AGNC Investment Corp (AGNCL) 2010 Q2 法說會逐字稿

Good afternoon.

My name is Lashanda and I will be your conference operator today.

At this time, I would like to welcome everyone to the AGNC Shareholders Conference Call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

Thank you.

[Mrs.

April Shimshock], Manager of Investor Relations, you may begin your conference.

Hello and thank you for joining American Capital Agency's Second Quarter 2010 Earnings Call.

Before we begin, I'd like to review the Safe Harbor Statement.

This conference call and corresponding slide presentation contain statements that to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act.

Actual outcomes and results could differ materially from those 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 statement, are included in the Risks Factors section of AGNC's 10-K, dated February 24, 2010, and periodic reports filed with the SEC.

Copies are available on the SEC's website at www.sec.gov.

We disclaim any obligation to update our forward-looking statements unless required by law.

An archive of this presentation will be available on our website and the telephone recording can be accessed through August the 12th, by dialing 800-642-1687, and the conference ID number is 86022968.

To view the Q2 slide presentation, please turn to our website www.agnc.com and click on the Q2 2010 Earnings Presentation link in the upper-right corner.

Select the webcast option for both slides and audio or click on the link in the conference call section to view the streaming slide presentation during the call.

If you have any trouble with the webcast during the presentation, please hit F5 to refresh.

Participants on the call today include Malon Wilkus, Chairman, President, and CEO; John Erickson, CFO and Executive Vice President; Gary Kain, CIO; Bernie Bell, Vice President and Controller, and Jason Campbell, Head of Asset and Liability Management.

And with that, I'll turn the call over to Gary Kain.

Thanks April, and good morning -- well, good afternoon, everyone, and thanks for joining us.

AGNC's performance this quarter was strong despite the significant volatility we witnessed in the financial markets.

As we discussed on the last call, we were well positioned for the GSE buyout, and we had hedged the portfolio to be able to perform reasonably well if interest rates had risen, which was the major concern a few months ago.

However, the European debt crisis coupled with deteriorating domestic economic data resulted in the opposite scenario, a significant drop in interest rates, which was led by longer term treasuries.

Despite this curveball, AGNC was able to maintain a dividend of a $1.40 per share, increase the dollar amount of undistributed taxable income, increase book value by over $0.60 per share, and most importantly, position the portfolio to attempt to minimize our exposure to faster speeds despite record low mortgage rates.

Now, taking a step back, we feel especially good about AGNC's performance over the last year or so.

We strongly believe that an active approach to managing our portfolio can produce solid performance despite an ever evolving investment landscape.

We have now paid a dividend of at least $1.40 per share for five straight quarters while growing the dollar amount of undistributed income in each of these quarters.

In addition, we're the only agency mortgage REIT that has grown book value for six straight quarters since the start of 2009.

However, we know we cannot dwell on the glory days of the past and must continue to focus on performance quarter after quarter.

Now, to this end, the opportunities and challenges that we face today are very different than those being discussed just a few months ago; the Fed is now widely expected to be on hold through most of 2011, and the mortgage market, it has held up well despite the rally and the completion of the Fed's mortgage purchase program.

Mortgage rates and yields are at all time lows, prices are at their highs and prepayment risk is very real for some of the more recent mortgage originations.

Now, our proven track record of navigating evolving prepayment challenges should give our investors confidence that we can continue to proactively select assets that will perform well, and we will continue to provide you with the information you need to monitor our performance on this front.

Given how low rates are today, we believe this will be critical in driving performance.

Let's face it, when it comes to prepayments, we are not in Kansas anymore.

Now, let's quickly look at and review the highlights for the quarter.

GAAP net income totaled $1.23 per share, and other investment related income, which is comprised mainly of realized investment gains and losses and derivative mark-to-market accounted for a net of $0.26 per share.

Excluding this number and the now completed terminated swap expense, leaves the total of a $1.06 per share.

It is important to point out that our net income number included $0.33 of net unrealized losses from derivatives outstanding as of June 30.

These are mark-to-market in current income as opposed to remaining an OCI, as would have been in the case if they had been swaps in hedge relationships.

To this point, taxable net income came in much higher at $1.77 per share, because it is not impacted by derivative mark-to-market items.

There was also another $0.21 of temporary timing differences between GAAP and taxable income.

Now, if you remember last quarter, taxable income was lower than GAAP income by about $0.25.

As you know, we declared a dividend of a $1.40, and again none of this was paid with our undistributed taxable income, which actually increased from $31 million to $37 million during the quarter.

Now, given our higher share count, we closed the second quarter with a healthy $1.10 per share of undistributed income.

Book value per share increased $0.63 from $22.91 to $23.54 per share.

And our economic return for the quarter, which is the sum of the dividends we paid plus our book value expansion, was $2.03 [for an] annualized 35% returned for the quarter.

Our mortgage portfolio totaled $7.2 billion at the end of Q2 and our leverage was approximately eight and a quarter times.

Now, lastly our overall prepayments on our portfolio came in at 28% CPR for the quarter despite the Fannie Mae buyout, but more importantly the prepayments paid on our portfolio was only 16% CPR in the most recent July release, and that still included some lingering impacts from Fannie Mae buyouts.

So, now let's turn the page to slide five and look at what unfolded during the quarter.

As you can see, we reworked this slide to provide greater insight into more products as we continue to diversify our holdings.

In particular, we added price movements on 15 year mortgages and significantly expanded our coverage of various types of hybrid ARMs.

We now break out new 5/1s, 7/1s and 10/1s and added seasoned 10/1s as well.

Now, for the quarter interest rates fell significantly led by longer term rates.

More specifically, ten year treasuries dropped 90 basis points this quarter, while two year treasuries fell only 41 basis points.

Also of note, swap spreads widened as treasuries significantly outperformed swap rates.

Now, mortgage prices also rallied substantially and we're now at all time highs in prices on almost all products and coupons.

It is important to note that some of the price increases in higher coupons, fixed rate and ARMs did not translate to fair value gains, because the Fannie Mae buyouts were priced in prior to the quarter or -- but were concluded by quarter end.

Said differently, some of the price increase merely paid for buyouts and true appreciation is less than what is implied by the price increase alone.

Now, in the lower coupon new production front, six straight mortgages outperformed hybrid ARMs, but this out-performance was actually much more pronounced midway through the quarter before ARMs recovered some of the weakness.

What we believe is most important going forward is a significant improvement in lower coupon fixed rate prices.

Why?

Because they drive mortgage rates.

Moreover, swap rates have only rallied since quarter end in most maturities, and mortgage prices are even higher.

This really raises the bar when it comes to asset selection, and finding the right securities has never been more important.

With this as the backdrop, let's turn to slide six and look at the changes to AGNC's portfolio strategy and holdings.

Now first of all, we fully deployed the capital we raised in May and grew our portfolio to $7.2 billion during the quarter.

Fortunately, the volatility brought on by the European debt crisis midway through the quarter presented some opportunities to purchase attractive securities.

In particular, new issue ARM spreads widened materially presenting some of the best opportunities we have seen over the past year and a half, which allowed us to reduce our significant underweight to this sector.

In growing our portfolio however, we maintained a reasonable balance between ARMs, 30 year and 15 year fixed rate mortgages.

Why?

Because the prepayment risk is real, and you have a better chance at finding securities that will outperform if you look across a variety of sectors.

In addition, we believe diversification is risk reducing for a given amount of leverage.

The following are some high level thoughts around our current asset selection strategies.

On the ARM front, we like new issue interest only 7/1 and 10/1 ARMs, and we'll show you why in a second.

We like higher coupon 2010 production Ginnie Mae ARMs, and seasoned higher coupon interest only 7/1 and 10/1 ARMs.

On the other hand, we are very concerned about newer issue 2009 and 2010 amortizing 5/1s and other amortizing 2008 and newer vintage hybrid ARMs.

Within fixed rate, we like low loan balance 15 year mortgages, and some other types of call protected 30 year new production mortgages.

We are also comfortable with season fixed rate mortgages as these borrowers have already passed up on opportunities to refinance either by choice or because they no longer qualify for GSE loans.

We also feel it's important to avoid 2009 and 2010 vintage generic high balance originations, because these borrowers just qualified for loans under new stricter underwriting guidelines, have pristine credit, fresh documentation and, thus, really have no hurdles to refinancing.

So, how important can this stuff be?

Does it really make a big difference?

Let's turn to slide seven and look at some of the recent prepayment information, and hopefully that sheds some light on the question.

Now, it would be logical to think that recent origination low coupon hybrid ARMs would be relatively safe.

One might conclude that if one kind of hybrid ARM were fast, then other similar vintages would face comparable issues.

Well, both of those conclusions are not supported by the recent data, and the differences are striking.

2009 issue amortizing 5/1s which comprise a vast majority of new ARM production, prepaid at 40% CPR in the most recent Fannie May released in early July, and that's the universe of everything produced in 2009.

What is more surprising is that these are very low coupons, 3.7% on average, and are only ten months old.

Now, let's contrast these with interest only 7/1 and 10/1 hybrids originated at the same time.

The prepayment speeds for both of these cohorts were around 10% CPR, despite the fact that these are also good credits.

Yes, that's right, 10% versus 40% CPR.

Why the massive difference?

The combination of the interest only feature and the longer reset attracts a different type of borrower.

As you can see, both features improve speeds over amortizing 5/1s on their own, but taken together they are very powerful.

So, now for probably the more important question, will these significant differences persist?

Our view is yes, and they could even get larger.

Why?

In August 2010, Freddie Mac will discontinue originating these interest only loans, and Fannie Mae is making the qualification criteria so onerous that many originators are unlikely to originate a significant amount of IO products.

As such, with new interest only loans, much more difficult to get, borrowers would likely have to refinance into amortizing loans and see their monthly payments increase significantly, even if their interest rates fell.

As such, we see these speeds remaining benign.

On the other hand, mortgage rates have dropped significantly and it was the rates available a few months ago which drove the June prepayments.

Thus, with lower rates now, there is no reason to expect an improvement on the 5/1s speeds over the foreseeable future.

For these reasons, at the end of Q2, we had no amortizing Freddie Mac or Fannie May 5/1s.

75% of our new issue conventional hybrids were interest only 7/1s and 10/1s.

As we sit here today, this percentage is even higher.

Now, let's look at one more example.

Look at the speed differences from the most recent Fannie Mae prepayment release on 15 year 4.5 coupons -- a major holding of ours.

Generic loan balances paid at 20% CPR, while pools with loan balances around 100K or less paid below 10% CPR.

This is why almost all of our 15 year mortgage securities are low loan balances.

Hopefully, this gives you some context for why we obsess about asset selection.

If we turn the page to slide eight, we can see the actual speeds on our portfolio broken out by new in-season vintages and by ARM and fixed.

As you can see, our strategies are making a difference with our aggregate portfolio having prepaid around 16% CPR last month and this number, again, even included Fannie Mae buyouts of below 5% coupon delinquent loans.

To give you some perspective, the aggregate Fannie Mae ARM universe prepaid at 49% CPR in the same month.

So, while we are not in Kansas anymore when it comes to prepayments, we believe we can still identify assets that will continue to perform well, and will continue to attempt to shield AGNC's shareholders from the most at-risk parts of the market.

The next few pages go into more detail around the fixed and ARM portfolios for those who are interested, but in the interest of time, let's skip to slide 12 and quickly look at the challenges -- the changes to our hedges during the quarter.

Now, consistent with our larger portfolio, we increased the size of our swap book from $2.4 billion at the end of Q1 to $3 billion by the end of Q2.

This brought the percentage of our repo balance hedged down to 45% from 51% at the end of Q1.

Now, the decision to hedge a lower percentage was made because the decline in interest rates had the effect of shortening the duration of our assets.

We also added another $200 million in receiver swaptions, bringing our total swaption portfolio to $500 million.

Again, swaptions are options we purchase that help protect us in the event of larger moves in interest rates.

Given the prepayment protection embedded in our assets and our swaptions, we continue to believe our portfolio is positioned to perform if rates move in either direction.

Now, to this point, we added a new slide this quarter on the next page in order to provide some greater insight into our interest rate sensitivity or duration gap.

Duration is a measure of how much the price on an asset is expected to change for a given parallel move in interest rates.

Duration gap is the difference between the price sensitivity or the duration of an entity's assets and its liabilities.

As such, it is a relatively crude way of measuring the amount of interest rate risk inherent in a portfolio.

Now market participants generally use models to calculate the duration of price sensitivity of a mortgage security.

And it's really important to keep in mind that different models will produce materially different estimates of duration, so investors should be very careful when relying on or comparing duration or duration gap numbers.

In addition, the duration of a mortgage security is not constant and changes with interest rates; this is called convexity.

And since mortgage securities tend to shorten in duration when rates fall and lengthen when rates rise, this negative convexity increases the interest rate risk inherent in a portfolio versus what would be implied by duration gap alone.

AGNC's model estimated a duration gap of approximately eight months at the end of Q2.

AGNC uses a risk management platform and models provided by BlackRock Solutions to calculate our duration gap, but we will periodically make adjustments to the base models or some inputs when we feel they are appropriate.

Now, with respect to hedging decisions, we use significant management judgment to compensate for some of the limitations and weaknesses inherent in model calculations and focus considerable attention on the underlying prepayment projections and other assumptions that drive the calculations.

That being said, I encourage everyone to refer to slide 22 and our related disclosures in our 10-K and our 10-Q for more information about these concepts.

We do hope this additional information helps to further the transparency into how we think about interest rate risk management.

If you turn to slide 14, I'm going to briefly touch on the business economics before taking questions.

So, given the changes to our portfolio and the equity raise, I'm going to concentrate on the left most column which shows our numbers as of June 30.

Our asset yield declined to 3.4% from 3.68% at the end of Q1.

The decline was largely a function of new acquisitions, the changing composition of the portfolio and increases in prepayment projections as a result of the decline in interest rates.

Our cost of funds dropped to 1.02% from 1.1% at the end of Q1.

This brought our net interest rate spread to 2.38%, which translates to a gross ROE of 23% or a net ROE of 21%, based only on spread income.

Again, this ROE gives no credit to other investment related income, including trading gains or losses or any of our undistributed taxable income, both of which could contribute to our dividends going forward.

So, in conclusion, we feel pretty good about things right now.

With the Fed likely on hold for an extended period, our main challenge is to manage the prepayment landscape.

We believe we have demonstrated that this is a major competitive advantage for AGNC, and we really like the composition of our portfolio.

That being said, if conditions change, we plan to react quickly and decisively to take advantage of new opportunities or to protect our book value.

At this point, I'd like to thank you for your interest and open the call up for questions.

(Operator Instructions)

Your first question comes from the line of Bose George with KBW.

Hey, good afternoon.

And once again, thanks for the detailed disclosure that you guys give.

No problem, thank you.

I wanted to start with a -- kind of a broader question on government policy.

Do you think there is any possibility that the GSEs do more to encourage refi -- or make refi activity more possible among credit impaired borrowers?

I mean, it's clearly that possibility.

On the other hand, I think that the situation we're in now is different from the GSE buyouts, which we just went through, in that the government has tried or the GSEs have tried to allow refinancing activity for people that are just underwater because of the LTV, but have been current on their loans.

There are programs, the HARP and HAP programs that in theory address those borrowers.

I think what's happened is the operational and some of the other hurdles that borrowers face, have inhibited any widespread use of those programs.

So, it's not as simple as flicking a switch like the buyout decisions were.

So, while I think there's always the risk of the government in a sense doing other things through the GSEs, I think that risk is lower now than it's been in a while, and I think right now the focus is probably going to be on unemployment and some other parts of the economy that are really getting the bulk of the attention.

But again, that risk exists.

Right, thanks for that.

And then just switching to the spreads on new investments, and I guess the related question is, I mean you're trading at a reasonable premium to book value, so probably -- it's accretive on a book value basis to raise capital, but how do you see the investment opportunities in that scenario?

Okay, so first on investment activities, we again invest throughout the spectrum.

Shorter reset, in a sense seasoned ARMs are now generally 2% low in that zone, maybe a little lower.

New issue 5/1s are 2.25%-ish run to reasonable speeds.

7/1s and 10/1 ARMs are 2.5% to 3%, 15 year mortgages in the neighborhood of 3% -- 2.75% to 3%, and 30 year mortgages in -- we'll call it the mid 3%, it's again very dependent on prepayment speeds.

Given where swap rates are, there are still some decent investments that will produce attractive returns.

So, you can still generate good value if you buy the right securities.

However, we have to be practical versus two or three months ago, especially kind of in the middle of last quarter or after the buyouts.

The opportunities are weaker than they were at that point.

So, that is one consideration, but things change on a daily basis, and it's our job to be on top of the market looking for opportunities, whether it's for the existing portfolio or if we were to look at equity.

Great, thanks a lot.

Your next question comes from the line of Matthew Kelly with Morgan Stanley.

Hey, guys, thanks for taking my question.

So, I was just wondering on your swap book -- you're about 45% hedged for your repos right now.

Where can that go to, and what are you solving for when you're coming up with that right number?

We're looking at the interest rate risk embedded in our portfolio.

We are looking at how we think the securities we own will perform in different interest rate moves, and we layer that in with our expectations about how our other hedges, swaptions and mortgage related hedges will factor in.

And those are the key drivers to the equation, and so that whole equation is what we at least -- and again, we want to highlight the weaknesses of just looking at duration gap.

But that's one of the reasons why we added that slide to give people a little bit of a sense for how we -- each of those pieces adds up.

But I do want to be careful to caution against just using the 45%, because again it ignores some pretty material factors, the composition of your mortgage portfolio and the other hedges that you have in place, such as in our case the swaptions.

Okay.

And then just as a follow up on the funding side for you guys, what do you see from repo counterparties in terms of willingness to lend?

Have they been more aggressive trying to lend to you in terms of pricing, where you think that's headed so far in the third quarter?

Repo availability and terms have been very good.

We definitely see counterparties aggressively willing to lend on each of these securities.

In terms of rates, they did tick up in the second quarter, and they've only moved a little bit.

I would think of them as largely unchanged to down a little bit maybe.

Okay.

And then just one final follow up from me on that.

How do you position yourself in case credit does freeze up at all in any pockets of your -- from your counterparties, how do you position yourselves against that sort of risk?

Great question.

I mean, one thing is that by essentially managing -- first off, by really managing the prepayment side carefully.

Prepayments drain or use up a fair amount of liquidity in terms of borrowing capacity.

So, by tightly managing the prepayments piece, it really helps you to, in a sense, build additional liquidity.

But second of all, we have a lot of TBA eligible fixed rate securities that are very easy to sell even in very illiquid markets.

And so our backup plan around liquidity is also the fact that we have liquid fixed rate passers.

And that's one of the reasons why we are so committed to a diversified portfolio, while we would be willing to lower our percentage of ARM holdings, to a much smaller number.

We really believe there is a minimum amount of fixed rate that we want to hold to have kind of that extra layer of comfort around liquidity.

Great, thank you.

Your next question comes from the line of Daniel Furtado with Jefferies.

Hey, Gary, thanks for taking the question.

No problem.

I don't really have too many detailed questions, the presentation answers most of them, but can you just expand a little bit on -- when you're talking about favorable risk and return, what you're seeing in the 20/10 Ginnie Maes, the 5/1s -- why you like those above some others?

Sure.

I mean, the Ginnie ARMs is something that -- the first thing I did, I think, when I came to Agency in 2009, was sell our Ginnie securities.

On the other hand, we saw them as favorable toward the end of the second quarter, both in terms of price and in terms of prepayment characteristics.

So, as we pointed out in the prepared remarks, we are very concerned about Freddie and Fannie amortizing 5/1s, and so we looked -- when new issue ARMs had cheapened up, we looked for alternatives that we thought would provide stable prepayments, and that was really the driver of looking at the Ginnie Mae speeds.

But if you pull up the 2010 and even the later 2009 vintage Ginnie ARMs, you'll see relatively stable prepayments and nothing like what you're seeing on the new issue conventionals.

The reason we like the higher coupons is Ginnie Mae ARMs do have more cap risk, they're 1% annual caps, and the higher you go up in coupon, the less relevant that is.

So, we found the kind of best risk adjusted returns within Ginnie Maes to be in the higher coupons.

Perfect, thanks a lot, good quarter.

Thanks.

Your next question comes from the line of Michael Taiano with Sandler O'Neill.

Hey, good afternoon.

Just a question on distributed income, the $1.10.

I mean given where you're at now, I mean it's certainly fair to say you'll have some again at the end of this year.

I mean, what's your view in terms of how you handle that?

Do you think you'll do similar to what you did last year and pay that excise tax?

Good question.

Our preference is, of course, to avoid an excise tax in the absence of other compelling information, but practically speaking we're pretty far away from the end of the year and we'll have to see how things unfold.

So, again, we'll play it by ear, but we'll evaluate our both liquidity, the ability to keep that capital invested and other considerations in kind of coming to a final decision.

Okay.

Not to try to lock into guidance, but given where you stand today, I mean do you feel fairly comfortable on being able to maintain the $1.40 dividend like through the end of the year?

I mean, what we're trying to do is give you all the information in our press release, and in our earnings presentation to give you a feel for our portfolio and how much we can earn there, and you have the undistributed number.

I think we would appreciate you kind of trying to come to your own conclusions on that front.

We really don't give guidance.

But I hope that helps; it's the best I can do.

Yes.

Yes -- no, I appreciate it.

And then just the last question, I mean when you look at you guys, and I know you guys take a different approach than many of your peers with a more actively managed portfolio, but just in terms of the risk profile.

I think if you look at some of the metrics that typically get looked at in terms of evaluating risk, I mean leverage, obviously you're at the high end of the group and sort of average pricier portfolio at north of 105, I guess is also higher than most folks.

How do we kind of contrast that just in your view?

I mean, are you able to do that more, because you think that the risk profile of your portfolio is less, and that you're just taking less prepayment risk?

How should we think about that?

Now, I'm really glad you asked that question, because I think that's something that's probably most misunderstood about Agency.

First off, I think we view leverage as a very blunt instrument and it's only one tool in managing risk.

Then you mentioned dollar price.

I will take buying a security that I think is going to prepay in a stable manner than buying a lower dollar price security that's going to be inconsistent out a few months to lower its dollar price.

In the end, that's not risk reduction.

So, from our perspective, we are very -- we view the most important thing we can do to manage risk is to have the best assets at all times for the market that we're dealing with, and the risk that we're dealing with.

And almost by definition, if you look back over what's happened over the last year and a half, worried about refis early, worried about delinquencies over three to six months ago, now kind of more worried about refis again.

When you look at those changing patterns, you can't do it unless you actively manage your portfolio.

So, I think that absolutely by repositioning your portfolio for the issues that you're dealing with, and by doing things like purchasing swaptions and other things, which actually cost money, and would be viewed as risk reducing, you can get to a very balanced position, albeit with a somewhat higher leverage.

But again, I did want to point to the leverage number being on the low end of the historical range, and we've just viewed it as not a time to be off the charts with low leverage, and have viewed it that way for the last couple of years.

And I actually think that's been the right decision.

Yes, you guys have certainly done well.

That's very helpful, thanks.

(Operator Instructions)

Your last question comes from the line of Matthew Howlett with Macquarie.

Yes, thanks for taking my question.

Yes, Gary, congratulations for you and the team again.

I guess just a general question in terms of you've run this Company sort of outside the box that we've seen from traditional agency mortgage REITS.

To the extent you can -- do you expect to continue doing that going forward, I mean as it relates to a compliance tests related to trading?

And of course as you get bigger, you're not going to be able to sort of move in and out or are you?

Then to extent, what can you continue to rotate and execute the strategy that's been so successful since you've went public?

The compliance tests are not an issue, and trading activity is not an issue.

We've discussed it with multiple councils and we just don't -- so that's really not an event or a consideration.

The big picture, I mean it depends on the environment, and I think there's a couple of things that will always add value.

The environment will change and continuously positioning ourselves into the securities that have the best chances of performing in an environment will always be important, and will always add to returns if we can continue to do that effectively, which we believe we can.

Second of all, even if we maintain the same basic composition, exchanging a kind of weaker performing bond for a better performing individual security within a category will also make a difference.

Yes, I think in the short run, we're very happy with our portfolio.

And some of the things like interest-only new issue hybrids are hard to replace right now.

So, in the short run, we may actually keep -- hold onto some of our securities for a little longer in the absence of a changing environment.

But big picture, I think there's still a lot you can do with your portfolio by adjusting the mix of securities to fit the environment even if we were quite a bit bigger.

Now, there will be a size where you start to run into a wall where in a sense you can't get in and out of things, but I think realistically we're a long way away from that.

Great.

And then, just getting back to the leverage and the liquidity, I know you're well below historical averages for the peer group, but we've heard talk that there is a sort of the national refinance or national mortgage, if you will -- I've seen estimates anywhere between point to three point sell-off in premium MBS.

I mean to the extent, I mean if you stress test would it be an issue with the repo couterparties?

I mean, what was -- I guess sort of what type of risk would there be in terms of leverage now if there was sort of some national change in -- to kick-start the refi market again?

I mean look, we absolutely stress test our portfolio for risks that would cover the magnitude of prepayment shock that we would view as being realistic.

And if you just want to think about it, simply haircuts on agency repo from a year ago are down more than 2%.

So, if you think about it, that 2% new hit versus the price of the mortgages right now, would effectively get you back to sort of the haircuts that we were at, not in 2008, but let's say in the first half of 2009.

So, there is cushion for those things, especially if you feel you can manage the prepayment issue.

And to the point of liquidity and prepayment risk, even if those things were inacted, the prepayments don't show up that month as we saw on the buyouts even with an immediate announcement, there is some time.

But look, we understand that risk, we are very focused on it and we were very focused on it in 2009 related to the buyouts, because that was probably the most extreme liquidity test you'll get in a relatively -- with the exception of 2008.

And we felt extremely well positioned for that, and we feel like we can handle volatility and have handled it very well to-date.

All right, well, thank you, guys.

If there are no more questions, I guess we'll conclude the call.

There are no further questions at this time.

Lashanda, could you please give them the replay details before we sign off?

Okay.

Thank you for participating in today's AGNC Shareholder's Conference Call.

This call will be available for replay beginning at 4'o clock PM Eastern today through midnight on August 12, 2010.

The conference ID number for the replay is 86022968.

Again, the conference ID number for the replay is 86022968.

The number to dial in for the replay is 1800-642-1687 or 1707-645-9291.

Also, you can contact investor relations at 301-968-9300 or by email at ir@agnc.com.

Thank you.

This concludes today's conference call.

You may now disconnect.