Earnings Call Transcript - AGNC Q1 2024

Operator, Operator

Good morning and welcome to the AGNC Investment Corp First Quarter 2024 Shareholder Call. 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.

Katie Turlington, Investor Relations

Thank you all for joining AGNC Investment Corp.’s first quarter 2024 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 facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC’s periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC’s website. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on this call include Peter Federico, Director, President and Chief Executive Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; Chris Kuehl, Executive Vice President and Chief Investment Officer; Aaron Pas, Senior Vice President, Non-Agency Portfolio Management; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I will turn the call over to Peter Federico.

Peter Federico, CEO

Good morning and thank you all for joining our earnings call. AGNC generated a strong economic return of 5.7% in the first quarter, driven by a combination of our compelling dividend and book value appreciation. On our earnings call last quarter, we talked about our growing confidence that the difficult transition period for Agency MBS was nearing its conclusion and that a durable and favorable investment environment for AGNC was slowly emerging. We highlighted our belief that short-term rates had peaked for this tightening cycle that interest rate volatility would decline and that Agency MBS would remain in this new, more attractive trading range. These positive dynamics were all present to some degree in the first quarter and will ultimately drive AGNC’s performance over the remainder of the year. With respect to monetary policy, there were both positive and negative developments in the quarter. On the positive side, there was a growing consensus among Fed members regarding the level and direction of short-term interest rates. As reflected in the March Minutes, participants judge that policy rate was likely at its peak for this tightening cycle, and almost all participants noted that it would be appropriate to move to a less restrictive monetary policy stance this year if the economy evolved as expected. In his testimony before Congress, Chairman Powell characterized the Fed’s position as waiting for a bit more data, and that rate cuts may not be far away. Importantly, the Fed also indicated that it would reduce the pace of runoff on its treasury portfolio at an upcoming meeting. This initial balance sheet action is a positive development for fixed income investors. The negative development was stronger-than-expected economic data. Inflation indicators did not show the continued decline that the Fed was hoping for, and growth in labor readings remained surprisingly robust. As a result, the timing and magnitude of future rate cuts became considerably more uncertain. The interest rate environment during the quarter was generally positive as interest rates increased gradually across the yield curve. Interest rate volatility also declined meaningfully during the quarter. Against this backdrop, Agency MBS performance across the coupon stack was mixed, with spreads on lower coupon securities widening and spreads on higher coupon securities tightening. Also noteworthy, Agency MBS spreads remained in the same well-defined trading range, and spread volatility declined meaningfully. In fact, in the first quarter, spread volatility was 20% to 30% lower than what we experienced last year. The supply and demand technicals for Agency MBS were also favorable in the first quarter as seasonal factors and affordability issues significantly curtailed origination activity. At the same time, bank demand proved to be greater than expected. This uptick in bank demand was in part due to a view that Basel III would be substantially revised. Collectively, these factors drove our favorable first quarter results. That said, periods of market turbulence are to be expected given the evolving nature of monetary policy. April is a good example of such an episode. After a period of relative stability in the first quarter, benchmark interest rates and volatility increased sharply due to less optimistic inflation expectations and escalating geopolitical risks. Against this backdrop, Agency MBS spreads widened meaningfully but remained below the midpoint of the recent trading range. Absent further adverse inflation developments, which could cause the Fed to change the direction of monetary policy, we believe this period of fixed income market turbulence will be relatively short-lived. Looking beyond the recent downturn, the long-term fundamentals for Agency MBS continue to be favorable and give us reason for optimism. With absolute yields above 6% and backed by the explicit support of the U.S. government, Agency MBS are appealing to an expanding universe of investors. Moreover, if monetary policy evolves largely as expected, interest rate volatility will decline, the yield curve will steepen, and quantitative tightening will come to an end. The specific timing of Fed rate cuts is not critical to the long-run performance of Agency MBS. As a highly liquid pure-play levered Agency MBS investment vehicle, we believe AGNC is well positioned to benefit from these favorable investment dynamics as they evolve over time. With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail.

Bernie Bell, CFO

Thank you, Peter. For the first quarter, AGNC had comprehensive income of $0.48 per share and generated an economic return on tangible common equity of 5.7%, which included $0.36 of dividends declared per common share and a $0.14 increase in tangible net book value per share. As Peter mentioned, the investment environment has been more challenging in April with longer-term interest rates moving sharply higher and Agency MBS spreads widening 10 to 15 basis points across the coupon stack. At the worst point late last week, our tangible net book value was lower by about 8% after deducting our monthly dividend accrual. Leverage as of the end of the first quarter increased modestly to 7.1x tangible equity compared to 7x as of Q4, while average leverage for the quarter decreased to 7x from 7.4x in Q4. Net spread and dollar roll income for the quarter remained strong at $0.58 per share. The modest decline of $0.02 per share for the quarter was due to a decrease in our net interest spread of 10 basis points to a little under 300 basis points for the quarter as higher swap costs more than offset the increase in the average asset yield in our portfolio. Consistent with higher interest rates, the average projected life CPR for our portfolio at quarter end decreased 100 basis points to 10.4%. Actual CPRs for the quarter averaged 5.7%, down from 6.2% for the prior quarter. In the first quarter, we also successfully raised approximately $240 million of common equity through our aftermarket offering program at a significant price to book premium. Lastly, with unencumbered cash and Agency MBS of $5.4 billion or 67% of our tangible equity as of quarter end, our liquidity continues to be very strong. We believe the substantial liquidity not only enables us to withstand episodes of volatility but also to take advantage of attractive investment opportunities as they arise. And with that, I’ll now turn the call over to Chris Kuehl to discuss the Agency mortgage market.

Chris Kuehl, CIO

Thank you, Bernie. Stronger-than-expected economic data during the first quarter led to a material repricing of market expectations for Fed rate cuts in 2024. Accordingly, yields on 5- and 10-year U.S. treasuries were higher by 36 and 32 basis points, respectively. In general, risk assets handled the repricing well considering the magnitude of the adjustment with the S&P gaining more than 10% and the Bloomberg investment-grade corporate bond index generating an excess return of approximately 90 basis points. In aggregate, the Bloomberg Agency MBS index lagged the performance of other fixed income sectors with spreads slightly wider versus U.S. treasuries. However, given the large move in rates, the relatively benign magnitude of aggregate underperformance was encouraging as compared to the way that MBS performed last year during similar moves. The performance of Agency MBS by individual coupons varied considerably, with spreads on the lowest index coupons widening approximately 10 basis points as the potential for bank supply weighed heavily on these coupons. In contrast, higher coupon MBS performed very well during the quarter, tightening 5 to 10 basis points as relatively slow prepayment speeds, limited supply, and steady fixed income inflows provided a favorable backdrop for these coupons. Our portfolio increased $3.1 billion from the start of the year to end the quarter at $63.3 billion as of March 31. During the first quarter, we continued to gradually move up in coupon and optimize our holdings in specified pools versus TBA. Our TBA position ended the quarter higher at $8.4 billion, with Ginnie Mae TBA representing approximately $5.2 billion as of quarter end. Our hedge portfolio totaled $56.3 billion as of March 31, and as I mentioned on the call last quarter, we began to gradually shift the composition in favor of a heavier allocation to swap-based hedges. This move benefited our performance during the first quarter as swap spreads widened 9 basis points and 5 basis points at the 5- and 10-year points on the curve, respectively. As Peter discussed, the data-dependent nature of current Fed policy will likely create some volatility in markets. However, the longer-run earnings environment for Agency MBS is very favorable with historically wide spreads, low levels of pre-payment risk, deep and liquid financing markets. I’ll now turn the call over to Aaron to discuss the non-agency markets.

Aaron Pas, SVP, Non-Agency Portfolio Management

Thank you, Chris. While higher rate environments typically have negative implications for both consumer and corporate credit fundamentals, the current robust employment landscape continues to bolster credit performance. Consequently, fixed income credit generally performed well in the quarter, resulting in positive excess returns across most sectors. As an indicator for credit spreads in Q1, the synthetic investment-grade and high-yield indices adjusted for the role tightened by approximately 10 and 45 basis points, respectively. On the credit fundamental side, we continue to expect an increasing divergence of consumer performance metrics. As we have previously noted, U.S. households have experienced varying degrees of inflationary pressures primarily bifurcated between households with low note-rate mortgage debt, who are relatively immune to the higher rate environment and housing inflationary impacts and renter households who are not. As a result, we expect the divergence of credit performance between the two groups to widen with renters at a relatively high risk of falling behind on obligations such as rent, auto loan payments, and credit card debt. Given our current portfolio construction, deteriorating performance for this cohort would be expected to have a negligible impact on our holdings. Accumulated inflation pressures and prolonged exposure to increased rate levels could, however, become a more material issue for a broader group of consumers to the extent they persist for a significant period. Turning to our portfolio, the market value of our non-Agency securities ended the quarter at $1 billion, in line with the prior quarter. The composition of our holdings was largely unchanged, though we did continue to rotate some of our credit risk transfer securities down the capital structure, where we saw relative value opportunities to improve risk-adjusted returns. Lastly, although asset spreads have continued to tighten, presenting a challenge for projected future returns, the funding landscape for non-agency securities is currently stable and remains relatively attractive. With that, I’ll turn the call back over to Peter.

Peter Federico, CEO

Thank you, Aaron. We’ll now open the call up to your questions.

Operator, Operator

[Operator Instructions] The first question comes from the line of Bose George with KBW. Please go ahead.

Bose George, Analyst

Everyone, good morning.

Peter Federico, CEO

Good morning, Bose.

Bose George, Analyst

Can you describe the level of current spreads and what that implies in terms of incremental ROEs?

Peter Federico, CEO

Sure, I appreciate the question, Bose. Yes, as we talked about and Bernie mentioned, we see mortgage spreads across the coupon stack widening somewhere between 10 and 15 basis points really in the month of April. The middle coupons, the 5.5% area, has been actually the worst-performing coupons quarter-to-date. But when you look at where mortgage spreads are now, they are approaching the middle of the range, but they’re still below the midpoint of the range. If you look at the current coupon to the 5- and 10-year treasury at the low 150 range, importantly, if you look at it concerning where the 5- and 10-year swaps are, that’s more like 185 basis points. So it depends on what your hedge mix will obviously drive our net interest margin. But that would translate to, given the way we hedge, a mix of swaps and treasuries leaning more towards swaps than treasuries in this environment could put that initial margin up in the 170 to 175 basis point range operating with the leverage that we typically operate in the mid-7s, low to mid-7s currently. That still translates to expected ROE of about 16% to 18% given our cost structure. So mortgages are obviously more attractive than they were at the end of last quarter; they are more attractive right now, and that seems to be a compelling level from our perspective.

Bose George, Analyst

Okay, great. Thanks. And a related question, can you just talk about the comfort level on the dividend, the breakeven ROE now, I guess, high 17s, but that’s within the range you just mentioned?

Peter Federico, CEO

Yes. As you pointed out in the past, it depends on how you look at that calculation. I think you’re referring to the dividend yield on our common, and that would translate to 17. So you’d have to think about leverage on common if you want to think about it that way. If you did that same calculation that we just went through, but did it on the common leverage, you would end up with an ROE above that 17% level. It’s important given our capital structure and the amount of preferred that’s still generating a lot of incremental value for our common shareholders. The average cost of our preferred stock, I think at the end of last quarter was around 7.25%. It’s a little higher now given the reset of one of our preferreds. But there’s a lot of incremental value there. If you think about it from a total cost of capital, the amount of common dividends, preferred dividends, and our operating costs as a percentage of equity, that came to around 15.7% or thereabouts. Our dividend level and that total cost of capital remains well aligned.

Bose George, Analyst

Okay, great. Thank you.

Peter Federico, CEO

Sure. Appreciate the good questions, Bose.

Operator, Operator

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

Rick Shane, Analyst

Hey, guys. Thanks for taking my questions this morning. Look, so one of the interesting facets of the portfolio is the contribution from swaps over the next several months. You have $8.5 billion notional rolling off. Those swaps essentially contribute about 20% to 25% of your spread income. As you look forward, given the opportunity, how do you replace that runoff?

Peter Federico, CEO

Yes, I appreciate the question, Rick. Yes, I think I didn’t hear the first part of your question, but I think you’re talking about swap spreads and swap spread performance. That was an important driver of performance because swap spreads tightened a lot. When you think about our net interest margin, we talked a lot about this. Our net interest margin has remained really robust. Last quarter, it was 298 basis points, and that’s not consistent with the economics that we just went through. If you think about that net interest margin at around 300 basis points, and you divide that and think about that from an ROE perspective, you’re going to get an ROE of 25%, 26%. The economics of our business, as we just talked about, are in the mid to high teens. What’s going to happen over time is as those swaps run off, you’re right, we have $8.5 billion still maturing, and we had about $5 billion mature, by the way, in the first quarter. That contributed to somewhat that slight decline in our net interest margin. Those will roll off over time, and our net spread or net interest margin because of those swaps rolling off will come down. There are other factors, though, that you have to consider. It’s not as easy as just those swaps rolling off. We will put other swaps on that have positive carry on them. If you put on a longer-term swap today, it’s still a positive carry by, for example, a 10-year by 150 or so basis points. Additionally, our asset yield is still below market yields. It’s still 25, 30 basis points below market yields. As Chris and the team roll the portfolio over and continue to move our assets around, we’ll see some uptick in our asset yield like you saw last quarter. But over time, that net interest margin over a longer period will come down more in line with the economics of our business, which is really the mark-to-market yield that we just discussed in the previous question.

Rick Shane, Analyst

Got it. Yes. And that really does get to the punchline, which is that as you’re looking forward to all of those factors, that’s really what’s dictating the dividend policy.

Peter Federico, CEO

I appreciate that clarification. That’s exactly right. It’s setting the dividend policy based on the level of return from an economic perspective that we’re observing as opposed to the current period earnings – that gets reflected in our net interest margin.

Rick Shane, Analyst

Okay, thank you very much.

Peter Federico, CEO

Sure. Appreciate the question.

Operator, Operator

Our next question comes from the line of Terry Ma with Barclays. Please go ahead.

Peter Federico, CEO

Good morning, Terry.

Terry Ma, Analyst

Hey, good morning. Thank you. You mentioned that you thought the recent volatility would be short-lived. Can you maybe just give a little bit more color on what gives you confidence that it will be short-lived – and then maybe just your expectations on where near-term spreads are set once the volatility this year.

Peter Federico, CEO

Sure. Both Chris and I tried to address this to some extent in our prepared remarks. I think Chris referenced the fact that this quarter looked a lot different than previous quarters when we had similar moves. That’s really a critical point from our perspective. What occurred in the first quarter was generally a very stable market condition, but there was a significant repricing of the timing and magnitude of short-term rate moves from the Fed. Importantly, it was not a shift and has not yet become a shift in paradigm with respect to monetary policy. The Fed was really clear in a number of communications that the policy rate was likely at its peak and the next move was likely going to be an easing. What we had in the first quarter was simply a plateauing of CPI data – it came in at 3.9%, then 3.8% and 3.8% again. It just didn’t show the improvement that the Fed was looking for. In the 2 or 3 days following each of those CPI reports, the 10-year treasury moved up 20 to 25 basis points. When we started the year, the market probably incorrectly expected the Fed to ease 5 or 6 times. Now, as we sit here today, the market has repriced to only 1.5 moves this year, and aggregate, the Fed funds futures in 2027 tell us there are only six moves in total, meaning that the Fed funds rate now according to the market’s projections is going to settle out at around 4%. That’s materially higher than what the Fed’s own long-run target is, which is still 2.5%. So what we had occur is a significant repricing of the path of short-term interest rates. We had volatility following inflation reports. If we get two or three inflation reports that are at or better than expected, we’ll have the same sort of significant repricing in the opposite direction. I think the Fed is looking for two or three months in a row of better data to have sufficient confidence. Once they get that data, then everybody will be pricing in the eases again and the direction of monetary policy will be clear again. Right now, it’s a little uncertain, but we think the repricing is largely over. With respect to spreads, when you look at current coupon spreads near the middle of the range, that seems like a good place from our perspective. Current coupons of the 5- and 10-year treasury at 150 to 160 basis points seem healthy against swaps, 180 to 190. We do have some negative seasonals right now between April and May; those should be kind of the worst seasonal months for mortgages in terms of origination. So the market is in a good place right now with the repricing that has taken place.

Terry Ma, Analyst

Got it. Thank you. Very helpful color. And then just on your hedge ratio and your duration gap, you guys took the hedge ratio down, and you’re now running a slightly positive duration gap. Maybe just a little bit more color on that move and then talk about where you’re comfortable running the book in this environment.

Peter Federico, CEO

Sure. I’ve talked about this for a while. It does make sense for us to gradually move our hedge ratio down as the Fed’s monetary policy outlook changes. We wanted to run with a very high hedge ratio, more than 100% of our short-term debt essentially termed out in order to protect our funding cost in a rising short-term rate environment. We’re now at the inflection point, and over time, I would expect that to come down. As we get more confidence in the timing and magnitude of the Fed cuts, we will ultimately probably operate with an even lower hedge ratio such that at some point in the monetary policy easing process, we would want to operate with some percentage of our short-term debt unhedged. Chris mentioned our gradual movement to more towards swaps in our hedge mix. I think we have a positive outlook.

Chris Kuehl, CIO

Yes, so our funding is obviously SOFR-based. Generally, we want to have a more significant portion of our hedges in SOFR-based swaps, which also have better carry. Over the last couple of years, the bid for mortgages was highly correlated with treasuries, given that the dominant investor base were index funds as opposed to banks. It made sense to have a more sizable component of our hedge book in treasury-based hedges. U.S. Treasury issuance was extraordinarily high at a time when banks were not in a position to grow the securities holdings. So, that had the effect of cheapening treasuries versus swaps. Now, with bank deposits stabilizing and QT likely drawing to an end, we’re gradually moving our hedge book to have a higher concentration in swap-based hedges. This will be a gradual shift; we want to maintain diversification within our hedge portfolio composition just as we do on the asset side.

Terry Ma, Analyst

Okay, great. Thank you.

Peter Federico, CEO

Sure. Thanks for the question.

Operator, Operator

Our next question comes from the line of Crispin Love with Piper Sandler. Please go ahead.

Crispin Love, Analyst

Thanks. Good morning. I appreciate it. Thank you for taking the question. Just looking at fund flows, bond flows have been very positive. Government fund flows have been positive as well, which have positive implications for agency, but only tells part of the story. So can you just speak to what you’re seeing on the flow side? Who are the major buyers right now of Agency MBS? I think you mentioned a little bit about banks coming back in the first quarter, but do you think some of the recent rate moves could keep some of them on the sidelines for a bit?

Peter Federico, CEO

Yes. We certainly did see that. You’re right. Part of the reason it didn’t feel like a paradigm shift in the first quarter was because bond fund flows generally stayed positive throughout the quarter. There was probably a week or two where they actually got to zero, maybe negative, but never really any big movement out of bond flows like we saw at various times last year. The bond fund flows continue to be neutral to positive. I think we’re also starting to see outside the bond fund complex inflows into mortgage-backed securities. Those flows are hard to quantify, but they are evident in particular, if you look at how the mortgages performed across the coupon stack, where lower coupons underperformed in higher coupons. The current coupon really above the 6 and 6.5% tightened on the quarter. I think that shows there’s new demand for those high-yielding securities. With the backup we have, the current coupon now at around 6.5%, that looks attractive to treasuries and also looks appealing to investment-grade corporates. Mortgages currently are worth about 30 basis points more than investment-grade corporates. I think the credit quality, obviously backed by the U.S. government’s support, helps in an environment where the economy is ultimately slowing. I think that trend will remain in place for a while; those reallocations tend to take time.

Crispin Love, Analyst

Great. Thanks, Peter. Appreciate you taking my questions.

Operator, Operator

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

Doug Harter, Analyst

Good morning, Doug.

Peter Federico, CEO

Good morning, Doug.

Doug Harter, Analyst

The way you’ve described the market, how are you thinking about continued capital raises and the attractiveness of that opportunity?

Peter Federico, CEO

I appreciate the question. We always look at it through the lens of our existing shareholders, first and foremost. As Bernise mentioned, we were able to raise capital through our at-the-money program very accretively in the first quarter. We’ll continue to look at those opportunities. The first quarter is a good example of the cost-effective nature of that capital issuance, the book value accretion that can generate value for our existing shareholders. As Chris mentioned, we added a little over $3 billion worth of mortgages during the quarter. Given the amount of capital we raised, we were able to deploy those proceeds immediately into the mortgage market. About half of those purchases went toward leveraging that new capital immediately. So there’s no drag from a dividend perspective; it’s accretive to book value. We will continue to look for opportunities to do that. I like mortgages better. Mortgages have spent a lot of time in the first quarter near the tighter end of the range, which gave us some pause. We will continue to be opportunistic if we can generate value for our existing shareholders through our capital markets activities.

Doug Harter, Analyst

And then just contrast that with how you see leverage today and how leverage might move around given kind of book value weakness but also the ability to protect and/or add new assets?

Peter Federico, CEO

We certainly have a lot of capacity and flexibility. I think that’s appropriate because we are moving in a positive direction slowly. There’s going to be volatility along the way. We want to be disciplined with our capital deployment and our leverage because monetary policy is still evolving. There are lots of variables that drive the Fed. Over time, we’ll get more clarity. There may be a time when we have even more confidence in the outlook. Our confidence is growing. We have strong liquidity positions of $5.4 billion. In relation to equity, it was one of our highest points last quarter at 67%. If you think about that on our assets, it’s over 8%. We have a lot of capacity but want to be disciplined. There’s an evolving environment; our confidence will grow. We’re starting to see consolidation in spreads; that’s healthy for the market. For mortgages to move to the high end of the range, it’s becoming increasingly challenging. There’s growing reasons for them to trade at the lower end of the range. We haven’t seen them all evolve fully yet, but we will see how the economy unfolds over the next three to six months and how the Fed’s behavior changes.

Doug Harter, Analyst

Great. Thank you, Peter.

Peter Federico, CEO

Sure. Appreciate that.

Operator, Operator

Our next question comes from the line of Jason Weaver with Jones Trading. Please go ahead.

Jason Weaver, Analyst

Hi. Good morning. I was hoping you could expand a little bit more on Doug’s first question there. The 25 million shares you issued during the quarter; can you talk about the timing and coupon deployment of that capital in the quarter and subsequently?

Peter Federico, CEO

I’m sorry, could you repeat the first part? I didn’t have a little to hear in your question.

Jason Weaver, Analyst

I was just trying to expand on the answer to Doug’s first question about the timing and deployment of the ATM issuance you raised in the first quarter.

Peter Federico, CEO

Yes, like I said, the ATM gives us flexibility. We were able to raise money through our ATM program and deploy it immediately. As Chris mentioned, you could talk about where we would like a coupon stack, but that gets deployed almost simultaneously.

Chris Kuehl, CIO

Peter mentioned the $3 billion increase. That was a fair value increase. We added roughly $4 billion in Agency MBS during the quarter in current phase terms. The majority of which was in higher coupon 30-year TBA. We also added about $400 million in hybrid ARMs.

Jason Weaver, Analyst

Was that sort of weighted throughout the quarter or weighted towards the beginning or end? Can you speak to that?

Peter Federico, CEO

We usually don’t give those sorts of detail. I appreciate the question, but…

Jason Weaver, Analyst

Fair enough. What were you thinking about the implications for the Fed’s reduction in Q2 and how that might change your portfolio strategy, hedging strategy?

Peter Federico, CEO

As Chris mentioned, the Fed is going to move first and significantly with respect to its treasury portfolio. I expect the Fed to announce next week at the meeting that they will cut the treasury cap in half. It does not appear based on the minutes that they are going to change at this point to the mortgage cap because the mortgages are running off so far below. They are running off at about half of the cap right now. I do expect treasury run-off caps to come down, which will have a positive development for treasuries relative to swaps. When you think about bank regulation and the fact that bank regulation is going to be less onerous, I think that’s going to also push us to, as Chris mentioned, to swap. I think that’s where it has an implication from a hedging perspective. Longer term, it’s still unclear exactly how the Fed is going to handle its mortgage portfolio with respect to its changes to its balance sheet. This is an important development. Last week, there was a paper from the Open Markets Desk at the New York Fed showing how the Fed may approach tapering its portfolio runoff. In both of those scenarios, they had the mortgage cap getting cut in half. That would not have any practical impact on the speed of runoff because mortgages for the Fed’s portfolio are running off between $17 billion and $20 billion. Still, it would have a long-term stabilizing effect on the mortgage market if they choose a cap structure like that. They could still achieve their stated purpose by allowing mortgages to run off and be redeployed into treasuries. Over a long-time horizon, they could achieve their objective of having primarily treasuries. That would be a transfer of mortgages to treasuries over multiple years. If they used a lower cap to allow that to happen, that could be positive for mortgages. We will have to wait and see how the Fed handles that. I don’t think we will get that level of detail right now, but I think we will get that over time.

Jason Weaver, Analyst

Alright. Thank you for that.

Peter Federico, CEO

Sure.

Operator, Operator

Our last question comes from the line of Merrill Ross with Compass Point. Please go ahead.

Merrill Ross, Analyst

Good morning and thank you. You might not answer this, given what you’ve just said, but did you add to the portfolio into April’s volatility, particularly in the 5.5, and what is the current leverage given the decline that Bernie referred to in book value?

Peter Federico, CEO

I’m sorry; I didn’t hear this last part. We have a little bit of a bad connection. I think the first part was, did we add to the portfolio in April?

Merrill Ross, Analyst

What is the current leverage?

Peter Federico, CEO

Current leverage is around 7.4, given the backup in net asset value and portfolio activity to date.

Chris Kuehl, CIO

With respect to relative value within the agency space, we haven’t had any material changes in the size of the portfolio quarter-to-date. Higher coupons significantly outperformed lower coupons during the quarter, in part given concerns around bank sales and lower coupons related to some M&A balance sheet restructuring announcements that were made. Also in response to very favorable prepayment reports that showed considerably flatter refi responses in higher coupons compared to what we saw during COVID with similar incentives to refinance. Up in coupon benefited from that as well. Despite the higher coupons outperforming, relative value is still generally upward sloping across the coupon stack.

Merrill Ross, Analyst

Okay. I have one other unrelated question, if you don’t mind.

Peter Federico, CEO

Sure.

Merrill Ross, Analyst

The Series C that’s callable. Wouldn’t you use some of your liquidity? I mean maybe on the margin, it’s not really material to you? I am just curious.

Peter Federico, CEO

We are constantly evaluating our capital structure. You are right; that series is callable. Even though it has reset higher and the coupon on that one is a little 10.7%, it’s still materially higher than our other fixed-rate preferreds. Given where the returns are on our portfolio, that is still a lot of value accruing to the benefit of our common shareholders. We will look for opportunities to optimize that cost of our capital. The preferred market has been relatively quiet right now, so there’s not a lot of activity going on, but I expect that to change over the remainder of the year, and there might be opportunities in the preferred market as we move forward. We will continue to evaluate that. But it does generate incremental value for our common shareholders.

Merrill Ross, Analyst

I believe MSA refinanced a series at 9%. I am just curious; not that seems like a really huge relative value trade from 10% to 9%, but...

Peter Federico, CEO

The other important part about the floating rate preferred obviously is that we are likely at the peak of that coupon. The coupon can change rapidly, so there’s a lot of option value in those series right now. The Fed obviously has a couple of quarters of positive inflation data, and the forward curve will be materially downward sloping, and those coupons could look very attractive in a year or so.

Merrill Ross, Analyst

Great. Thank you.

Peter Federico, CEO

Sure. I appreciate your question.

Operator, Operator

And our last question comes from the line of Eric Hagen with BTIG. Please go ahead.

Jake Katsikas, Analyst

Good morning. This is actually Jake Katsikas on for Eric. Appreciate you guys taking my questions. First one, could you flesh out a little bit the outlook you have for prepayment speeds, including how much room you might see for your forecast to change with mortgage rates coming up recently? Do you think faster speeds would be a benefit or maybe a headwind on earnings or possible economic return? Thanks.

Peter Federico, CEO

Sure. Chris, do you want to talk about prepayment?

Chris Kuehl, CIO

Given our coupon composition, slower speeds, the prepayment reports over the last two months have been some of the more interesting than we have had – that we have had over the last couple of years. After spending December through mid-February at sort of local lows and mortgage rates with rates around 6.5% to 6.75% after spending the second and third quarters last year originating pools with 7.5% to 8% note rates. We got a lot of insight into the refi response on a sizable population of loans with, call it, a 75 basis point to 100 basis point incentive to refinance. What we learned was that speeds were quite a bit slower than what many had feared and slower than what we observed during COVID on similar incentives to refinance. This has provided a tailwind to higher coupons. I think there are a number of factors that contributed to the slower response than what we saw during the last refi wave. Slower speeds are favorable for our position. With respect to the lowest coupons, which are a very small percentage of our holdings, even there, turnover speeds have been slightly better or faster than what many had feared. I hope that gives you some insight into our outlook on speeds.

Jake Katsikas, Analyst

Yes, it does. Appreciate that. And then finally, just going back to leverage. What is your historical range for leverage been? And do you think that range might change at all if mortgage spreads remain historically wide?

Peter Federico, CEO

Yes. Historically, our leverage has ranged probably at the low point, around 6% and at the highest maybe around 9% or 9.5%. That gives you some bookends, but really, what you have to think about with leverage is that it’s dependent on the environment. It depends on mortgage spreads being tight versus wide. All other things equal, in an environment that we have just gone through, where there has been a significant negative fixed income market repricing as the Fed went from quantitative easing to quantitative tightening—bad for all fixed income securities with high volatility. You have to volatility-adjust down the leverage. Each unit of leverage has a higher risk element to it. So, all other things equal, that meant we had to bring our leverage down. As the environment changes and we get more confident mortgage spreads will hold, that will be an important driver for leverage going forward. It’s going to depend on monetary policy, on interest rate volatility, on the cost to rebalance, liquidity in the market, and our view on where mortgage spreads may go.

Jake Katsikas, Analyst

Thank you so much.

Peter Federico, CEO

Sure. Appreciate all the questions.

Operator, Operator

We have now completed the question-and-answer session. I would like to turn the call back over to Peter Federico for closing remarks.

Peter Federico, CEO

Again, we appreciate everybody’s time this morning, and we look forward to speaking to you again at the end of the second quarter.

Operator, Operator

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