Earnings Call Transcript - NLY Q1 2026

Operator, Operator

Good day, and welcome to the First Quarter 2026 Annaly Capital Management Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Sean Kensil, Director Investor Relations. Please go ahead.

Sean Kensil, Director, Investor Relations

Good morning, and welcome to the First Quarter 2026 Earnings Call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section and our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our first quarter 2026 Investor Presentation and First Quarter 2026 financial supplement, both found under the Presentations section of our website. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Co-Chief Investment Officer and Head of Residential Credit; V.S. Srinivasan, Head of Agency; and Ken Adler, Head of Mortgage Servicing Rights. And with that, I'll turn the call over to David.

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Thank you, Sean. Good morning, everyone, and thank you for joining us on our first quarter earnings call. I'll open with a brief review of the macro landscape before discussing our performance, then I'll provide further detail on each of our three investment strategies and conclude with our outlook. Serena will then discuss our financials before opening up the call to Q&A. Now starting with the macro backdrop, January and February saw a continuation of many of the trends seen in the second half of 2025 highlighted by a resilient economy as well as modest stabilization in the labor market. Consequently, fixed income markets initially experienced continued strong investor demand and generally muted volatility. Ultimately, however, the war in the Middle East ruptured the calm as it introduced an energy price shock that may challenge the performance of the U.S. economy as the rest of the year unfolds. Although the U.S. is better insulated from higher commodity prices than most of Europe and Asia, rising oil and food prices risk further squeezing a consumer that is already facing slowing income growth and persistent affordability constraints. The bond market reacted sharply to the Middle East conflict and higher commodity prices as Treasury yields sold off meaningfully in March. Short-term rates led the sell-off as investors priced higher near-term inflation, while long-term yields rose on increased term premium. Expectations for monetary policy shifted significantly with markets pricing limited probability of any rate cuts this year compared to roughly 2.5 cuts priced in at the end of February. For the time being, it appears that officials will be best served by waiting to evaluate incoming data for clear signs that inflation pressures are receding, where the labor market is more markedly weakening before further lowering rates. This past quarter also saw the release of the Federal Reserve's reproposed bank capital requirements, which were generally in line with market expectations. The newly proposed capital standards are more market friendly than both the original 2023 Basel Endgame proposal and current standards, providing the potential for deployment of excess capital from banks into fixed income and housing finance. The reproposal also specifically targets the mortgage market as residential mortgage loan risk-weighted assets are estimated to decline by 30%. This could accelerate bank loan growth and lower Agency MBS securitization rates — a positive technical for prime loans and Agency MBS. Also, the elimination of a provision that deducted mortgage servicing rights above a specific threshold from regulatory capital may at the margin lead to slightly higher demand to hold MSRs on the part of banks. Now with respect to our portfolio performance in the first quarter, we delivered an economic return of 1.5%, reflecting the strength of our diversified housing finance platform across a volatile market backdrop. Leverage remained conservative at 5.7 turns, and we generated $0.76 of earnings available for distribution per share. Capital markets remained supportive in the first quarter, and we were able to raise approximately $510 million of common equity through our ATM in Q1. The majority of the capital raise was deployed in our Residential Credit and MSR strategies given the tightening experienced in the Agency in January and as such, our aggregate capital allocation to Residential Credit and MSR increased from 38% to 44% at the end of the quarter. Now turning to our investment strategies and beginning with Agency. Spreads tightened sharply in early January, following the GSE purchase announcement before ultimately drifting wider, initially simply on tight valuations and later on increased rate volatility following the outbreak of the conflict in the Middle East. Despite the wide intra-quarter range, MBS widened only modestly quarter-over-quarter with lower coupons outperforming. For Agency strategies, the story for the first quarter was about our ability to allocate capital dynamically as relative value shifts. Following the January tightening, we redeployed capital away from Agency and into our credit businesses, which exhibited a more attractive return profile. However, the ultimate retracement of MBS spreads back to more reasonable levels later in the quarter left us entering Q2 with a more balanced view of the relative value landscape across our three businesses. The further support for Agency currently is the strong technical backdrop the sector is exhibiting as aside from the GSE purchase mandate, weekly flows into fixed income funds are strong and CMO issuance continues to absorb over 30% of gross supply as banks have ramped up buying CMO floaters. Moreover, recent changes to bank capital rules encourage banks to retain more loans, which could lower securitization rates and decrease organic growth in Agency MBS. In our Agency portfolio specifically, we ended the quarter at $92 billion in market value, a marginal decrease from year-end with Agency representing 56% of the firm's capital. We opportunistically repositioned the portfolio during the late quarter sell-off in rates, rotating down in coupon from 6s into 4.5 TBAs. Notably, 4.5s provide more durable cash flows and improve the portfolio convexity should rates retest recent lows. Also to note, we added modestly to our Agency CMBS portfolio in the quarter. We maintained conservative interest rate exposure throughout Q1 with continued focus on protecting book value and managing risk through disciplined measured hedging. Tightened rate macro volatility led to more active tactical hedge adjustments in the quarter as markets moved quickly in response to geopolitical developments. Despite this activity, the net impact by quarter end was modest with overall hedge levels changing only slightly. We remain comfortable maintaining exposure in swap spreads given the increased clarity around bank capital regulation and the growing presence of mortgage investors who actively hedge using swaps. That said, Treasuries have proven to be a more effective hedge in sharp volatility episodes, such as March, which is why they continue to be an important part of our overall hedge composition. Now moving to Residential Credit. Our portfolio ended the first quarter at $10.3 billion in market value, increasing to 23% of the firm's capital, driven largely by continued growth in our whole loan correspondent channel. Residential Credit spreads tightened at the outset of the year as the strong movement in the Agency basis drove a rally across securitized products. However, similar to Agency, credit spreads gave back their tightening in late February and March with AAA non-QM spreads ending the quarter 10 to 15 basis points wider. We acquired $6.7 billion in whole loans on the quarter, approximately 80% sourced via our correspondent channel. Our lock volume was very strong at $7.4 billion, a 16% increase quarter-over-quarter and a 41% increase year-over-year. Securitization markets remained healthy with Q1 Residential Credit gross issuance of $79 billion, a 63% increase year-over-year. Our OBX platform settled 8 securitizations for $4.7 billion on the quarter generating $570 million of high-quality proprietary assets for Annaly's balance sheet and our joint venture. Subsequent to quarter end, we priced an additional 4 securitizations and have now brought 12 transactions to market totaling $6.6 billion year-to-date. Onslow Bay remains the largest non-bank securitizer of Residential Credit and is well positioned to continue to benefit from the growth of the private label market. We maintained our tight credit standards as our quarter end locked pipeline is represented by a 764 weighted average FICO, a 67% combined LTV with less than 2% of the portfolio greater than 80% LTV. Now shifting to MSR, our portfolio ended the first quarter at $4.2 billion in market value, and our capital allocation to MSR increased to 21% of the firm's capital. During the quarter, we committed to purchase $24 billion in principal balance or roughly $388 million in market value of MSR with a weighted average note rate of 3.4%. These purchases came across four bulk packages as well as our flow channels. We were the second largest buyer of conventional MSR in the first quarter, as measured by transfers, and we are now ranked as the fifth largest nonbank conventional servicer. Bulk supply in the first quarter, roughly $80 billion UPB, was above Q1 '25, and we expect supply levels to remain ample throughout the balance of the year. We continue to scale our flow MSR capabilities in order to acquire current coupon MSR when attractive and our active flow partners more than tripled quarter-over-quarter as we purchased $1.9 billion UPB via flow, though still a small share of our overall purchases. Underlying fundamentals within our MSR portfolio remained strong, with prepay speeds muted at 4.2 CPR in Q1, while our credit profile continues to be high quality with serious delinquencies just under 50 basis points. The portfolio's weighted average note rate of 3.3% continues to provide significant prepayment protection and is the lowest note rate among the top 20 largest agency MSR holders. Our MSR valuation multiple increased modestly to a 5.94 multiple primarily driven by the increase in interest rates. And lastly, to touch on our outlook, we believe each of our investment strategies is well positioned to deliver attractive risk-adjusted returns through the remainder of the year, supported by a constructive market and housing finance backdrop. Agency spreads are at a more reasonable level today than earlier in the year, offering prospective new money returns in the mid-teens and as I noted earlier, market technicals are the most favorable they've been since the end of QE. We believe that our portfolio composition continues to be a meaningful differentiator for Annaly, minimizing prepayment risk while also generating strong carry. Our Residential Credit business continues to see very strong growth, all while maintaining a diligent focus on asset selection and credit quality. While the non-QM and broader Residential Credit market is attracting new forms of institutional capital, our early investment in infrastructure and technology, the expansion of our correspondent partners and the depth of our OBX platform creates competitive advantages that are not easily replicated, and we intend to continue growing our allocated capital to Residential Credit. Our MSR portfolio is distinguished from other scaled portfolios in the industry by our significantly out-of-the-money note rate and the high credit quality of our underlying borrowers. This has allowed us to consistently outperform our model projections, providing ample and predictable cash flows. We expect to further add MSR this year with increasing usage of our flow acquisition channels and benefiting from our long-standing synergistic relationships with large originators and servicers. Overall, Annaly's scaled, diversified housing model has demonstrated our ability to perform across different market environments. Over the last three years, Annaly has delivered a double-digit annualized economic return with a lower-levered and more efficient platform than peers. The ability to dynamically allocate capital toward the most attractive relative value opportunities is critical in times such as this past quarter, and as we entered the second quarter with a reduced overweight in Agency, we see a more balanced opportunity set with each strategy, providing compelling new money returns. And now with that, I'll hand the call over to Serena.

Serena Wolfe, Chief Financial Officer

Thank you, David. Today, I will briefly review the financial highlights for the quarter ended March 31, 2026. As in prior quarters, our earnings release discloses GAAP and non-GAAP earnings metrics, and my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. This quarter, our portfolio delivered sound performance even as market volatility and geopolitical challenges increased. Our diversified housing finance platform proved resilient, and our proactive hedging strategy protected us against interest rate volatility throughout the quarter. With that context in mind, as of March 31, 2026, our book value per share decreased by 1.9% from the prior quarter to $19.82. After accounting for our $0.70 dividend, we achieved an economic return of 1.5% in Q1. Earnings available for distribution per share increased by $0.02 to $0.76 per share and exceeded our quarterly dividend. We achieved this level of EAD primarily through a 30 basis point improvement in our average repo rate to 3.9% and higher TBA dollar roll income driven by increased specialness. Partly offsetting these benefits were lower levels of swap income due to lower average receive rate on declining SOFR. Net interest margin benefited from the reduction in cost of funds, improving 2 basis points to 1.71% while our net interest spread remains strong, declining modestly to 1.42%. The Residential Credit securitization business achieved another record quarter, issuing $4.7 billion across 8 securitizations, surpassing $50 billion in total issuance since inception. Our economic leverage ratio remained disciplined at 5.7x and our Q1 reported earning repo rate was 3.87%, down 15 basis points. The weighted average repo days to mature at the end of the quarter increased by one day to 36 days. Total warehouse capacity across our Residential Credit and the MSR businesses was $7.6 billion, including $2.8 billion of committed capacity. We have ample available capacity in both businesses with utilization rate at 65% for Residential Credit and 50% for MSR. We ended the first quarter with $7.4 billion in unencumbered assets. This includes $5 billion in cash and unencumbered Agency MBS. We also have roughly $1.6 billion of fair value of MSR pledged to committed warehouse facilities. This amount remains undrawn and can be quickly converted to cash, subject to market advance rates. In total, we have about $9 billion of total assets available for financing, down $300 million from the prior quarter. This represents about 55% of our total capital base and provides significant liquidity and flexibility. Finally, on our OpEx, our efficiency ratio fell 2 basis points to 1.29% this quarter, continuing our trend of being one of the lowest in the mortgage REIT sector despite operating three fully scaled businesses on the balance sheet. That concludes our remarks. We will now take questions. Thank you, operator.

Operator, Operator

The first question comes from Crispin Love with Piper Sandler.

Crispin Love, Analyst, Piper Sandler

Dave, you mentioned the bank capital rules. Do you think these changes will drive significant changes in bank balance sheets with banks holding more mortgages? Mortgages have definitely been moving towards nonbanks for an extended period of time. I think the bank crisis in 2023 only increased that given the asset-liability mismatches. So I'm curious if you think these changes could be meaningful, could change just on the margin, and what that could mean for the broader mortgage industry?

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Sure, Cris. We'll have to see. When you look at the estimates in terms of balance sheet capacity for mortgages as a consequence of the rule, it gets a little over $600 billion in balance sheet capacity. In terms of how we see it evolving, the tiering of LTVs is quite favorable, and we think it will reduce agency issuance as banks will retain more loans. We don't know at this point the extent of it, but generally, it's good for the technicals associated with mortgages. As far as origination, and I'm going to hand it over to Mike momentarily, we don't see banks getting back into origination. That has largely moved outside of the banking system into nonbanks. The nonbanks have made considerable investments and it will be hard to ultimately compete with them. Banks obviously still engage in origination, but that's typically on behalf of their customers as opposed to a real profit center. Mike, feel free to add.

Michael Fania, Co-Chief Investment Officer & Head of Residential Credit

Yes. I would just add, Crispin, that banks have been focused on catering to their retail customer. They are not focused on pursuing origination through the correspondent channel. You could see that through Wells Fargo, but there have been a number of other companies that have deemphasized correspondent lending as a way to acquire the customer. We do not think that these rules will change that. A lot of it is, as David is saying, that the secular trend of nonbanks is going to stay in place. They've invested in technology and resources, and profitability in the mortgage origination market is currently challenging. If you look at 2025, the net profit margin for independent mortgage bankers was 21 basis points, which is historically low. So it's not really a conducive environment for banks to come back into the mortgage origination market with a large presence.

Crispin Love, Analyst, Piper Sandler

Okay. That makes a ton of sense. And then just a second question for me on capital allocation across the businesses. You did lean into Residential Credit and MSRs. Can you just remind us what your long-term goals are for allocation? I believe it was 50% Agency, 30% Residential Credit, 20% MSRs. First, does that still stand? Is that a place that you'd like to get to and just be able to dial up or dial down specific areas?

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Yes, that is correct, and you did identify those metrics accurately. It is a long-term objective of ours, but as I've always said, we're very patient about getting there. This past quarter is an example of our ability to pivot. In January, Agency MBS were very difficult to buy given the valuations, and the ability of the other businesses to pick up the slack and add assets is a testament to the flexibility of the model. Long term, 50% Agency, 30% Residential Credit, 20% MSR is still the target.

Operator, Operator

Next question comes from Bose George with KBW.

Bose George, Analyst, KBW

Actually, can we get an update on your book value quarter-to-date?

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Sure, Bose. As of Friday, we were up 4% in economic terms.

Bose George, Analyst, KBW

And that's 4% net of the accrued dividend?

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Inclusive, inclusive of the dividend accrued.

Bose George, Analyst, KBW

Okay. Great. And then on the Basel III question. The MSR risk weighting has remained at 250%. Do you expect that to go down after the comment period? And if so, do you think that gets the banks a little more active on the MSR side?

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Well, the banks are already active on the MSR side. We see them bidding for MSR. Under the current proposal, the 250% risk weight is in place, and I would expect that banks are going to be very active at lobbying around that 250% risk weight. Whether they'll be successful or not, we don't know, but they'll certainly be proactive about commenting on it.

Operator, Operator

The next question comes from Ameeta Lobo Nelson with UBS.

Ameeta Lobo Nelson, Analyst, UBS

On the increased capital allocation to non-agencies in Q1, the presentation states returns of about 12% to 15%. Can you expand on how that looks among the various non-agency subsectors you're active in?

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Sure. Mike, do you want to take it?

Michael Fania, Co-Chief Investment Officer & Head of Residential Credit

Sure, Ameeta. The net increase in the portfolio was $2.3 billion and it's broken down into three components. One is third-party securities. That portfolio was $2.1 billion at the end of the quarter, up $435 million. Within third-party securities, we bought $395 million of CRE CLOs. These are AAA assets, points of enhancement, or like a two-year spread duration; they're uncapped floaters, seven turns of leverage, that gets you kind of to 12%. We also bought BB non-QM bonds. These are the B-piece ones. We bought those in the range of 3.35 to 3.40 over. I would say those are in the 12% to 13% levered ROE range. And then we also bought $55 million of NPL, RPL A2s. These are unrated securities. We're buying the subordinate bond with 15 to 20 points of enhancement and they're in the kind of 3.50 range. So those are in the 12% to 13% range as well. That accounts for the lower end of that 12% to 15% range. The other two components of the portfolio are OBX, which was $3.5 billion and is where you're getting those mid-teens returns, and whole loans, which were up $1.65 billion on the quarter. When whole loans are sitting on warehouse lines, you're earning kind of in that 11% to 12% range, but when they're ultimately manufactured into OBX securities, you're earning that roughly 15% on one turn of leverage. So that is the breakdown over the quarter.

Ameeta Lobo Nelson, Analyst, UBS

I appreciate that detailed answer, Mike. Referencing recent reports from the rating agencies on non-QM delinquencies, particularly newer vintage collateral, and with the rising pressure you referenced on the consumer from inflation: how is that impacting investor appetite in credit? Has it impacted your credit enhancement and pricing in your deals in any meaningful way?

Michael Fania, Co-Chief Investment Officer & Head of Residential Credit

Yes. What we are experiencing is that the 2024 and 2025 vintages up the seasoning curve are showing lower delinquencies than what was experienced in 2023. 2025 is outperforming 2024. When you look at our portfolio, our serious delinquencies — D90-plus — are around 140 basis points. That has been quite consistent over the last year, call it in the 130 to 145 basis point range. So our performance has been very consistent. In terms of the deals themselves, what we're seeing broadly is when non-QM gets up the seasoning ramp, the 2023 vintage, if you include other third-party non-QM shelves, you're maybe in that kind of 5% to 6% range as a percentage of current. What you are not seeing, however, is realized losses. Realized losses, cumulative losses within non-QM, are still just a handful of basis points across various vintages. So we have not really seen an impact from the investor side. We're comfortable with the structures of the deals, the credit enhancement, the performance, and ultimately the fact that these borrowers have equity and they're not realizing losses on those delinquencies. The rating agencies have been constructive. They initially were, we thought, very conservative evaluating these transactions, and credit enhancements have actually probably declined a little bit given the actual performance we've seen over the last number of years.

Operator, Operator

The next question comes from Richard (Rick) Shane with JPMorgan.

Richard (Rick) Shane, Analyst, JPMorgan

You guys were aggressive in the first quarter, raising capital through the ATM. The stock continues to trade at a premium to book. I am curious in this environment with spreads tightening again how aggressive you might be at these levels and also given deployment into what I would describe as less liquid, more bespoke instruments, whether it's MSR or CRT. Is the strategy to raise capital and then deploy it into the core Agency book? And then as you see opportunities rotate into the other asset classes, how should we think about deployment and your ability to mitigate the drag as you redeploy capital?

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Sure. Good question, Rick. In the first quarter, the capital raise was specifically related to Residential Credit and MSR in real time. In January, Agency obviously got quite tight, as I mentioned, but we were seeing a lot of supply coming in both MSR and the loan pipeline was picking up. So we felt it was highly productive to raise capital, and we did so. We added nearly $400 million in market value in MSR and obviously a couple of billion in Residential Credit. That was the purpose. We weren't just raising capital to put it in Agency and then redeploy it; it was specifically earmarked. On a go-forward basis, Agency looks better than it did in January after the GSE announcement. When we look at that sector, the technicals are as supportive as they've been since QE. While spreads are not as cheap as they were in 2025, it's a very investable sector because we feel it's safer given the breadth of demand across virtually all market participants. We wouldn't hesitate to methodically raise capital and invest in Agency, but we don't feel our footprint needs to be heavy. It has to work for us. Q1 was not about just storing it in Agency and then redeploying it. We have done that from time to time, but it's a very thoughtful process. We were not frequently in the market in March when volatility was high. The stock had to be liquid with a strong bid associated with it, and we didn't have a heavy footprint at all. We'll maintain that approach.

Operator, Operator

The next question comes from Harsh Hemnani with Green Street.

Harsh Hemnani, Analyst, Green Street

So there were a few securitizations this quarter that included Agency-eligible loans. Could you talk a little bit about the dynamic that's incentivizing originators to sell their loans into the non-agency channel over the agencies? And then how you expect that to trend over the coming quarters?

Michael Fania, Co-Chief Investment Officer & Head of Residential Credit

Sure. I would say that Agency-eligible investor loans and Agency-eligible second homes has been a continuing sector within Residential Credit over the last number of years, particularly when the FHFA and the GSEs made changes to their LLPAs. At higher LTV levels, it is onerous to deliver those products to the GSEs. Dependent upon where market execution is, many originators would rather retain those loans, put them on gestation facilities for a period of time and deliver to non-agency aggregators like ourselves relative to delivering to correspondents or the cash window. There's enough pay-up for them to hold that loan and perform due diligence, paying incremental warehouse costs relative to delivering it to another correspondent or cash window within a handful of days. That's existed in the market for years given those LLPAs. A newer development is that Agency owner-occupied collateral, which does not have the so-called onerous LLPAs, has seen more originators securitize into the PLS market. At this point, I think there have been three originators that have come to the market with differing objectives. One of them, which is fairly large, has been clear that the execution of owner-occupied in the PLS market versus the Agency market is roughly breakeven, but they're utilizing it to create credit investments. We did a deal this quarter with that company. It was a partnership transaction. We didn't actually take principal risk, but we are charging for the use of our shelf. We take down senior bonds in that structure. I think their incentive was they wanted additional capital markets distribution away from the GSE. So we've seen a handful of originators pursue owner-occupied securitization. At this point, though, we don't think it's actually more profitable relative to Agency execution; it's more about broadening originators' capital markets distribution.

Operator, Operator

The next question comes from Merrill Ross with Compass Point Research and Trading.

Merrill Ross, Analyst, Compass Point Research and Trading

You mentioned that there were slight changes in your hedging portfolio despite the shift in your equity allocation. I'm wondering if the lower periodic income reduces your appetite for hedging with swaps over Treasury futures and just how you expect to roll forward your hedge in the second quarter?

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Sure, Merrill. I'll take a big-picture approach to your question and talk about swaps versus Treasuries. We saw a couple of market changes beginning last fall. One is that the Fed ended QT and started reserve management purchases, which signaled to us that the Fed is going to stand behind balance sheet in the market. The key difference between swaps and Treasuries is that Treasuries have balance sheet risk, swaps don't. When you add the potential for balance sheet support from the Fed, swaps become a safer hedge. Second, we gained clarity on bank capital rules, which should free up a little bit of balance sheet. From that standpoint, our disposition toward hedging with swaps is more optimistic. Having said that, the correlation between mortgages and swaps hasn't historically been as tight as mortgages and Treasuries. Treasuries are a tighter fit to hedge; they tend to be more effective in certain environments. So it makes sense to maintain Treasuries as a hedge even though the carry isn't as good. However, more recently, the market is evolving — REITs and GSEs hedging more with swaps, and banks buying CMO floaters which are SOFR-based — so we expect better correlation between mortgages and swaps on a go-forward basis. Between both developments, we're more comfortable hedging with swaps, and you might see a slight increase in our usage of swaps. That said, in shock environments like March's sell-off, Treasuries tend to underperform swaps and end up being a better hedge. So you want some element of your hedge portfolio in Treasuries to cushion those episodes. Generally, we're comfortable with around a two-thirds hedge ratio between swaps and Treasuries, and you could see that go up as swaps fit improves.

Operator, Operator

The next question comes from Jason Weaver with Jones Trading.

Jason Weaver, Analyst, Jones Trading

I was hoping you could disaggregate the 190 basis point book value decline by what was driven by spread widening versus marks on the Residential Credit and MSR books, and if that's materially reversed in April?

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Yes. Resi performed the best, followed by MSR, and Agency lagged. Agency spreads, as well as costs associated with dynamically hedging, contributed. We had a 50 basis point variation in 10-year swaps, and that can cost a bit. Some of the book value deterioration was a consequence of managing the portfolio and hedging. Generally, Agency lagged the other two with a little bit of spread widening and a slightly negative return, while Residential Credit delivered low to mid-single digit returns and MSR low single digits in terms of economic return.

Jason Weaver, Analyst, Jones Trading

Given the geopolitical volatility since March, has that shifted your outlook for the runway for the Onslow Bay business? Or have you changed your retention target with that strategy?

Michael Fania, Co-Chief Investment Officer & Head of Residential Credit

Jason, if anything, Q1 has given us more comfort in ramping up residential whole loans and the correspondent business. Similar to what we experienced during earlier volatility events, there's been significant resiliency within the non-agency market. Q1 showed over 60% growth year-over-year in Residential Credit despite spreads in the top part of the capital stack experiencing meaningful swings. The market was fully functioning: we priced and settled 8 deals at $4.7 billion and priced 12 deals to date. As we sit here today, the cost of funds on a AAA security is probably in the ~1.20% range all-in SOFR cost or SOFR plus 1.50 and you're in the low 5% cost of funds. The market has shown increasing growth, sponsorship and liquidity, and we're comforted that despite volatility, the market continued to operate at a high level.

Jason Weaver, Analyst, Jones Trading

Congrats on the quarter.

Operator, Operator

The next question comes from Trevor Cranston with Citizens JMP.

Trevor Cranston, Analyst, Citizens JMP

With mortgage rates increasing a decent amount over the last several weeks, can you give us an update on your thinking as to the probability of further efforts from the government to potentially lower mortgage rates and what form do you think that could potentially come in?

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Sure. Affordability issues moved a little to the sidelines in light of the conflict in the Middle East. To summarize what's been done thus far: the GSE announcement was meaningful for the mortgage basis. There have also been a couple of executive orders focused on regulation — around building and mortgage lending — but those are around the edges. The ROAD Act is stuck in the House; it has some positive impact for affordability through pilot programs to convert vacant buildings into attainable housing, spur construction through regulatory relief, grants for manufactured housing, etc. These efforts are helpful but they aren't enough: mortgage rates are higher, many borrowers are locked in, and home prices are high. Ultimately, we need lower rates to help affordability. One novel idea is that to get mortgage rates lower you could take a bipartisan approach focused on reducing spending and raising revenues to reduce deficits and get overall interest rates down. Until you deal with bigger structural problems in the economy, it's hard to get mortgage rates materially lower.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to David Finkelstein for any closing remarks.

David Finkelstein, Chief Executive Officer & Co-Chief Investment Officer

Thank you, operator, and thanks, everybody, for joining today. We'll talk to you next quarter.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.