Earnings Call Transcript - NLY Q2 2025

Operator, Operator

Good day, and welcome to the Q2 2025 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 of Investor Relations

Good morning, and welcome to the Second Quarter 2025 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 in 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 second quarter 2025 investor presentation and second quarter 2025 financial supplement, both found under the Presentations section of our website. 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 L. Finkelstein, CEO and Co-Chief Investment Officer

Thank you, Sean. Good morning, everyone, and thank you all for joining us for our second quarter earnings call. Today, as usual, I'll briefly review the macro and market environment as well as our performance for the quarter, then I'll provide an update on each of our three businesses, ending with our outlook. Serena will then discuss our financials before opening up the call to Q&A. Now starting with the macro landscape, the U.S. economy is persevering through considerable trade-related uncertainty and resulting market volatility in recent months. Growth is likely to run around 1% annualized for the first half of the year, well below the pace of recent years, but is arguably outperforming post-Liberation Day expectations. Employers hired nearly 450,000 workers in the second quarter, which has lowered the unemployment rate marginally to 4.1%. Overall hiring has slowed compared to recent years, but the labor market is relatively balanced, and layoffs have been somewhat muted. Inflation, meanwhile, likely ran at the slowest level in the past three quarters, as the continued decline in service sector inflation offset firming goods prices, some of which are likely tariff-related. The economy and the labor market's resilience have affirmed the Fed's current wait-and-see stance with the majority of policymakers indicating a preference for more data to assess the impact of tariffs on inflation. We anticipate the Fed will ultimately deliver on the two interest rate cuts projected for 2025 at the last FOMC meeting, given the consensus view among policymakers that current interest rate levels remain somewhat restrictive. As it relates to markets, a positive reversal in sentiment as the second quarter progressed helped risk assets recover from their sharp underperformance in early April, and financial conditions have reached some of the most accommodative levels since the onset of the hiking cycle in 2022. And despite the improvement in markets, longer-term treasury yields remain elevated as the market will need to continue to fund large deficits, particularly with the passage of the recent tax and spending bill. Swap spreads have also been unable to reverse the majority of their April tightening, which left Agency MBS spreads 5 to 10 basis points wider on the quarter. Now against this backdrop, we delivered an economic return of 0.7% for the second quarter, while generating earnings available for distribution of $0.73, once again out-earning our dividend. Q2 marked the seventh consecutive quarter of generating a positive economic return for our shareholders, demonstrating the diversification benefit of our three fully scaled housing finance strategies. Year-to-date, we've delivered a 3.7% economic return with a total shareholder return of over 10% through quarter end. Furthermore, we raised just over $750 million of accretive capital in the second quarter through our ATM program, which was predominantly deployed in the agency sector. Leverage increased modestly to 5.8x in light of the increased allocation to agency. Now turning to our investment strategies and beginning with agency. Our portfolio ended the quarter at nearly $80 billion in market value, up 6% quarter-over-quarter. After the early April volatility, market conditions for Agency MBS improved. Rates were range-bound, the yield curve remained relatively steep, implied volatility declined, and comparable fixed income assets tightened given the favorable risk sentiment in markets. Agency MBS did lag in the recovery as demand from overseas and the bank community remained muted, but we believe that these participants could become more active, should the Fed resume cutting or as expected regulatory reform materializes. With respect to our activity early in the quarter, we managed our duration through the tariff-driven volatility with little adjustment to our agency portfolio. As markets normalized, we steadily added Agency MBS at attractive spreads in line with our capital raising, growing our agency portfolio by roughly $4.5 billion in notional terms. Purchases were fairly evenly split across 4.5s, 5.5s, and 6s, and we marginally preferred pools over TBAs as repo financing was slightly more attractive than dollar roll carry. We continued to operate within a narrow interest rate risk band given the volatility we've experienced thus far this year. In Q2, all asset purchases were hedged, and duration extension was prudently managed due to the rise in long-end rates. Within our hedge portfolio, we remain in favor of holding swaps against shorter-term risk due to the positive carry profile while maintaining a more balanced mix of treasury and swap exposure in the intermediate and long end. Swap spreads tightened significantly during the quarter, and forward markets are signaling further tightening in the months ahead. That said, we can nimbly adjust our hedges between swaps and treasury risk, but for now, maintaining a roughly 60-40 hedge allocation between swaps and treasuries is more favorable in our view. Overall, we remain optimistic on the agency sector as fundamentals are sound, and there are several potential catalysts on the horizon to improve Agency MBS technicals. Additionally, we're encouraged by the administration's recent statements regarding GSE reform, noting that any privatization efforts will preserve the implicit guarantee and aim to tighten MBS spreads, removing a significant market concern. Shifting to residential credit. Our portfolio was relatively unchanged at $6.6 billion in market value and $2.4 billion of capital. The resi credit sector broadly tracked corporate credit over the quarter, widening in sympathy with other risk assets in early April, only to finish the quarter with spreads roughly unchanged. Now, despite the turbulence in the first half of the quarter, the non-agency market demonstrated its durability with over $43 billion of gross issuance in the quarter. Our Onslow Bay platform had its highest quarterly securitization activity to date, closing $3.6 billion across seven transactions, and we priced an additional two securitizations in July, bringing cumulative 2025 activity to $7.6 billion across 15 transactions, generating approximately $913 million of high-yielding proprietary assets for Annaly and our joint venture. Onslow Bay's expanded credit correspondent channel also remains the industry leader, generating $5.3 billion of locks and funding $3.7 billion of loans over the quarter. This is despite tightening our credit standards once again, given some of the headwinds we are seeing in housing. Our current lock pipeline has a 764 weighted average FICO, and 68% LTV and is over 95% first lien. Regarding the housing market, available-for-sale inventory continues to increase as affordability remains challenged given elevated mortgage rates, high home prices, and increased property taxes and insurance premiums. While housing affordability has been an issue for the past three years, we've entered a buyer's market as sellers now materially outweigh prospective homeowners. Higher supply has led to four consecutive months of negative HPA according to Zillow, and we expect the majority of the housing market to turn modestly negative year-over-year in the near term. Now balancing the deceleration of the housing market is a stable labor market, low consumer delinquencies, expansionary fiscal policy, and elevated asset pricing, including equity markets. We remain well positioned in this environment as we control all aspects of our loan manufacturing strategy, and the resulting assets have minimal leverage. Notably, over 70% of our residential credit exposure is represented by retained OBX securities and residential whole loans collateralized with high-quality borrowers. Moving to our MSR business. The portfolio ended the second quarter unchanged at $3.3 billion in market value, comprising $2.6 billion of the firm's capital. While bulk trading activity was healthy in the second quarter, we were measured with respect to new purchases as MSR valuations remain firm, acquiring approximately $30 million in market value. Our MSR valuation improved very modestly quarter-over-quarter, driven by the steepening of the yield curve, lower implied volatility, and strong observed bulk execution. Solid fundamental performance of the portfolio persisted this past quarter with a 3-month CPR of 4.6%. Serious delinquencies unchanged at 50 basis points. And escrow balances up 6% year-over-year, which helped to drive increased float income. The portfolio continued to generate well-defined durable cash flows given the 3.24% note rate with the average borrower at 350 basis points out of the money. As we move forward, we remain focused on furthering the build-out of our flow servicing relationships and capabilities and expanding our subservicing and recapture partnerships, which should allow us to capitalize on MSR opportunities across both the bulk and flow channels as relative value dictates. Now to conclude with our outlook, we maintain conviction that our portfolio will continue to generate strong risk-adjusted returns in the current environment. We've been encouraged by declining macro volatility as of late, and we see further benefits to our portfolio in the mortgage sector should expected Fed cuts materialize. In the near term, we expect to be overweight agency given historically attractive spread levels, but over the long term, we'll strategically grow our residential credit and MSR portfolios as we look to expand Onslow Bay's presence across the housing finance sector. As always, we remain flexible in the current investing climate with our historically low leverage and ample liquidity, we're well positioned as we enter the second half of the year. And with that, I'll turn it over to Serena to discuss the financials.

Serena Wolfe, CFO

Thank you, David. Today, I will provide a brief overview of the financial highlights for the quarter ended June 30, 2025. Consistent with prior quarters, our earnings release will disclose both GAAP and non-GAAP earnings metrics. However, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. As of June 30, 2025, our book value per share decreased 3% from the prior quarter to $18.45. After accounting for our dividend of $0.70, we achieved a positive economic return of 0.7% for the second quarter. This brings our economic return to 3.7% for the first half of the year. Earnings available for distribution per share increased by $0.01 to $0.73 and once again exceeded our dividend for the quarter. Results were primarily driven by higher yields on our investment portfolio of 5.41% compared to 5.23% in the prior quarter. Additionally, we saw lower average repo rates of 4.53% during the quarter, a modest decline of 3 basis points in comparison to the prior quarter. These increases were partially offset by lower swap income due to very modest swap runoff in the first half of the year. Our rotation up in coupon and agency over the last several quarters is evident in our interest metrics due to our increase in yields. The resi credit business generated additional income due to the growth of accretive OBX securitizations on balance as Onslow Bay experienced another quarter of record issuance. Net interest spread ex PAA has increased again, reaching 1.47% in the second quarter compared to 1.24% a year ago. Net interest margin ex PAA is 1.71% in Q2 compared to 1.58% in Q2 2024. Turning to our financing strategy. Over the past several years, we have made deliberate and disciplined efforts to expand and diversify our funding sources. Today, our financing platform encompasses a diverse range of traditional and nontraditional financing arrangements which enhance both our liquidity profile and operational flexibility. We have added substantial capacity through non-mark-to-market arrangements, second lien and HELOC lines, structured repurchase agreements, and committed lines. For example, across our residential loan facilities, our non-mark-to-market capacity has grown from $150 million or 6% of total available capacity at the end of 2023 to $1.9 billion in the second quarter, now representing 45% of total capacity. These additions complement our more traditional financing sources, including bilateral repo, our internal broker-dealer, sponsored repo, securitizations, participation interests, and warehouse financing facilities. This breadth of funding structures allows us to navigate a range of market environments more effectively, enhancing stability during periods of volatility and positioning us to capitalize on opportunities as they arise. During the quarter, we added approximately $5 billion of repo principal, including term, at attractive spreads. This increase was primarily due to the growth of the agency portfolio. As a result, our Q2 reported weighted average repo days maintained a healthy position of 49 days. During the quarter, we upsized several resi credit warehouse facilities and added a new MSR line, increasing our capacity by $500 million. As of June 30, 2025, our total facility capacity for the residential credit business was $4.2 billion across 10 counterparties, with a utilization rate of 40%. Our MSR business has total available committed warehouse capacity of $2.1 billion across 4 counterparties as of June 30, 2025, with a utilization rate of 50%. Inclusive of our committed MSR warehouse facilities, our weighted average days to maturity is 56 days. Annaly's financial strength is further evident in our unencumbered assets, which ended the second quarter at approximately $6 billion, including cash and unencumbered Agency MBS of $4.7 billion. In addition, we have roughly $1.5 billion in fair value of MSR that has been pledged to committed warehouse facilities but remains undrawn and can be quickly converted to cash, subject to market advance rates. Together, we have approximately $7.4 billion in assets available for financing, a decrease of roughly $70 million compared to the first quarter. Now that concludes our prepared remarks, and we will open the line for questions. Thank you, operator.

Operator, Operator

Our first question is from Bose George at KBW.

Bose Thomas George, Analyst

Actually, first, can I just get an update on book value quarter-to-date?

David L. Finkelstein, CEO and Co-Chief Investment Officer

Sure, Bose. As of last night, pre-dividend accrual book was up about 0.5%, so call it, 1.5% economic return.

Bose Thomas George, Analyst

Okay. Great. Can you discuss your comfort level with the dividend and how it relates to the economic return you are seeing from the portfolio?

David L. Finkelstein, CEO and Co-Chief Investment Officer

Sure. So obviously, we raised the dividend earlier this year, and we make those decisions very deliberately. We did have confidence that it was certainly earnable. And that's been the case; we've out-earned the dividend, and we expect to certainly cover and potentially out-earn the dividend for the remainder of the year, all else equal. As it relates to economic return, the way we look at it is the portfolio should generate an economic return approximating or upwards of the dividend. There are hedging costs, which could erode that economic return somewhat. But nevertheless, the goal is to get as close to the dividend as achievable while managing for hedging costs and other costs. We feel pretty good about where our economic return is year-to-date, certainly. And as I mentioned, we have had positive economic return for the past seven quarters. We think the environment is certainly conducive to achieving close to that dividend yield, given volatility has come down and asset spreads are relatively cheap.

Operator, Operator

The next question from Doug Harter, UBS.

Douglas Michael Harter, Analyst

David, hoping you could just talk through kind of how you thought about managing the portfolio through the second quarter. Your comfort in letting kind of leverage rise during kind of the extreme bout of volatility versus kind of feeling compelled to kind of risk manage the portfolio? And just help us with that thought process.

David L. Finkelstein, CEO and Co-Chief Investment Officer

Sure. Good question, Doug. So look, we came into the quarter with a very good liquidity position, consistent with where we're at this quarter. So we're comfortable in light of the volatility. Liberation Day was announced well in advance, and so we wanted to be prepared for it. Our leverage was low, and we had ample capacity. As April did get underway, our biggest focus was managing rate exposure. Given our low leverage, we could allow leverage to drift higher, which we certainly did. Rate exposure was something we were more focused on. And I think when it comes to the rates market in the current environment, navigating uncertainty is now the base case, and we need to be prepared for a range of outcomes. So we're keeping our rate risk very close to home, as I mentioned Doug, in my prepared remarks. We let duration drift, but we're very disciplined when it comes to bands. Now we feel we're in a much better place certainly than we were in April and throughout the second quarter. We have a little bit more clarity on where tariffs are heading. The tax bill is complete. We came into this quarter with virtually no duration. We drifted a little bit, and so far as rates have gone up, which is fine, but we feel good about the rates view. But that's the key focus in terms of managing that type of volatility given the fact that we have flexibility in light of relatively low leverage. Does that help?

Douglas Michael Harter, Analyst

Very helpful. In that context, how do you think about balancing continued investment in a market you find attractive, whether that involves increasing leverage or securing new capital? How are you making those decisions now that there is slightly more certainty compared to three months ago?

David L. Finkelstein, CEO and Co-Chief Investment Officer

Yes. So look, as it related to the second quarter and raising capital, we were very deliberate with how we invested it. Our view when it comes to raising capital is, as we've said before, it's got to be accretive to book value and accretive to earnings. As we raise capital, we deploy it accordingly. We look at new capital the same as we look at existing capital, and we study our leverage position on a daily basis. If we feel like we're under-levered, we'll put money to work. To your point about an environment that was uncertain early in the second quarter, it can be difficult at times to deploy capital. But at the end of the day, we had confidence that capital raised would be accretive, and so we're comfortable putting it to work. Now related to increasing leverage versus raising capital, it was more advantageous for us, we felt, to raise capital and put that money to work as opposed to increasing leverage, given the uncertainty. Now we're in a place where all has come down. We could raise leverage, but we don't need to. If you look at the returns we're generating and the yield we're generating, which spreads where they're at, you can earn quite a handsome return with relatively low leverage, and it gives us a lot of flexibility to manage other parts of the portfolio, and it provides smoother returns. The point I want to stress about consistently positive returns is that we have run at meaningfully lower leverage over the past couple of years than we had in the past. It's worked out quite well. There's always an episode of volatility here and there. But we're able to sit on our hands with low leverage and not be forced sellers in many circumstances, and that's led to smoother returns because we haven't been in positions to sell cheap assets. As we raise capital, we've been able to deploy it profitably. So we feel really good with the leverage where it's at. We haven't raised capital thus far this quarter, but if the opportunity materializes, we may do so.

Operator, Operator

The next question from Rick Shane, JPMorgan.

Richard Barry Shane, Analyst

One of the things you mentioned is the expectation that rates will decrease later in the year and the commentary about negative home price appreciation. In relation to the credit portfolio, can you help us understand some of the dynamics involved? How are you protected on the credit side? What are the advantages and disadvantages of having higher speeds on a portfolio that has different discount characteristics than the traditional agency portfolio? This is going to be the first cycle with a credit portfolio of this size, and it would be beneficial for investors to grasp the dynamics, including the pros and cons, as we enter a new phase of the housing cycle.

David L. Finkelstein, CEO and Co-Chief Investment Officer

Yes. I'll start, and then Mike can take it from there. I'll just say, Doug (sic) Rick, Mike has been very forward-thinking about making sure that the quality of the credit portfolio is as high as it could be. We were very early in tightening credit standards in 2022. I've talked about how we've tightened them more recently. When you look at the underlying credit, it's as high quality as it gets in that sector. Our mark-to-market LTV on the portfolio, I think, is around 62%. We look at stress scenarios with HPA shocks, and if you look at our portfolio, we experienced, say, a 20% decline in home prices, roughly 4% of that portfolio would be underwater, which is a very high-quality credit portfolio in our view. I think Mike has done a nice job and feel free to take it from here and talk about how you manage it.

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

Yes. Thanks, Rick. I think that I would just add that in terms of the proactive changes that we've made since 2022, they are very significant. I would say that we are an outlier in the market in terms of making those changes. So if you go back to the middle of 2022, the weighted average FICO in our lock pipeline was 735; about 20% of our originations were greater than 80 LTV; and about 20% or less than 700 FICO. If you fast forward to our lock pipeline right now, it's a 764 weighted average FICO, only about 1% of loans are greater than 80 LTV, and only about 4% to 5% are less than 700 FICO. It has not impacted our volume in a meaningful way. Still, we've been very proactive in seeing the housing market decelerate and trying to be on our front foot. Dave did mention the quality of the portfolio; it's a $30 billion plus GAAP whole loan portfolio. The 759 original FICO; it's a 62 mark-to-market LTV. There's $300,000 of borrower equity in those underlying properties. The D60+ as of the end of the recent quarter was under 2%, it was 185 basis points, and that's actually down about 7 to 8 basis points quarter-over-quarter. In terms of the second part of your question about speeds, the portfolio is a $655 gross WAC; that's the GAAP consolidated portfolio. The 1-month CPR is 13%. Looking at our non-QM portfolio rates that are 8.5% to 9%, so you're seeing 100 to 150 basis points in the money, but they're only paying 25% to 35% CPR. The S-curves within this market are flatter than the agency market and much flatter than the jumbo market. You do have forms of prepayment protection like penalties. Overall, I believe we are well insulated if there is a significant rally, given the current gross back of the portfolio and the prepayment protection that we have.

Richard Barry Shane, Analyst

Got it. Okay. That's helpful. And look, this is all triggering thinking about this on a deeper basis. I don't see anywhere in the disclosures, but I may just be missing something. Is there a breakout by vintage, so we can think about the cohort exposure and HPA underlying HPA by year?

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

Yes, Rick, that's not something that we have disclosed, but we can follow up with you offline in a discussion about potentially disclosing that in the future.

Operator, Operator

The next question from Jason Stewart, Janney Montgomery Scott.

Jason Michael Stewart, Analyst

Congrats on seven consecutive quarters of positive economic returns, quite an achievement there. I wanted to continue on Rick's question on the private credit markets. What's your expectation at this point for GSE reform and how does that impact opportunities and developments in terms of products and where you can grow that business?

David L. Finkelstein, CEO and Co-Chief Investment Officer

Sure. We've talked a lot about this in the past, Jason. Our expectation is now that the tax bill is done and we're working our way through tariff negotiations. We do expect it to be on the front burner over the near term. The GSEs do still need to raise capital, and there's a lot of work to do before privatization can occur. As we've said in the past, many of the loans that the GSEs originate are considered non-core; I think roughly 20% thereabouts. Ultimately, we'll be able to compete for that origination, in our view. So we're optimistic both in terms of lower supply in the agency sector, which can help the technicals, and also the ability to broaden the approach on the residential side. Does that help?

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

Sorry, Jason. One thing I could add for David: in terms of the correspondent channel, about 10% to 11% of the actual correspondent lock volume is agency collateral. So that includes agency investor agency second homes. You're not seeing us coming to the market to do stand-alone deals. However, that collateral is often included in our non-QM transaction. We are capitalizing on some of the pricing that the GSEs have and some of the efficiencies within the PLS market relative to GSE execution. So we are doing that right now.

Jason Michael Stewart, Analyst

Okay. That's helpful. And then on the MSR portfolio, I understand that the 3.24% gross WAC is so far out of the money that any sort of meaningful movement in rates would have a prepayment effect. But how do you think about external factors impacting the multiple, whether it's M&A activity in the space, lower rates impacting transaction multiples elsewhere? How do you think about that regarding the valuation of the MSR portfolio?

David L. Finkelstein, CEO and Co-Chief Investment Officer

One of the key factors affecting MSR valuations recently has been the reduction in servicing costs due to technological advancements, which are currently increasing rapidly, along with consolidation in the servicing sector. There are about four to five companies investing hundreds of millions of dollars in technology, and we anticipate significant progress in servicing that will lead to lower costs over the next few years, ultimately benefiting us by reducing subservicing expenses. We are pleased with these developments and believe there will be considerable differentiation in servicing. We are collaborating with those making these investments, which results in excellent service. We assist them by providing scale and act as a capital and liquidity provider when there is a need to move MSR off the balance sheet. We are satisfied with our position and appreciate the sector's evolution, as we believe it will only become more efficient, positively impacting valuations. Considering our multiple, we are priced relatively conservatively, and the performance of our MSR has exceeded our expectations.

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

Yes. Another exogenous factor that's really helped, as Dave mentioned in the prepared remarks, is just the growth in the float accounts; the T&I accounts are up 6% year-over-year. This has not been the first year it's been that much and certainly below what the industry has typically documented. Another exogenous factor is servicers have been able to maintain their customers for longer than ever before. Developing that customer relationship generates cross-sell opportunities and other revenue streams off the MSR derived from the MSR asset. These initiatives are in their infancy, but they hold a lot of promise given all the technology investments.

Operator, Operator

The next question from Eric Hagen, BTIG.

Eric J. Hagen, Analyst

I have one on the MSR as well. As these low coupon MSRs continue to season and pay down slowly, how should shareholders think about the value in pairing that opportunity with these higher coupons? Even compared to a couple of years ago when the complexion of the mortgage market was a little different, the level of prepayment risk looked a little different, volatility. How should we think about the pairing of that opportunity now?

David L. Finkelstein, CEO and Co-Chief Investment Officer

Yes. We've built out the capability to really participate actively in any coupon. The way we've done that, and again, as Dave alluded to, is building out these partnerships with the largest, best, and most technology-enabled servicers and we capture partners. Given the portfolio of partners we have and given we already have exposure to all the coupons, while not a lot in the higher coupons, we have enough to be statistically significant. We're ready and there, and we are placing bids on all coupons and prepared. On the low coupon side, there is still a lot out there that does change hands because there is still a need for the mortgage industry to recycle out of the lower-yielding loans, low-rate MSR, and reallocate that capital to originating new loans, which would be the higher coupon MSR. So we're still facilitating that trade while building out the infrastructure.

Eric J. Hagen, Analyst

Okay, that's helpful color. How much hedging or like dollar duration is covered by the MSR position at this point? If you didn't have the MSR, how much bigger was your hedge portfolio or your swap portfolio? In other words, how much is the return of the total portfolio being supported by this pairing of MSR and Agency MBS?

David L. Finkelstein, CEO and Co-Chief Investment Officer

I would call it less than 2% of the overall hedge portfolio. There's very little structural leverage in the MSR position, so we don't get meaningful duration change, but it's just a very powerful cash generator with a little bit of negative duration there.

Operator, Operator

The next question from Crispin Love, Piper Sandler.

Crispin Elliot Love, Analyst

Can you dig into the demand picture for Agency MBS in the current environment? Where is the bulk of demand coming from? You seem pretty positive on the space. Just curious about your expectations in demand. Have you seen more involvement from banks? Is it too early there? Just curious on the picture overall and then how that could impact your spread expectations.

Unidentified Company Representative, Unidentified Representative

Sure. On fundamentals of demand, fixed income funds saw about $50 billion in redemptions in April. But since then, they have seen about $50 billion per month in inflows. Demand from fixed income funds has been pretty strong. CMO issuance continues to be robust; we're seeing about $25 billion to $30 billion in CMO issuance, but that is taking away about 30% of the gross supply to the market. What we've not seen is demand from banks and overseas accounts. Even without that demand, I think fundamentals are quite supportive for Agency MBS; implied volatilities are currently at three-year lows. Asset carry is attractive for unhedged accounts. So we do think MBS spreads can tighten 3 to 5 basis points to treasuries, even without additional demand from banks and foreign accounts. The real bullish case for MBS is that a combination of regulatory reform and further easing in monetary policy will materially increase demand from banks and Asian accounts, and we think the odds of that happening in the second half of the year are quite good.

David L. Finkelstein, CEO and Co-Chief Investment Officer

Yes, Crispin; if you think about the bank model, they benefited quite a bit from high short rates and the generation of NIM, specifically as a consequence of that. As the Fed does reduce rates, that need for NIM to replace that NIM will materialize, and we expect it to come into Agency MBS.

Operator, Operator

The next question from Matthew Erdner, JonesTrading.

Matthew Erdner, Analyst

I'd like to revisit residential credit. In the second half, what have you observed so far this quarter? I know there are nearly $1 billion in securitizations already. Do you think Q3 will align with Q2? Additionally, what are your margin expectations moving forward, considering the Fed's rate cuts?

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

Sure. Thanks, Matt. In terms of issuance, year-to-date, gross issuance has been $92 billion; that's outperformed analyst expectations. I think we're tracking probably to be the highest issuance year since 2021, where we were north of $200 billion. The capital markets remain robust; they're healthy. In terms of securitization levels, we actually have the tightest prints in terms of AAAs where we've printed post-Liberation Day. Our latest transaction was Non-QM 13; it was a $662 million transaction, $500 million of AAA bonds, and we sold the AAA at $138 while all other issuers and sponsors are around $140 to $150 range. I think what Q2 showed us in early Q2 and the volatility we saw in April, indicated a resiliency and maturation of the non-agency market that, again, if that occurred three, four, five years ago, we don't think you would see the same outcomes. So I think it's very healthy, and we continue to build up the investor base. In terms of the second part of your question regarding margins, we don't publish our margins on our correspondent channel. What you can assume is that we're retaining about 11% to 12% of our transactions using around 1 turn, 1.5 turns of recourse leverage, which means 5% to 7% of capital deployment for each $100, and you're looking at mid-teens returns on that capital deployed.

Matthew Erdner, Analyst

Got it. That's very helpful. And then just as a follow-up to that, you guys talked about the credit box there, but you don't expect that to have any effect on the volumes that you guys see for the remainder of the year.

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

Yes. It's hard to say. We did $5.3 billion of locks, $3.7 billion of fundings on the quarter, which was virtually identical to Q1. Looking at some of the origination volumes we’ve seen from the banks and some of the non-banks so far, origination volumes are up approximately 20%. It's hard for us to say that if we did not make some of these changes to our guidelines and pricing that we would not have done more volume. Still, we feel very good with the type of volume that we're doing. We've done $7.5 billion of closed funded loans through the correspondent for the first half of the year; that’s a $15 billion run rate. We think the non-QM DSCR market is about 5% of total originations, so roughly $2 trillion of total originations means about $100 billion of non-QM DSCR. Our market share is around 15%, and we think that's a comfortable level for us at this time. So we feel good about the volumes and the targeted credit box that we have.

Operator, Operator

Next question from Trevor Cranston, Citizens JMP.

Trevor John Cranston, Analyst

I guess a question on the macro outlook. It seems like there's a pretty strong consensus around steepening of the yield curve going forward. But as the impact of tariffs starts to come in, how much risk do you guys see of the impact of that on inflation being greater than anticipated? If some of the pricing in the Fed cuts were to come out of the market, how do you think agencies in particular would perform in that type of scenario?

David L. Finkelstein, CEO and Co-Chief Investment Officer

Sure. Just looking at the macro outlook as it relates to tariffs, there will be inflation that will pass through. We're just starting to see it with the last CPI print, and it will come through the summer. Our view is overall that we will continue experiencing services inflation and shelter coming down while goods inflation will be increasing. As the Fed forecasts, we have a 3.1% core PCE at the end of the year. That equates to roughly 25 basis points per month core PCE, and we feel like that's a reasonable assessment with services inflation coming down and goods inflation going up. We anticipate that they'll deliver on the two cuts; they have an unemployment rate of around 4.5%, or 0.4% higher than that. The labor market is slowing, and that will likely materialize. In terms of growth, they project 1.4% GDP, to achieve that we need close to 2% growth for the second half of the year. Overall, both the forecast and the dots seem to paint a pretty accurate picture. If the cuts do not occur, let's assume inflation runs higher, and the Fed cannot cut. You will see a flattening of the yield curve, for which we are hedged. Agency MBS, as long as volatility is contained, should perform just fine. If, on the other hand, you see a broader deterioration in the economy and the Fed becomes more aggressive, then that would be good for agency because you would see more cuts and greater involvement. But overall, if they do not deliver on the cuts, we are reasonably well-hedged for that, and it's not our base case. We actually think they will be delivered.

Operator, Operator

This concludes our Q&A session. I would like to turn the conference back over to Mr. Finkelstein for any closing remarks. Thank you.

David L. Finkelstein, CEO and Co-Chief Investment Officer

Thank you, Vicki. Everybody, have a good rest of the summer, and we'll talk to you soon.

Operator, Operator

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