AGNC Investment Corp. Q1 FY2025 Earnings Call

Good morning, and welcome to the AGNC Investment Corp. First Quarter 2025 Shareholder Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Katie Turlington in Investor Relations. Please go ahead.

Thank you all for joining AGNC Investment Corp. first quarter 2025 earnings call. Before we begin, I'd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the reform act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer; Bernice Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.

Good morning, and thank you for joining our first quarter conference call. Government policy actions and their potential negative impacts on economic growth and inflation have made investors more cautious in the first quarter. This heightened uncertainty surrounding macroeconomic conditions and monetary policy led investors to favor high-quality mortgage-backed securities and cash over riskier assets like equities and corporate debt. Due to our attractive monthly dividend, AGNC achieved an economic return of 2.4% in the first quarter. When reinvested, AGNC's total stock return for the quarter was positive 7.8%. However, the tariff policy announcement in early April significantly increased volatility across all financial markets. As the tariffs were broader and more impactful than expected, recession fears grew substantially. Consequently, equity prices dropped further from their peak in February, entering bear market territory. Interest rate volatility also rose considerably; in the first nine trading days of April, the yield on the 10-year treasury first fell sharply and then rose sharply. During this brief period, the yield fluctuated by more than 100 basis points. This interest rate volatility, coupled with general macroeconomic uncertainty, led to a breakdown in standard financial market correlations, constrained liquidity, and negative investor sentiment. The agency MBS market was also affected by these adverse conditions and experienced significant pressure in early April. The current coupon spread to a blend of 5- and 10-year treasury rates widened to 160 basis points, the highest level in the last five quarters. The performance of Agency MBS relative to swaps was notably poor due to the unprecedented narrowing of swap spreads during the peak market turmoil. Consequently, the current coupon spread to a blend of swap rates reached an intraday peak of 230 basis points, with the widest level during the peak of the COVID pandemic being 235 basis points. As of yesterday, this spread was around 220 basis points—still elevated but lowered from the peaks. AGNC was well positioned to handle the recent market volatility and managed it effectively. Although AGNC's net asset value was negatively affected by the widening mortgage spread, the anticipated returns on our portfolio have increased due to these wider spread levels. Furthermore, at current valuation levels, we believe Agency MBS present investors with an attractive return opportunity, both on a levered and unlevered basis. Recent trading patterns support this value proposition, and historical data shows that spreads do not typically remain at these levels for long. Agency MBS also provide an appealing fixed income alternative to corporate debt and other credit-sensitive instruments, particularly given the worsening economic outlook. For these reasons, even though macroeconomic uncertainty is likely to stay high in the near term, we remain very positive about our outlook for agency MBS. Now, I will hand the call over to Bernie Bell to discuss our financial results in more detail.

Thank you, Peter. For the first quarter, AGNC reported total comprehensive income of $0.12 per common share. Our economic return on tangible common equity was 2.4% consisting of $0.36 in dividends declared per common share and a $0.16 decline in tangible net book value per share due to modest spread widening during the quarter. Quarter end leverage increased to 7.5 times tangible equity, up from 7.2 times at year-end, driven by the decline in tangible net book value per share and the deployment of recently issued equity capital. Average leverage was 7.3 times for Q1, up slightly from 7.2 times in the fourth quarter. We ended the first quarter with a strong liquidity position consisting of $6 billion in cash and unencumbered Agency MBS, representing 63% of tangible equity. During the quarter, we raised $509 million of common equity through our at-the-market offering program at a material premium to tangible net book value, generating meaningful accretion for common stockholders. Net spread and dollar roll income increased $0.07 to $0.44 per common share for the quarter, driven by a higher net interest rate spread and larger asset base. Our net interest rate spread rose 21 basis points to 2.12%. This improvement was driven by higher asset yields, a greater proportion of swap-based hedges and lower funding costs as our repo positions fully reset to prevailing short-term rate levels during the first quarter. Our treasury-based hedges generated additional net spread income of approximately $0.02 per share for the first quarter which is not reflected in our reported net spread and dollar roll income. Lastly, the average projected life CPR in our portfolio increased to 8.3% at quarter end from 7.7% at year-end, consistent with lower rates. Actual CPRs averaged 7% for the quarter, down from 9.6% in the fourth quarter. And with that, I'll now turn the call back over to Peter.

Thank you, Bernie. Before opening the call up to your questions, I want to provide a brief update on our portfolio as of quarter end and discuss in greater detail our outlook for agency mortgage-backed securities. As I already mentioned, slower economic growth expectations pushed equity prices meaningfully lower during the quarter. In contrast, fixed income returns as reflected by the major Bloomberg indices were positive with Agency MBS being the best performing fixed income asset class in the first quarter with a total return of 3.1% followed by U.S. treasuries at 2.9% and corporate debt at 2.3%. On a hedge basis, however the performance of Agency MBS was more mixed with spreads to treasuries generally widening during the quarter, particularly in the low and middle coupon segments of the market. The current coupon spread to the blended 5-year and 10-year treasury rate widened 8 basis points during the quarter. Our asset portfolio totaled $79 billion at quarter end, up about $5 billion from the prior quarter. The mortgages that we added were largely high-quality specified pools and pools with other favorable prepayment characteristics. As a result, the percentage of our assets with favorable prepayment characteristics increased to 77%. The weighted average coupon of our portfolio, meanwhile, remained steady at just over 5%. Our aggregate TBA position was relatively stable during the quarter, although the composition shifted to include a combination of Ginnie Mae and conventional UMBS in response to changing implied financing levels and delivery profile characteristics. Consistent with the growth in our asset portfolio, the notional balance of our hedge portfolio increased to $64 billion at quarter end. In duration dollar terms, our hedge portfolio composition was about 40% treasury-based hedges and 60% swap-based hedges at quarter end. Despite the recent financial market volatility, our outlook for agency MBS remains positive. On the demand side of the equation, we continue to believe that regulatory relief will eventually lead to greater demand for Agency MBS from banks. We also believe more favorable bank capital requirements are forthcoming which could benefit the treasury and swap markets. Another noteworthy development in the first quarter relates to the future of the GSEs. The rapid recapitalized and release narrative that garnered significant attention at the end of last year, and that was a source of uncertainty for investors seems to have quieted somewhat. Importantly, many key decision-makers have expressed the desire for lower mortgage rates, improved housing affordability and for the preservation of the many positive attributes that characterize today's housing finance system. There also appears to be a greater appreciation for the very complex and interconnected nature of our $14 trillion housing finance system, the cornerstone of which is the GSE conventional mortgage market. This most recent episode of financial market volatility is a good reminder that uncertainty related to the housing finance system came quickly to meaningfully higher mortgage rates. In our opinion, the best way to improve housing affordability is to clarify and importantly, make permanent the role of the government in the housing finance system as it exists today. If the government were to do so, the demand for agency mortgage-backed securities would increase, the capital requirement for these securities could be reduced to be consistent with Ginnie Mae securities and lastly, mortgage rates and housing affordability would improve. Also noteworthy, taking this action would not preclude the government from choosing a different capital structure for the GSEs at some point in the future. With that, we'll now open the call up to your questions.

We will now begin the question-and-answer session. The first question comes from the line of Bose George with KBW. Please go ahead.

Hi, everyone. Good morning. Actually, I wanted an update on your book value. You gave the April 9 number with the pre-release, but how does it look since then?

Yes. Thank you for the question, Bose. Yes, Bernie did not include that in the prepared remarks. But mortgage spreads did widen a little bit further from our pre-release number. I would have put our book value down at the end of last week, somewhere in the range of 7.5% to 8%.

Okay. Great. And then, I mean yesterday, spread widening suggested a little bit lower since then as well?

Yes. Yesterday was a difficult day in all the markets. Mortgage spreads widened both relative to swaps and relative to treasuries. The number I quoted was 220 basis points, which was sort of back to the wides we saw. But it's going to be volatile. This is the kind of conditions we are. I would also point out yesterday that while mortgage spreads did underperform considerably, again, there's not a lot of trading volume. I don't believe it's indicative of any forced selling. I believe it's just indicative of really bad investor sentiment. And we also saw again yesterday weakness, if you will, or narrowing of swap spreads, which continues to be a challenge, and that's what's making mortgage performance relative to swaps so difficult. It's not so much what's happening with mortgages to an extent, but it's what's happening with the swap market and swap spreads narrowing like they have really been unprecedented kind of moves, which I think are indicative of the currency flows and the balance sheet constraints and just lack of correlations that's going on right now.

Great. That's helpful. Thanks. And then can you just talk about the comfort level with the dividend, just given where the mark-to-market book value is, if you can just sort of walk through the ROE math that you guys have done in the past?

Certainly. Let me start by discussing our total cost of capital, which we frequently reference. At the end of the first quarter, our total cost of capital, calculated as the dividends paid on both common and preferred stock plus our operating expenses divided by our total tangible capital, was approximately $9.5 billion. This indicates that the breakeven return on our portfolio needed to cover all these costs was 16.7%. However, based on last week's book value, this total cost of capital is now likely closer to 18%. The next question is how this compares to the economic return on our portfolio, which is fully mark-to-market. Our returns moving forward reflect current market valuations, particularly between mortgages and swaps or treasuries. From this viewpoint, especially in the case of mortgages versus swaps, we see unprecedented levels at present. Therefore, I would estimate that expected returns, considering today's valuation levels and comparing mortgages to swaps, are likely between 19% and 22%. When looking at the spread between mortgages and a blended swap curve, which includes 2-year, 5-year, and 10-year swaps, the spread closed yesterday at 220 basis points. Leveraging a portfolio of swaps as we do would yield low 20% returns, which are historically high. So, addressing your question, while our total cost of capital has risen due to the mortgage spread and the decline in our book value, the anticipated returns remain well-aligned with that total cost of capital.

Great. That's helpful. Thanks.

Thank you. We have the next question from Crispin Love with Piper Sandler. Please go ahead.

Thank you, and good morning everyone. Just going back to a few weeks ago, can you discuss how you were able to manage the extreme rate volatility where 10-year yields went from about 4% on April 4 to 450-plus over the course of the next few days. Just based on the book value update, seem to have managed it pretty well, but can you detail how you were able to just based on positioning going into as well as active management during the volatility?

Yes, that's a great question. One key reason we navigated the situation effectively is due to our strong position going into the market. We ended the quarter with a leverage of 7.5, which was slightly higher than our previous level. As mentioned before, we focus heavily on using our capital efficiently, and we maintained a strong liquidity position, with $6 billion in unencumbered cash, representing 63% of our equity. This gives us substantial capacity to handle periods of market volatility without needing to change our asset composition or reduce our leverage. We are always conscious of the potential adverse impacts on our portfolio and liquidity when we assess market shocks. We stress test interest rates and do not assume positive correlations in our calculations. This time, we observed a breakdown in correlations, which affected all market participants. Initially, there was a flight to quality as investors shifted away from equities in favor of fixed-income assets, particularly benefiting Agency MBS. However, this trend was disrupted by a shift in sentiment away from dollar-denominated assets. Throughout this period, we managed to remain steady and avoid drastic actions, which has led to a more orderly market in the past two weeks. Importantly, we haven’t encountered any significant distressed selling, although there were some position liquidations early on in the swap market. Overall, while the market has faced some challenges, the lower volume of the repricing might be a positive aspect. I'll stop here and welcome any follow-up questions.

Peter. That's all helpful. And in the beginning of that answer, you did mention leverage. But can you just share your go-forward outlook on leverage and the hedge ratio? You said that you expect more volatility. And in recent years, you've kept leverage pretty well contained. So are you comfortable with the recent levels you've had? Or could you take it down even further, just given wider spreads, so returns could be protected even if you bring it down a bit, but just leveraging the hedge ratio?

That's exactly right. Clearly, the current spread levels enable us to achieve attractive returns without excessive leverage. Over time, we will assess this. This was one of the reasons we entered this period with lower leverage than our historical averages, allowing us to operate at levels in the low 7s while still generating good returns. This could continue going forward. However, I don't anticipate these spread levels to be maintained. If they do persist, we will reconsider our approach. Based on our observations, I don't believe the current spreads, particularly between mortgages and swaps, are sustainable. For instance, the current coupon mortgage backed by U.S. government support in light of a deteriorating economic outlook shows a spread of about 200 basis points compared to 10-year swap rates. This indicates significant excess returns, especially at 165 basis points compared to 10-year treasuries. In a 5% or 6% environment, these spreads seem unsustainable. That said, we could remain in this range for a time or even see spreads widen due to macroeconomic and government policy uncertainties. We will evaluate our position moving forward.

Thank you, Peter. Appreciate you taking my questions.

Our next question comes from Doug Harter with UBS. Please go ahead.

Thanks. Good morning, Peter. In the past, you've discussed leverage levels and expressed confidence in the stability of those ranges. I understand you mentioned that current spread levels are not sustainable. How do you assess the risk of spread levels potentially widening further due to uncertainty before they normalize, and how do you plan to manage that possible scenario?

We need to be ready for various scenarios, which is part of our daily routine as we assess and manage risks. It’s true that spreads can widen, and it's crucial to understand the differences in mortgage performance, especially compared to treasuries and swaps. For instance, I've noted the spread between mortgages and 5- and 10-year treasuries is at 165 basis points, a level we've seen frequently over the past five quarters, which is not particularly concerning. I mentioned this as the upper end of a narrow trading range, and recently we surpassed that threshold. In comparison, back in September 2023, when interest rates hit 5% and there was uncertainty regarding government issuance, that spread was around 190 basis points. While mortgages are wider compared to the more recent range, they're still within a broader band. Contrarily, the story with mortgages versus swaps is different. The fluctuations here aren't primarily due to concerns about mortgages but rather significant technical changes in the swap market, where swap spreads have shifted drastically. For example, during the first quarter, there was anticipation that swap spreads would widen due to government regulation changes, leading to speculative trades. At one point, 10-year swap spreads became negative 35 basis points, leading to nearly a 30 basis-point shift. This shift is what drives mortgage performance, not an actual concern about mortgages. There is nothing fundamentally or technically wrong with the agency mortgage market. Eventually, investors will recognize the value from a fixed-income viewpoint, particularly because of the attractive returns relative to treasuries and swaps. I believe there will be a movement of capital towards this asset class, especially from corporates. That gives me confidence that valuation levels will eventually normalize, though we must be prepared for further widening and distress. Our strategy involves having a well-diversified portfolio with various coupons and asset mixes, including high and low pay-ups and generic pools. Additionally, maintaining strong cash reserves and unencumbered liquidity is essential, and we are in a position to navigate through this period effectively.

And I guess just following up on that, Peter, given the move in the volatility in swap spreads, have you or are you considering kind of changing some of the makeup of your hedge portfolio?

Yes, that's a great question. And I put in my prepared remarks, it's about 60% from a duration dollar perspective. So when you think about it from a market value perspective, it is important to think about the mix of your hedges on a duration dollar basis. And yes, we have a little bit higher weight now to swaps. I do think that over time, that a sort of a base case may be that a 50-50 mix may be the best mix on a go-forward basis as a starting point. And I say that because it's important we are seeing in the marketplace to have great diversification, and that also applies from the asset portfolio, as well as the hedge portfolio because we see all these sorts of temporary dislocations that have occurred, and they happen from time to time, and they happen for reasons that nobody anticipated like the tariffs. The same applies for having great diversification in your hedge portfolio, and I think that's sort of the base case for us is that we want to have a mix on a go-forward basis that gives us the best diversification, so the starting point may be having hedges across the curve for sure, but also having a mix of both treasury and swap-based hedges so that we're able to withstand these periods as best we can. And that served us well this time. So I think you're right to some extent that the mix may come down on a go-forward basis.

Great. I appreciate it, Peter. Thank you.

The next question comes from the line of Trevor Cranston with Citizens JMP. Please go ahead.

Hi, thanks, good morning. Actually, a follow-up question on your choice of hedge instruments and swap spreads. You mentioned sort of the unwinding of trades betting on a widening of spreads in the earlier part of this year. Can you maybe just share your thoughts on kind of where you think we are in that process and kind of what your general outlook is for swap spreads going forward from here? Thanks.

Yes. I think the significant move in swap spreads yesterday, which narrowed by about 3 basis points in the 10-year part of the curve, was somewhat unexpected. After the initial period from April 6 to April 10, it seemed that much of the trading volume had been unwound. What we’re observing in the swap market now reflects a few factors. There are balance sheet constraints affecting financial intermediaries, which have become apparent. Last week, bank CEOs highlighted these constraints due to regulatory requirements and expressed the need for relief, believing they could do more if these limits were lifted. Additionally, there’s a pessimistic outlook for U.S. dollar-denominated assets, leading investors to prefer derivatives instead of holding hard U.S. dollar assets, which contributes to the current narrow swap spreads. It’s clear to me that a change regarding the supplemental leverage ratio is on the horizon, as discussed by the Fed and the Treasury Secretary. There seems to be a consensus that this ratio will ultimately be eliminated, which would benefit the treasury market and likely widen swap spreads. However, the timeline has taken longer than the market expected. According to the Fed, they wanted to avoid making significant regulatory changes until Michelle Bowman is confirmed as the Head of Bank Supervision. She recently went through the nomination process, and her confirmation is anticipated in a couple of weeks. I expect this will act as a catalyst for some normalization in the swap market moving forward.

Got it. Okay. That's helpful. And then on the capital side of things, obviously, you guys have been utilizing the ATM program over the last several quarters. Can you just give an update on kind of how you guys are thinking about that after the selloff over the last few weeks? Thanks.

We have been taking advantage of that as much as possible. The first quarter is a solid example of this, as we successfully raised capital in a way that positively impacted our book value. This capital was used to support the expansion of our portfolio, contributing to a $5 billion growth. From the perspective of our existing shareholders, this was a strong instance of benefiting both in terms of book value and over the long term, from earnings. I believe this same strategy remains relevant at current valuation levels, as it’s a favorable time to deploy capital, and we will continue to take an opportunistic approach.

Okay, got it. Thank you.

The next question comes from the line of Matthew Erdner with JonesTrading. Please go ahead.

Hi, good morning guys. Thanks for taking the questions. Kind of as a follow-up to the ATM, could you talk about kind of the pace of deployment throughout the quarter? And it looks like you guys kind of invested in that 5.5 coupon there? And as a follow-up to that, where do you guys think is the best opportunity in the coupon stack right now? Thank you.

Yes. In my comments during the fourth quarter call in January, I noted that we were slow to deploy the capital raised in that quarter because we were waiting for better investment opportunities. At that time, I believed opportunities were beginning to emerge, and we started deploying that capital around the time of that earnings call in January. This provides context for when we made those deployments. You're correct that our weighted average coupon on our portfolio remained almost unchanged, at just over 5% for the quarter, indicating that the mortgages we added were primarily concentrated around the 5.5 area. We favor that part of the curve. The pools we acquired had either high-quality characteristics or favorable prepayment characteristics. About $1 billion of our growth came from TBAs. In terms of our view on value moving forward, we're seeing improvements in the dollar roll carry implied financing levels, especially for conventionals compared to last year when the dollar roll market was less attractive. It's been better to finance those positions on our balance sheet, and that has gradually improved throughout the first quarter. This is one reason we shifted some of our TBA position from Ginnie Mae's to UMBS in the first quarter. Looking ahead, if this trend continues, we might hold more TBAs due to the increase in implied financing levels. From a pool perspective, we still favor the intermediate part of the coupon stack, as it offers some prepayment protection, especially now that mortgage rates are nearing 7%, currently around 6.8% to 6.9%. We still see good carry in that area, and if we purchase higher coupons, we will seek those with some form of prepayment protection.

Got it. That’s very helpful. I appreciate all the color to that.

Sure.

The next question comes from the line of Jason Stewart with Janney Montgomery. Please go ahead.

Good morning, Peter. Thanks for the color and comments. A couple of quick follow-ups. You've talked a lot about conceptually changing the swap portfolio, the hedge portfolio going forward? Were there any meaningful changes to date post quarter end that we can incorporate for our modeling purposes?

There have not. We have not really had any substantial portfolio changes.

Okay. Thanks. And then just a clarification. Your 7.5% to 8% down on book was cent 331, not the pre-release date, right?

Yes.

Got you. Okay. And then you mentioned.

Thank you for the great clarification, by the way.

Yes, no problem. You mentioned greater appreciation for complexity of the housing finance system. Is that comment tied to the SLR change that you're expecting? Or is there something more specific to housing that you see as a catalyst to kind of get some clarity in the market?

Yes. I discussed the GSEs because I believe something important is emerging regarding the outlook for Agency MBS. We are in an environment where spreads are historically low, presenting a great buying opportunity, but there is significant uncertainty and volatility due to macroeconomic factors. However, it's important to recognize that amidst the noise surrounding the future of the GSEs, some comments, particularly from the Treasury Secretary, highlight the significance of lower mortgage rates and improving housing affordability. He noted mortgage spreads on a specific day, which shows his awareness of the issue. While debates about the GSEs and their capital structure continue, the housing finance system, particularly the conventional mortgage market created by the GSEs, is functioning exceptionally well. It's crucial to understand that changes to the GSEs, while seemingly uncomplicated, could have far-reaching effects. For instance, the TBA market, which trades without credit risk, is incredibly liquid and underpins our housing finance system. It is essential for loan originations, servicing, and allows homeowners to secure mortgage rates in advance. There is now a greater understanding of this interconnectedness. Although we can discuss the potential future structure of the GSEs, it is evident that they provide substantial benefits to our housing finance system. To improve housing affordability, especially with current mortgage rates, we must approach this issue thoughtfully and cautiously, as expressed by the Treasury Secretary. Overall, the current structure with the GSEs in a strong capital position and the PSPA agreement is functioning effectively. We can still consider changes, but we must maintain that core structure. I'll stop here.

Got it. Makes sense, thanks Peter.

Next question comes from the line of Eric Hagen with BTIG. Please go ahead.

Hi, thanks good morning guys. I want to take your temperature on the prepayment environment and maybe how you'd characterize the level of convexity risk that you see in the market generally and how you maybe compare the level of convexity risk that we're taking in the portfolio with spreads at these levels versus the nature of the level of prepayment risk in the portfolio the last time spreads were near these levels?

Thank you for your patience. I want to clarify our book value update, which goes up to the end of last week and includes our dividend accrual. It's important that everyone understands this. Regarding the prepayment outlook, I want to highlight a few points. The recent merger of Rocket and Mr. Cooper will increase the negative convexity in the market because of their refinancing efficiency. To put it into perspective, this merged entity is expected to account for about 10% of originations and 15% of servicing volume. Rocket's refinancing speed is likely 10% to 20% faster than the broader market. While prepayment risk is present, our portfolio faces more call risk than extension risk, as reflected in our sensitivity analysis. We are still far from facing significant refinance risk overall. For instance, with current mortgage rates around 6.18%, only 15% of borrowers would see a meaningful refinancing incentive at a 50 basis point drop. If mortgage rates fell to 5%, that percentage would increase to 25%. Given the recent market movements and a steepening yield curve, mortgage rates could rise further, making significant prepayment scenarios less likely without a substantial drop in rates. Our portfolio's characteristics, which include 42% high-quality pools, also indicate that about 75% of our holdings have traits that help manage prepayment risk. In particular, our higher coupon holdings at 6% and 6.5% have approximately 95% of positions with some degree of prepayment protection. While prepayments can occur, we particularly value these characteristics. Our approach to managing prepayment risk focuses more on these underlying features rather than just on loan balance metrics, ensuring we maintain significant protection across our portfolio. I’ll stop here for any questions.

That's great stuff. I appreciate the detail. I want to ask maybe a more general question related to the mortgage market and the sensitivity that you guys see to margin calls with respect to levered investors like mortgage REITs potentially being forced to sell assets or raise liquidity in certain shock scenarios and whether you think that could reverberate or contribute to wider mortgage spreads and how meaningful do you guys think that risk is in the market right now?

I don't think any of that is related to the current repricing in the mortgage market. I haven't observed anything like that. What we often see is that the main flow in the mortgage market is from passive investments, which has both positive and negative aspects. When fixed income flows increase, there is a demand for money managers to buy mortgages. Conversely, when the bond and equity markets shift towards cash or risk-off strategies, we tend to see bond fund redemptions. The major flow affecting mortgage valuations has been money leaving bond funds as investors raise liquidity for expected or actual redemptions. This situation calmed down, but we noticed some pressure in the market last week due to a long holiday weekend and higher origination volumes ahead of it. While these factors can influence the market, I have not seen any signs of forced deleveraging, especially within the REIT sector. All the REITs appear to be in strong positions regarding their liquidity, leverage, and portfolios, so I don't expect this to be an issue.

Gotcha. Thank you, we appreciate you guys.

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

Hi, thanks for taking my question. Actually, Jason asked the question I wanted to ask and he asked it far more articulately than I would have. So thank you.

We have one more question.

The next question is from the line of Harsh Hemnani from Green Streets. Please go ahead.

Hey, good morning. So you sort of touched on swap spreads to mortgages widening a lot more than spread treasuries and maybe on the flip side of that, if I heard you correctly, I think you mentioned that the swap-based hedges might come down or that's what you are planning to do. Can you talk through that decision on how you're paying on the one hand, sort of playing offense because these spreads look unsustainably high versus, on the other hand, being more diversified and more defensive. So could you walk through your thoughts on the business in making there?

Yes. No, you're right. So I mentioned both those factors. And I also mentioned that we have not made any change to our swap portfolio. So important from that perspective. So that would be something when I answered that question, I was more referring to over the long run, that may be something that we factor into our overall risk management strategy as sort of from a base case desire to have a more balanced position between swaps and treasuries. But we'll have to wait and ultimately have the market settle and volatility to come down and make that determination. But in the short run, you're 100% correct that there is much better carry, on mortgages versus swaps and we’ll try to take advantage of that.

Right. That's helpful. Thank you.

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

Well, again, thank you everyone for participating on the call. Thank you for the questions. Although the market is volatile, as I mentioned, our long run view continues to be very positive for Agency MBS as an asset class, and we look forward to talking to you again at the end of the second quarter.

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