now is where is short-term swap and rates, for example, where are they priced relative to the Fed funds neutral rate or the target rate.

So what's happened over the last couple of months as the Fed has transitioned, One, we got the first ease, that's important, but also take, for example, 2- and 3-year swap rates, they now reflect essentially the neutral Fed funds rate at around 3.25%. So you can kind of get to the same answer by doing 1 or 2 things. You can wait till the actual eases occur, and that will get reflected in our repo balance or you could also term that out into the swap market at essentially the same long-run neutral rate. So I do expect that to be a benefit over the next, call it, 3 or 4 quarters.

Operator: Next question will come from Rick Shane with JPMorgan.

Richard Shane: Look, on the whiteboard in my office, I have a note that says it's never different this time. But when we look at the rate -- the refi environment, the distribution of outstanding mortgages is different than we've ever seen. It's not a bell curve, it's a barbell. You have borrowers over the last 3 years who really probably been sold mortgages with the idea that they are going to be able to refinance them. And I think we probably having thought predicted this for two decades, may be finally on the cusp of the mortgage origination process being transformed by technology. Do you think -- are you guys seeing different behavior in terms of speeds?

Is it a risk that we need to be thinking about at this point?

Peter Federico: Yes to all of the above. And that's one of the reasons why I talked in the previous answer about wanting more down-rate protection, particularly given the administration is focused on mortgage rates and housing affordability, which are all very important. But we are seeing all of those factors. First, let me just put in perspective sort of the refinance outlook, if you will, from a mortgage perspective, some from a traditional perspective. We talk about -- when we talk about refinanceability of the universe, we talk about when mortgages are about 50 basis points in the money.

So at a 6% mortgage rate, which is about where it is today, 20%, this gets to your point about the composition of the universe. Only 20% of the market has a 50 basis point incentive. And that mortgage rate has been persistent at 6% or above, and it's likely going to stay fairly high, given that difficult for the 10-year to get much below 4%. But that's about 20% today. A full 100 basis point drop in the mortgage rate to 5%, which is going to take some new information to get that mortgage rate down to that. That's for sure. That percent increases to 30% of the universe.

And it will take a full 200 basis point rally in the mortgage rate to 4% in order for 40% of the universe to become refinanceable. So in terms of the big numbers, you need a really sizable move in the mortgage rate to have a big prepayment event. All that said, what we are seeing consistently is that there is a lot of capacity in the system for refinance activity. Technology is definitely having an impact. And you can see that -- for example, we've seen it for the last couple of quarters.

In this last quarter, for example, when we see brief periods of the mortgage rate dropping, like, for example, I think it was in the month of September, the mortgage rate dropped below 6.15%, maybe it got to as low as maybe 6.10% or something in that range. And it stayed there for only a couple of weeks. What we're seeing is a very fast pull-through of refinance activity. So what that's telling you is there's pent-up demand, there's capacity to process those loans and the mortgage originators are pulling them through in a much faster time period than they do historically.

So those are all things that we have to be cognizant of, and that's one of the reasons why we wanted more down rate protection, we'll likely operate with a positive duration gap. And we are always trying to optimize the asset composition of our portfolio so that we have the best characteristics possible that will give us more prepayment protection. I talked about that percent being at around 75%, 76%. But we've been operating 80% or north of 80%. And certainly, for the higher coupons we want that percent to be very high. One final point I'll make on the prepayment outlook.

One of the other things that you'll see in the coupon composition of our portfolio, I talked about focusing our purchases at the production coupon, which is in the 5% to 5.5% range. You'll see that we've gone down in coupon somewhat have the concentration of our portfolio is now between 4.5% and 5.5%. So that, too, gives us additional prepayment protection.

Richard Shane: Got it, Peter, this is why I love this job. That's such an interesting answer. I do appreciate it. If I can ask one follow-up, which is that as policymakers are looking for ways to improve affordability, do you see levers out there that are available to reduce the incentive that borrowers need to narrow that 50 basis points in a way that could increase speeds as well?

Peter Federico: Well, so one is -- I'll answer that in two ways because it is really fascinating. First, they're actually -- because there's so much capacity in the origination business right now from a mortgage originator perspective and the refinance and the technology and so forth, there does appear to be some anecdotal evidence that they are getting mortgage borrowers to refinance with something less than a 50 basis points incentive. So there could be people refinancing for as little as 25 basis points of incentive because if the technology is so -- it's that easy, if the costs are low.

It a lot depends on where you are -- the geography matters an incredible amount when it comes to refinance cost. The state you live in, the locality, the title, taxes, recording all of those things vary greatly from one location to another. So that certainly is a consideration. There are things that can be done that would streamline this further. One would be the GSEs certainly have, at times, taken actions that would deduct, for example, waving of appraisals or other sort of insurance. There's a discussion about the insurance waiver for refinances, which is an interesting title insurance. That's very interesting. I don't know that, that will go through or not because there's risk associated with that.

But that's a clear example of the GSEs and the regulator trying to come up ways to improve the refinanceability, they could also do it with their g-fees. One final point. From an administration perspective, and this is why I brought this up. The administration's focused on mortgage spreads, in my opinion, is unprecedented. I've never heard of the administration and the Treasury Secretary identifying the spread between the mortgage rate and the risk-free rate as clearly as he has. That's a clear sign that they believe that if they can take actions through their -- perhaps through their reform to stabilize or lower that spread further that, that will transfer into the mortgage rate and transfer into refinanceability.

They can certainly do things with respect to treasury issuance, and they are clearly focused -- they, the treasury are clearly focused on the 10-year. So that's something that we have to watch, whether they change the composition of their interest -- some more short-term issuance versus long term? And then sort of when you think about just the GSE reform process, I still believe that there are things that can be done, how they treat MBS from a capital perspective in this new bank regulation is going to be important to watch.

That could be another source that would lead to greater refinance activity and maybe even an adjustment to the capital requirement for Agency MBS depending on how the path of reform goes. So there's lots they can do, and there's lots that's happening. It's a very interesting time.

Operator: Next question will come from Trevor Cranston with Citizens JMP.

Trevor Cranston: Peter, you painted a pretty positive picture in terms of the supply-demand outlook for MBS. I guess the other thing that could have a major impact on spreads would be implied volatility and how that's being priced. So can you maybe share your outlook on volatility if you think there's room for that to continue coming down or if there are things you guys are thinking about that could cause that to move back to a higher level?

Peter Federico: Yes. Yes, it's a great question. I think it's really important because as we talked about, I think it was in the first question, we talked about where spreads are today and the fact that spreads are nearer the lower end of the range. And the question that really, I think everybody asked at this point is -- are we going to bounce back up into the range? Is there a reason for spreads to bounce off these lows and then sort of move back into the middle of the range, which has been the practice? Or how are the forces sort of evolving that will drive spreads in one direction or another?

The way I would describe sort of our outlook on spreads from a sort of macro perspective is that -- as we went through the last several years, there were lots of reasons why we had a question what the upper end of the range was. There was so much uncertainty in the system monetary policy, fiscal policy, geopolitical risk, all those things the Fed tightening monetary policy in an unprecedented way in the balance sheet runoff. All those things made us question where the upper end of the spread range was. Today, I feel highly confident in the upper end of the spread range.

And I feel less confident if you think about it that way, in the lower end of the spread range, that there are now a number of factors that are pointing as possible reasons why spreads could break through the lower end of the range. We talked about, the administration -- just what we just talked about, the administration is focused on spreads. The demand outlook improving while supply stays relatively in check. The funding market is an interesting one because the Fed is right at the inflection point with respect to its balance sheet.

And given where funding rates are now, I really do expect the Fed to end its balance sheet very soon, I'm kind of looking for them to end their balance sheet at this meeting and announce it for either November or December, but I do expect it, certainly by the end of the year, given the way the funding markets are behaving. And then they are also considering, as I pointed out, other changes that I think would be really good for the repo market. So that's a positive.

And then I think that the treasury's leadership on GSE reform indicates that they, like we just said, are looking for reasons and actions that they could take that would improve the spread outlook. From a volatility perspective, we certainly have a very favorable monetary policy stance evolving. That's really good. It should be good for volatility. And if there is some clarity coming in the next month or 2 with respect to tariffs, in particular, then I think we have an environment from a volatility perspective where interest rates could remain relative -- volatility can remain relatively benign.

And that's a really -- put all that together, those are reasons why mortgages could break through the lower end of the range. So that's the way I look at it. There are less reasons to be concerned about mortgages going wider and certainly going through the upper end of the range, and there's more reasons to believe that mortgages could go through the lower end of the range.

Trevor Cranston: Yes. Okay. That makes sense. And then you guys recently announced the creation of these current coupon indices. Can you maybe just briefly talk about kind of what the economics are for AGNC and if there's kind of any other things you guys are sort of exploring on the like third-party asset management side of things?

Peter Federico: Yes. We did that not for any reason for economics. I don't think there's any economics to it, but we did spend a lot of time on putting that index together. And we did it just because we felt like it would be beneficial to the market. When you think about the mortgage market. It's -- and we talk about this a lot. It's sort of an under-understood, it's not a very transparent market. There's a huge, fixed income market, but it's hard for retail investors to gain access to this market, and it's certainly hard for them to gain information about the market. If you don't have a Bloomberg, it's very difficult to find out how mortgages behave.

And when you think about mortgage performance, there's really just one benchmark out there. It's an important benchmark. It's the Bloomberg Mortgage Index. It represents the entire, what is it, $9 trillion universe. So it has a very different characteristic than sort of certain aspects of the market. I point that out because if you look at the index, the aggregate index, Bloomberg Aggregate Index, the average coupon on the outstanding universe is around 3.5%. So if an investor invests in a bond fund and it's gaining exposure to the mortgage market, they're getting it because that bond fund is buying that index of exposure, and they're getting an average coupon of around 3.5%.

But there's no index that shows, well, if you want to just go out and buy a production coupon, a newly originated mortgage coupon this month, what are the characteristics of that? So we created an index that rebalances every month, right? Sean, rebalances every month. That is the right mix between the 2 coupons that will center around the par coupon. And the yield associated with that par coupon, that, for example, today is at 5%. So it's a way for investors to gain some more information. We gave you the whole history of performance on it. It's on our website, so you don't need Bloomberg terminal.

And it's just our way of trying to bring transparency give investors more to look at, more to understand, maybe it can be used for some other measures -- there is 1 ETF out there, for example, that is a current coupon ETF. That's a great way for investors to gain access to this par price production coupon. So we just did it because we thought more information is better. Ultimately with more information, we can hopefully attract more investors to this fixed income asset class.

Operator: Next question will come from Doug Harter with UBS.

Ameeta Lobo Nelson: It's actually Marissa Lobo on for Doug today. If you could talk to us about your view of optimal leverage in the current spread and ball environment?

Peter Federico: Yes. Yes. Well, I would say right now, you look at our leverage, we're sort of operating right where we have normally been. It was a little higher at times when mortgages were cheaper, we're back to around 7.5x leverage, as Bernie mentioned, I think that's a good place to be. We think we're at that unencumbered cash, which is 66% of our equity. So we have a lot of flexibility. And what I would just say is that given all that flexibility and given all the considerations and the factors that we are looking at, as they evolve, over the next couple of months.

Those factors will inform whether or not we want to continue to operate with this leverage or higher leverage or lower leverage. But certainly at this level, we have a lot of capacity, a lot of flexibility, and we're able to generate really attractive returns.

Ameeta Lobo Nelson: And I know you touched on this with Trevor's question. But what do you see as the biggest near-term risk to your constructive view on spreads?

Peter Federico: Yes. Well, I would say they're sort of the macroeconomic ones. I mean, obviously, if something changed significantly in fiscal policy, for example, that flowed through to inflation outlook that those would be not priced into the market. And then if there's something that causes inflation to go up and volatility to go up and the Fed have to pause again, those would be factors that would put pressure on fixed income generally and on Agency MBS specifically. So those would -- It has to -- I think at this point, they're the sort of the big macroeconomic forces.

Something happens significantly in the tariff outlook or for some reason, the Fed believes that the inflation outlook has changed dramatically, but they'll have to change course. But that change in inflation outlook would have to be really, I think, very significant probably not tariff-related because the tariffs seem to be now viewed at the Fed as being a level price change, not as an ongoing tariff or inflation pressure. So it would have to be something along those lines, and that inflation pressure would have to exceed and outweigh the weakening that is clearly apparent in the labor market, which the Fed is going to have to respond to.

Operator: The next question will come from Kenneth Lee with RBC Capital Markets.

Kenneth Lee: Just one from me. And I think you've touched upon this briefly. In terms of the hedges, net duration gap didn't change that much. Is the thinking here that it could potentially be more positive over the near term as you look to get more down rate protection, but I just wanted to get your thoughts around that?

Peter Federico: Yes. Well, we certainly would like to operate with a -- maybe a slightly larger duration gap than we have today. I think today, was it Chris? 0.2, duration gap right now. So it's not very substantial. But then again, the 10-year rate is at 4% or a little bit below 4%. And just from a rate perspective, I think the nearer-term risk for the 10-year rate is that it's a little higher, not a little lower. So I think there could be at a point in time where we want to operate with a higher duration gap, but at a little bit below 4%, it may not be right now.

Operator: Your next question will come from Harsh Hemnani with Green Street.

Harsh Hemnani: You touched on this in the prepared remarks a little bit, but there's two ways to manage that down rate risk. The first is asset selection, as you mentioned and the second would be the path you took this quarter was maybe expanding TBAs and getting outright convexity hedges. Given that you've deployed all the capital you raised in, call it, the second quarter and third quarter, was this sort of a decision driven by sizing at all in the sense that it might be harder for you to source those specified pools in the market at this time or at the speed you would like to? Anything on that front in terms of sizing?

Peter Federico: Yes. No, it's a really good question, Harsh. Thank you. You're right. So quite often, as I mentioned, when we raise capital, we want to deploy it sort of immediately. And so we do that by buying generic kind of mortgages, TBAs or production coupons that have the most negative convexity, if you will. But what's important is that over time, we continue to refine and upgrade, if you will, our asset composition. And there's lots of opportunities and capacity to do that.

In the third quarter, for example, what you don't see in our overall numbers is that we actively rotate out of certain specified pools into new specified pools as those opportunities arise as the GSEs, for example, sell new specified pools. Just to put a number on that in the third quarter, about $8 billion of our specified pools rotated and changed into different specified pools that had slightly different characteristics that we preferred more than our existing holdings. So that optimization happens all the time in our portfolio, and that is an important source of alpha generation for us. And I think that there's lots of capacity to do that.

It does take some time months and quarters, but you can do that in significant size on a regular basis. And so what you'll likely see us because we are always trying to give ourselves greater down-rate protection, particularly in the current environment. You'll see us rotate out of those generic pools as opportunities arise into specified pools with certain characteristics that we think are beneficial in the current environment. It could relate to credit, it could relate to LTV, it could relate to HPA in certain areas, lots of little factors can have a big impact on the refinanceability of a mortgage.

Operator: Next question will come from Bose George with KBW.

Bose George: Actually, a couple of little things for me. Peter, you mentioned the $0.05 tailwind. What's the time frame for that? Is that sort of looking at the forward curve and by the time the Fed is done? Or just any color on that?

Peter Federico: Well, the $0.05 -- the way I calculated the $0.05 that was -- you think about that, that was the drag if short-term rates instead of being at 4.43 were reflected basically at about 100 basis point difference in a sense, short-term rates going to the neutral rate. So if that were to happen, for example, over the next, let's say, 6 months, that would be -- that $0.05 would occur over that time period. So it all depends on the pace with which the Fed lowers the short-term rates or the pace with which we which we term out that short-term debt into swaps at the comparable rate.

Bose George: Okay. That makes sense. And then in terms of -- to the extent spreads tighten further, I mean, is that a good thing or a bad thing? It obviously takes up your book value, but does it make it harder to cover the dividend? Or does the math still work since you're getting the lower ROE just on a higher dollar amount of equity?

Peter Federico: Well, you're right in that if the entire change of our book value is due to spreads, then from an investor perspective, they get the benefit, the same economics of the benefit. So if spreads stay where they are, for example, then there's no change in our book value and the future earnings stay strong. Conversely, if the only thing that changes is that spreads tighten, then our book value goes up by the present value of those earnings that you give up. So from an investor perspective, you're sort of indifferent from a return perspective, you're going to get the same economics of the return whether it's in the form of future earnings or in book value appreciation.

From that point forward, then the dividend yield on our book value would be lower. The return on our portfolio would be lower, but they would still be aligned. And from an investor perspective, they would have gotten the same economic benefit all in.

Bose George: Okay. Makes sense. Actually, just one more on spreads. To the extent -- and you noted that if QT is likely done fairly soon. But to the extent the Fed is continuing to run off Agency MBS and reinvesting in treasuries, does that create potential spread risk just of widening of spreads versus treasuries?

Peter Federico: Yes. Chairman Powell actually talked about this just a couple of days ago in his meeting where he indicated that they were essentially at the turning point for the balance sheet and that they were going to end the runoff. And now I think it's become clear that they are. It's -- right now, they continue to -- he, for example, continue to reference the outstanding guidance which is that they intend to hold primarily treasury securities. What they haven't defined for the market, and this is important for the mortgage outlook, is what primarily means. You can make the case that primarily means 95% or primarily might mean 60%. I don't know, and that's an important distinction.

But he said that they will study that and they will clarify that. And certainly, they have a clear mandate to whatever they do with respect to runoff, do so in a way that does not create instability in the market, and he mentioned that. So I don't expect them to do anything with respect to the mortgage portfolio that would destabilize the market. And right now, the runoff pace of the Fed's balance sheet, about $200 billion a year, is certainly an amount of mortgages the private sector can handle those mortgages will get redeployed into treasury. So I think there's still some discussion and outlook there that might change with respect to the balance sheet and the composition.

And ultimately, as we talked about, that could be a lever that -- the government believes is an important one that would actually improve mortgage affordability by changing that composition to include mortgages. And if that were the case, that would certainly put downward pressure on mortgage spreads and downward pressure on the mortgage rate.

Operator: Your next question will come from Eric Hagen with BTIG.

Eric Hagen: Can you walk through the approach behind raising the preferred stock and how much leverage in the capital structure you feel like you're comfortable taking both maybe in the near and longer term. And just generally, I mean, what are the variables that you consider to raise preferred stock is like a substitute for common stock?

Peter Federico: Sure. Yes. The transaction that we did, it was nice to be able to access that market. Sean, when was last time it was like -- we shut off for like 5 years out of that market? So I mean, that market has been dormant for a good 4 years. So I think it was important to reopen that market. I think we were the second transaction to get done in that market. And it was a really -- from our perspective, when you think about -- it was a higher coupon than what we had issued previously.

But consistent with where the breakevens, if you will, with respect to our floating rate were so it's 8.75% coupon on that transaction, it was traded really well in the aftermarket. So we're really happy with it. And that 8.5% coupon is what you want to think about from the economics from a common shareholder is if we can turn around and take that -- those proceeds from the preferred lever that the way we lever it, then that means that we're going to generate a return. Let's just say, make it simple, it's like 16%. There's 9 extra percent of carry that's going to accrue to the benefit of our common shareholders.

So we pushed up, we wanted to issue that, and we pushed up our overall percent of preferred. I think after that transaction; it's around 18% of our overall capital mix. So we feel like that's a good sort of relative mix in our capital structure. It could be a little higher. It has been a little higher. I think at some points in our past, 22% to 25% was about the highest it's been. So we have a little bit of flexibility there.

But certainly, we wanted to take advantage of the reopening of this market because we do believe, and Bernie mentioned this, this is another reason why there's additional earnings that will accrue to the benefit of our common shareholders because of that preferred.

Operator: Our last question for today will come from Jason Weaver with JonesTrading.

Jason Weaver: Peter, can you talk a little bit about how you see the prepay risk in those higher coupon 30s in the 6% and 6.5% range? I think a bit under half are spec, but what specific type of collateral protection are you focusing on there?

Peter Federico: Yes. No, that's really -- it's an important point. And that's one of the reasons why we give you a table that shows like what we call high-quality prepayment characteristics and that's what you're referencing there. But there are other characteristics that we seek that aren't just low loan balance, for example, that are categorized there that have other prepayment protection. So I think it was in the back of our presentation. That's why I talk about 76% of our portfolio has other characteristics. So with respect to those higher coupons, we end up, yes, we end up with -- on Page 8, we give a breakdown, we say 39% high-quality prepayment characteristics and 37% of other characteristics.

Well, those other characteristics matter a lot. They could be loan age and they could be credit and they could be FICO and they could be geography, and they could be certain MSAs, all those kinds of things come together. But with respect to our higher coupons, almost 100% of those higher coupons, I think it's in the high 90s, have some sort of embedded prepayment characteristics that we like. So even though we do have some higher coupons and they are exposed to prepayment risk, particularly in this environment, like we talked about. We are also very cognizant of the characteristics of those pools.

And can we source pools that have characteristics that we believe will give us more stability in those cash flows. So that's the way we kind of look at that. But we did rotate down, as I mentioned, in coupon. So we do have a smaller exposure to the higher coupons and the ones that we do still have in our portfolio have characteristics that we like.

Jason Weaver: That's helpful. And then maybe one more for Bernie. I know you gave an unchanged book value estimate to date, but can you give me any sense of the level of liquidity into October and whether it's substantially different from your cash on hand at quarter end?

Bernice Bell: Sure. Yes, it's -- our liquidity is largely unchanged since quarter end.

Operator: We have now completed the question-and-answer session. I would like to turn the conference back over to Peter Federico for concluding remarks. Please go ahead.

Peter Federico: Well, again, I appreciate everybody taking the time to join our call today. We are certainly happy to be able to deliver the results that we did in the third quarter. In fact, I think the third quarter may have been one of the -- our fourth best quarter over the last 10 years. So we're certainly pleased to be able to deliver that for shareholders. And as I mentioned, we continue to be optimistic about the outlook for the agency market and for our business. So we look forward to speaking to you again at the end of the fourth quarter, sometime in January.

Operator: Thank you for joining the call. You may now disconnect.

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