AGNC Investment Corp (AGNCL) 2021 Q1 法說會逐字稿

Good morning, everyone, and welcome to the AGNC Investment Corp.

First Quarter 2021 Shareholder Call.

(Operator Instructions) Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Katie Wisecarver of Investor Relations.

Ma'am, please go ahead.

Thank you all for joining AGNC Investment Corp.'s First Quarter 2021 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 facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC.

All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the Risk Factors section of AGNC's periodic reports filed with the Securities and Exchange Commission.

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

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

Participants on the call include Gary Kain, Director, Chief Executive Officer and Chief Investment Officer; Bernie Bell, Senior Vice President and Chief Financial Officer; Chris Kuehl, Executive Vice President of Agency Portfolio Investments; Aaron Pas, Senior Vice President, Non-Agency Portfolio Management; and Peter Federico, President and Chief Operating Officer.

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

Thanks, Katie, and thanks to all of you for your interest in AGNC.

Our portfolio continued to perform extremely well in the first quarter despite the significant rise in intermediate and longer-term interest rates.

Economic return for the quarter totaled 8.2%, bringing our trailing 12-month economic return to 40.7%.

Optimism surrounding vaccines and the potential for a very strong economic recovery in the second half of 2021 pushed most risk asset prices higher.

While broad equity indices advanced during the quarter, cyclical and recovery-oriented stocks significantly outperformed other sectors.

Credit spreads were mixed during Q1, and housing markets in most regions maintained very strong positive momentum.

Consistent with this stronger economic outlook and in response to more fiscal stimulus, we saw a substantial increase in longer-term interest rates and a material steepening of the yield curve.

To this point, the yield on the 10-year treasury, which closed the quarter at 1.74% essentially erased almost all of the decline experienced in 2020.

Unlike other periods of rapidly rising interest rates, agency MBS performance was strong across the board during the quarter with higher coupons being the best performers.

Despite the 80 basis points sell-off in 10-year rates, higher coupon TBAs actually increased in price during Q1, while corresponding specified pools in aggregate were only modestly lower.

Furthermore, despite material price declines, lower coupon TBAs still outperformed our hedges and provided a positive contribution to both economic return and earnings.

This is a very different result from what happened back in late 2016 or in mid-2013, the last 2 periods when interest rates increased rapidly.

Looking ahead, we continue to feel good about the composition of our portfolio, especially in light of the somewhat different risk return characteristics of our lower coupon TBA position and higher coupon specified pools.

The benefit of this barbell portfolio can be seen clearly in the prior 2 quarters return profile, with lower coupon TBAs being the strongest performer in Q4 and higher coupon specified pools leading the charge in Q1.

Despite the spread tightening that has already occurred in the agency MBS space, the sector still looks attractive on a relative value basis for levered investors given the elevated valuations that exist across the entire fixed income and equity spectrum.

Key positive differentiators for agency MBS include repo rates at all-time lows, favorable dollar roll financing levels and the likelihood of moderating prepayment speeds given the uptick in rates.

Against this backdrop and given our confidence in our portfolio, we continue to believe AGNC is well positioned for the remainder of 2021.

Lastly, I would like to mention that we published our first annual ESG report last month, and it is available on the corporate responsibility section of our website.

Hopefully, this helps our stakeholders better understand our commitment to corporate responsibility and our approach to ESG.

At this point, I will turn the call over to Bernie to review our financial results for the quarter.

Thank you, Gary.

Turning to Slide 4. We had total comprehensive income of $1.33 per share for the first quarter.

Net spread and dollar roll income, excluding catch-up AM, was $0.76 per share.

The marginal improvement over the fourth quarter was due to the combination of lower funding cost, a sharp decline in CPR projections and earnings accretion due to share repurchases, which more than offset our lower operating leverage and an overall decline in asset yields.

Tangible net book value increased 6% for the quarter led by the strong performance of our higher coupon specified pools.

And notably, at $17.72 per share now exceeds the pre-COVID level of $17.66 per share as of December 31, 2019.

Including dividends of $0.36 per share, our economic return on tangible common equity was 8.2% for the first quarter.

As of last Friday, we estimate that our tangible net book value is down about 1% so far this month.

Turning to Slide 5. Our investment portfolio at quarter end totaled $90.3 billion compared to $97.9 billion at the end of the fourth quarter.

Our leverage ended the quarter at 7.7x tangible equity, down from 8.5x as of last quarter end.

We had $5.2 billion of unencumbered cash and Agency MBS at quarter end or approximately 48% of our tangible equity, which excludes both unencumbered credit assets and assets held at our broker-dealer subsidiary Bethesda Securities.

Actual prepayment speeds on our agency portfolio declined 3 CPR for the first quarter to 24.6%.

Given the significant increase in primary mortgage rates of approximately 50 basis points over the first quarter, our forecasted life CPRs decreased to 11.3% as of quarter end from 17.6% the prior quarter.

Lastly, during the first quarter, we completed an additional $215 million of accretive common stock repurchases at an average repurchase price of $16.05 per share.

Over the past 12 months, we have repurchased over $650 million or approximately 7.5% of our outstanding common stock at compelling discounts to tangible net book value as we seek to optimize shareholder returns through a combination of share buybacks, dividends and net book value accretion.

I'll now turn the call over to Chris to discuss the agency mortgage market.

Thanks, Bernie.

Let's turn to Slide 6. The sell-off in interest rates accelerated during the first quarter, and with it the trend of lower interest rate volatility also reversed.

The yield curve steepened with 5- and 10-year treasury notes selling off 58 and 82 basis points, respectively.

Despite the sharp move higher in rates, Agency MBS performed extraordinarily well during the quarter with spreads tightening 5 to 20 basis points, depending on the coupon and pool type with higher coupon MBS meaningfully outperforming lower coupons.

TBA roll financing also improved midway through the quarter with dollar roll levels on 30-year production coupons trading in a wide range of around 0 to negative 70 basis points.

Today, 30-year 2s and 2.5s are currently trading with implied financing rates around negative 15 and negative 40 basis points, respectively, which compares favorably versus 1-month repo rates of around 10 basis points.

Let's turn to Slide 7. As you can see in the top left chart, the investment portfolio totaled $90.3 billion as of March 31.

Given the spread tightening during the quarter, we opportunistically reduced holdings in 15-year MBS as well as in certain specified pool categories.

And within our TBA position, we moved higher in coupon given the relative underperformance of 2.5s versus 1.5s and 2s as a result of a shift in production into higher coupons.

As you can see on Slide 7, we maintained a large average TBA net roll position during the first quarter at $32 billion.

And while difficult to predict, it's likely that we will continue to carry a sizable net long roll position as we anticipate that roll implied financing will remain attractive relative to repo.

Looking ahead, the themes that we discussed last quarter are still largely in place.

And while agency MBS spreads are tighter, other risk assets have also performed very well, leaving the favorable relative value backdrop for MBS intact, especially in light of the tremendous ongoing direct support from the Fed.

And while the risk of a taper tantrum is on investors' minds, there are many differences today that should help MBS better weather a taper, if and when the Fed's requisite conditions are met.

Additionally, given the large rate move that we have already experienced, a good portion of the mortgage market extension that occurred in 2013 has already taken place without disruption to market liquidity or valuations.

I'll now turn the call over to Aaron to discuss the non-agency market.

Thanks, Chris.

I'll quickly recap the quarter and provide a brief update on our current positioning.

While the equity markets generally marched higher throughout the first quarter, structured products were a bit more muted.

For the most part, the market ranged from little change to somewhat tighter by the end of the quarter after posting strong returns in Q4.

The credit risk transfer market saw relatively heavy new issue supply coupled with extending spread durations due to lower note rates on new production mortgages.

The sell-off in rates further added to these pressures.

The significant shift to longer spread duration bonds led to weakness in the new issue market and subsequently into seasoned bonds in the secondary market.

Jumbo private label issuance volume was elevated with a total of about $9 billion issued in the first quarter relative to full year issuance of $21 billion and $22 billion in 2019 and 2020, respectively.

Demand for credit in these deals remained strong and credit spreads were firm throughout.

AAA spreads did not fare as well and began to come under some pressure.

The fundamental side for both housing and residential credit remain favorable.

The housing landscape looks good and the trends for the consumer on the labor market front continue to improve.

Additionally, by the metrics we use internally, the more recent CRT and prime jumbo deals look to be some of the cleanest from a collateral attribute and risk perspective in many years.

Please turn to Slide 8. Turning to our holdings, as you can see in the chart in the top right, the non-agency portfolio increased over the quarter.

The roughly $650 million increase was driven by incremental investments in credit risk transfer securities and AAA RMBS.

On the CRT front, early in the quarter, we added some higher credit support M2s.

Later in the quarter, we shifted to focus on B1s as spreads widened.

With the fundamental backdrop sound, it made sense to add into the weakness.

On the RMBS side, in light of the supply pressure and widening spreads, we opportunistically added some AAAs at the end of the quarter.

Finally, our CMBS position increased slightly with the composition shift due to sales of AA and AAA conduit that tightened early in Q1 in favor of adding exposure to several down in credit single borrower deals.

With that, I'll turn the call over to Peter to discuss funding and risk management.

Thanks, Aaron.

I'll start with our financing summary on Slide 9. As expected, our average repo funding cost in the fourth quarter fell to 21 basis points, an improvement of 17 basis points from the prior quarter.

Our funding cost at quarter end was even lower at 15 basis points.

Attractive funding opportunities for agency collateral were available across the short-term funding curve and regardless of whether sourced through our captive broker-dealer or direct with counterparties.

I expect these favorable funding conditions to continue and for our repo costs to remain relatively stable at the current level over the next several quarters.

Our aggregate cost of funds, which includes the cost associated with our TBA position and our swap hedges averaged 2 basis points, down from 5 basis points the prior quarter.

This improvement was due to the combination of lower repo costs and attractive TBA dollar roll funding, offset somewhat by slightly higher swap costs.

Our net interest margin, which represents the spread between our asset yield and our cost of funds remained very strong at 200 basis points in the first quarter.

On Slide 10, we provide a summary of our hedge portfolio.

In aggregate, our hedge portfolio totaled $79 billion, up meaningfully from $67 billion the prior quarter, as we proactively added swap, swaption and treasury hedges.

As a result, our hedge ratio at quarter end increased to 98% of our funding liabilities.

With the yield curve steepening significantly during the quarter, the maturity profile of our hedge portfolio was an important driver of our book value performance.

At quarter end, 72% of our hedges had a maturity of 4 years or more.

This was particularly important in the first quarter with 10-year swap rates increasing 81 basis points, while 3-year swap rates increased just 22 basis points.

Lastly, on Slide 11, we show our duration gap and duration gap sensitivity.

Our duration gap at the end of the quarter was long about half a year.

The movement in our duration gap from negative to positive was consistent with the increase in interest rates and the corresponding extension in mortgage durations.

Given the cumulative rate move over the last several quarters, the duration on our mortgage portfolio has extended from a low of 2.8 years to 5.1 years this last quarter.

And with that, we will now open the call up to your questions.

(Operator Instructions) And our first question today comes from Bose George from KBW.

Congratulations on an impressive 12-month period here.

First, just wanted to ask about incremental returns.

I mean, just, obviously, given where as -- sort of how tight spreads have gotten here?

Yes.

Thank you, Bose, it's Chris -- go ahead, Gary.

Yes, Bose, first off, thanks for the comments.

And look, I'll let Chris go into the details on incremental returns.

I think the key thing is, yes, spreads have tightened, but there has been an offset, in particular, in the 2.5% coupon where dollar roll levels have definitely rebounded from kind of the lows or the weakest levels maybe toward the end of last quarter.

So that's a significant offset.

So with respect to 2.5s, and to some degree, 2s, you can still get low double digits given the improvement on the roll side.

Chris, I don't know if you want to add anything to that.

Yes, sure.

So I guess -- I mean, within the 30-year production coupon mix, I'd say I mentioned earlier, 1.5s and 2s have tightened quite a bit more than 2.5s.

And as Gary mentioned, ROEs on 2.5s can be low double digits even without roll specialness.

The gross ROE on 2.5s before convexity cost is very high single digits.

And as I mentioned earlier, the 2.5% rolls currently trading around negative 40 basis points.

So roughly 50 basis points through repo.

And while there's no certainty how long this degree of specialness will persist, these levels have been and could continue to be material contributors to returns with each 25 basis points of advantage versus repo worth roughly 2% on an annualized basis at 8x leverage.

Higher coupon specs, generally high single digits area.

15s are mid-single digits.

And we've been reducing some exposure there, as I mentioned earlier.

Okay.

Great.

That's helpful.

And then can you just talk about how you view leverage.

Just again, given where spreads are, your leverage is kind of at the lower end of your range now.

Is that kind of where you want to keep it or just your thoughts there?

Sure.

Look, our leverage has declined modestly over the past several quarters.

And this is just a natural reaction to the market conditions that we're seeing.

It's a combination of, as you've said, the tighter spreads.

It's also the volatility -- interest rate volatility has ticked up from kind of the lows that we saw post crisis.

So at this point, we have the luxury of being able to produce very strong economic return.

And to be able to do so with lower leverage where we have lots of dry powder to reinvest to the extent that there is some kind of shock to the system.

So this is a very, very comfortable position for us to be in, and we'll continue to just react to the market conditions.

Again, this is our risk management process, kind of just working normally.

And that's leading to this kind of positioning.

Our next question comes from Doug Harter from Crédit Suisse.

Gary, can you talk about how you're viewing dividend with your (inaudible) having been drifted a little bit lower, but still relatively attractive.

Kind of how do you view kind of setting the dividend level versus kind of having more ability to kind of continue to grow book value in (inaudible) ?

Yes.

I think I got your question, Doug.

You were breaking up a little bit, but what I understood it was just how we view the dividend in today's environment in light of the current earnings, the earnings environment and so forth.

And look, we've gotten this question multiple times over the past few quarters.

And I view this as a significant positive that we keep getting asked about this.

I think investors and analysts continue to see our net spread and dollar roll income well above the dividend and also demonstrating significant resilience in that area.

And we've also been able to produce very strong book value and total economic returns during this period of the past 4 quarters, with every quarter being north of 7.5% per share.

So -- and additionally, we've bought back a fair amount of stock over the past year, over $600 million, as Bernie mentioned.

So in our minds, things are really working well right now.

We're paying a great dividend.

We're growing book value.

We're seeing our share price and our price-to-book improve and what matters in the end for investors is the total stock return.

And by extension, total economic return.

So our most important objective is to maximize this.

It's to make money for shareholders rather than to obsess about, in a sense, which pocket the return goes to.

So I think we're going to continue to evaluate the dividend level, but our bias continues to be offering an attractive dividend but one that's not expected to be a headwind to book value.

So hopefully, that addressed your question.

Our next question comes from Brock Vandervliet from UBS.

Just wondering what your latest thoughts are with respect to reading the tea leaves and timing of the beginning of the taper?

Good question and, obviously, important from a timing perspective.

I think there are 2 things I want to say with respect to taper.

The first is, I'll answer your question.

And the second is really to talk about what the taper might look like or feel like.

But let me start with timing.

Look, I don't think this is any rocket science, but we see the economy performing very well in the second half of the year and including the second -- the remainder of this quarter, we think the economy accelerates.

We do think there are going to be price pressures.

We do generally agree with the Fed that they'll be shorter-term in nature.

However, we don't think that they're necessarily going to appear shorter-term in nature.

In other words, we do feel like the Fed may start to feel pressure over the summer with respect to just growth, strength in the economy and add inflationary pressures, which they're going to hope are temporary, but there's going to be concern both in the market and in economic circles that maybe the inflationary pressures will be more lasting.

Against that backdrop, we think the Fed is going to have to start talking.

Even though right now, they don't want to talk about talking about tapering.

They're going to have to start talking about it.

And I think an eventual taper will probably begin either at the very end of this year or very early next year.

So that's what we see in terms of timing.

A couple of things that I just want to reiterate and people, I think, forget this.

When they taper, they're going to reduce on a monthly basis, most likely, the amount of mortgages they're adding to their balance sheet, okay?

So let's say they did $5 million -- $5 billion a month, that would take them 8 months to then -- to not be adding anything to their balance sheet.

But what I think people forget is they're still going to be replacing the runoff in their portfolio.

And they did that for years after they stopped tapering last time around.

And they usually will coincide shrinking their balance sheet maybe with a rate increase.

And as they've communicated, and I think everyone believes, that's a -- ways after the tapering.

So they will still be buying a lot of mortgages.

And they own 30% of the mortgage market right now.

And so that's not going to change for a long time.

And remember, in a taper environment or in a environment where they're raising rates, prepayments are going to be very, very slow on this outstanding universe of mortgages, which is very low coupon.

So the Fed's portfolio, again, even when they're not replacing runoff, it's not going to be running off very quickly at all.

So big picture, that should give investors a lot of comfort around kind of this exit.

And I want to add a couple of other points related to kind of the whole taper equation, which is -- and I think you can see it from what we just went through.

And this is very, very different than 2013.

We already got an 80 basis point, and really if you count the end of the prior quarter, over 100 basis point increase in interest rates.

And against that backdrop, mortgages have performed very, very well as evidenced by our economic returns.

But importantly, we've essentially absorbed a lot of the extension in the mortgage universe and in people's portfolios like ours, well pre-taper, right?

And the separation of this extension component of mortgages with a taper component, which may affect spreads, is a big benefit both to an individual portfolio but also to the market.

And that's a major reason why an eventual taper should feel very, very different from what we saw in 2013.

There are a host of other reasons why this is -- should be a lot easier to manage than -- back then.

And I mean I could list a few.

But I think what I'll do is just say one of -- there's one other issue, which is, back then, mortgages -- agency mortgages were extremely tight.

And they are tight now, but other products, in particular, both equities and credit-based fixed income, were actually pretty wide.

So mortgages stood on their own as being a fully valued product or more than fully valued.

In this environment, mortgages don't stand out, okay?

Yes, they're fully valued.

We've talked about that but everything is.

And so this should be a very different landscape.

So said another way, on a relative basis, mortgages are absolutely fine right now.

Last time around, they were very tight on a relative basis.

A host of other things, but I think that gives you an idea why investors should not panic about an eventual taper.

Our next question comes from Eric Hagen from BTIG.

So you guys have done a good job preserving a relatively healthy balance between owning higher premium spec pools in sort of half of the portfolio.

And then TBAs are, call it, generic securities in, call it, the other half.

What do you think investors are picking up from owning that current construct, which they might not be getting if you were more concentrated in either one of those buckets?

That's an excellent question.

And I do -- I'll repeat one thing that I said in the prepared remarks, which is, I think you're getting stronger overall performance, but you're also getting smoother performance, right?

So in Q4, I mean, clearly, both from an earnings perspective -- Q3 and Q4, from an earnings perspective, the lower coupon TBAs were really pushing our returns and driving kind of the -- again, what we focus most on total economic return.

And obviously, this quarter, both performed well, but higher coupon specs clearly were the better performer in terms of total economic return.

So I think it's -- so it's -- they have very different risk characteristics.

Lower coupons, we can go through a few, right?

So lower coupons are going to -- returns are going to be sensitive to spread moves, origination versus the Fed and bank demand.

So there's more spread noise there because there's lots of production.

There's lots of trading volume.

When it comes to return, the dollar roll levels, which they hit their lows maybe 3 months ago, the dollar roll levels hurt the investment return.

In the case of higher coupons, you're obviously dealing with the #1 variable there is not supply and demand technicals because there's none being produced.

The universe of specs shrinks every month with prepayments.

Your #1 kind of moving part on the spec position is prepayments, right?

And so higher rates and wider mortgage spreads will actually improve your prepayment dynamic whereas they hurt the lower coupons.

So we're very comfortable and we really like having this balance between the two because you're not solely concerned about prepayments in the case of the higher coupons.

And in the case of a lower coupon portfolio by itself, you have a lot more interest rate sensitivity and more sensitivity to technical factors.

So hopefully, that answers your question.

Yes.

That's great color.

I wanted to also just get your thoughts around how much hedging and volatility risk you guys expect to incorporate in the portfolio going forward?

And how does that plug into the way you guys think about spread risk overall right now?

Eric, very good question.

Thank you.

Well, first off, you saw the increase in our hedge portfolio.

So we're operating right now close to 100% hedge ratio.

Our duration gap has moved from negative to positive.

And overall, we did add hedges in all components of our portfolio.

We added some swaps.

And in fact, this last quarter, we added some shorter-dated swaps predominantly in the 3-year sector just as an incremental hedge to lock in more short term funding, if you will.

We were able to lock in 3-year funding at essentially 25 basis points.

So I don't really look at that as a market value hedge, it's a hedge of our liabilities.

We did add more options to our portfolio.

And in particular, we've added some further out of the money options, which really are a hedge against volatility.

And we'll continue to look at that.

We'll continue to manage our duration fairly carefully.

I would not expect us, though, to operate with a negative duration gap like we have in the past.

And one of the key reasons for that is that in the current yield curve environment with the yield curve steepening, for example, from 2 years to 10 years to 140 basis points, there's an incremental cost now of operating with a negative duration gap and conversely, that's an incremental positive from an ROE perspective of operating with a positive duration gap.

We are still biased toward rates going higher.

So we'll continue to operate with a defensive position.

But ultimately, we think we'll reset at a slightly higher rate.

And once we stabilize there, you can expect us to operate with more of a positive duration gap, which would, as you point out, give us some incremental protection against, obviously, the 2 rate risk that we're seeing -- even seeing this quarter.

But also the fact that in a down rate scenario once we establish a higher rate level, mortgages are more likely to widen into a rally scenario.

So we'll use a positive duration gap as an incremental hedge for that risk.

Our next question comes from Rick Shane from JPMorgan.

This is Charlie on for Rick actually.

I sort of have a follow-up to the leverage question that came up earlier.

When you see overnight repo at basically 0 and short-term rates so low, which has really been a great funding tailwind for AGNC.

I mean given that context, you've got an environment, it seems where the market is, for the moment, essentially giving you almost free leverage.

So I'm wondering how you balance really the opportunity cost of not getting more aggressive on the borrowing weighed against the risk of additional leverage?

Sure.

And I mean, you brought up a really important point, which is something, I think we mentioned, which is, look, one of the negatives of this environment for investors in any product is the fact that assets or financial assets are fully valued.

The mortgage market, as you correctly point out, is unique in that, yes, rates are low everywhere, but the financing abilities in the Agency MBS market are uniquely favorable and low, both between repo rates at the lowest ever levels essentially around 0 and dollar roll levels even better than that, right?

So yes, that's a -- there's a balancing between fully valued assets realistically and incredible funding.

And so that -- I think what you're seeing is that reflected both in our earnings picture, okay, and results coupled with the fact that we're going to -- we're not letting leverage plummet.

One thing I want to mention is a lot of the reduction in leverage has just come from book value going up, and it's just not reinvesting or aggressively reinvesting that book value.

So I think we're going to continue to be opportunistic with respect to leverage.

Leverage isn't on a one-way trend lower.

If we see -- if we feel like that mortgages widen and we feel like it makes sense to add to leverage, we're obviously in a very, very strong position to do that.

So I think we'll continue to be responsive to market conditions.

But you bring up a good point about an offset, and it's something that we certainly factor into the equation.

Our next question comes from Trevor Cranston from JMP Securities.

Most of my questions have been answered.

You guys mentioned the change in your lifetime prepayment expectations, which obviously makes sense.

But I guess, over the near term, like over the next few months, can you maybe give some context for exactly how much you think speeds are likely to drop and how much that will kind of change your monthly reinvestment needs?

Trevor, this is Chris.

So the most recent factor report for April likely represented sort of a local peak in speeds given a large uptick in collection days, which accounted for most of the increase.

Driving rates were only slightly higher for that period.

To date, only a small portion of the rate move that we saw late in the first quarter has been reflected in actual prepayment speeds given how sharp the sell-off was.

And we should see the impact from the majority of the rate move show up over the next couple of months.

For the May factor release, which we'll get next week, the primary driving -- the driving primary rate was around 30 basis points higher than the prior report.

So speeds in aggregate for the market will likely be around 15% to 20% lower for that release month-over-month.

Importantly, in addition to the higher current mortgage rates, the much steeper yield curve implies that mortgage rates will continue to increase.

And against this backdrop, it's logical and realistically necessary to assume higher mortgage rates and slower prepayments over time.

And this is a big piece of what you're seeing with our projections coming down versus the most recent current actual speeds.

Said another way, it's periods like today when rates have recently and sharply moved higher and when the yield curve is steep, where you would expect to see the biggest gap between actual speeds and projections.

And over time, these should converge.

Yes.

One thing that I just wanted to add, and that was an excellent answer.

The two things.

First off, just keep in mind, even if we had speeds, if our lifetime projections didn't change, that would have been worth maybe $0.05 in our net spread and dollar roll income.

So our net spread and dollar roll income with our old prepayment speeds, which it would be illogical given an 80 basis point increase in 10-year notes and a yield curve steepening to have your prepayment speeds unchanged.

But even with that, that's worth maybe $0.05.

So that's like kind of at the highest level of big picture issue to keep in mind.

And just to reiterate, like when you look at our lifetime speeds, there's a -- if you look at the shorter-term projections, they're materially higher than the lifetime speeds.

Again, the lifetime speeds assume interest rates are -- mortgage rates are going up.

And so it's very misleading, and it's apples-to-apples to compare a lifetime speed to short-term speeds.

And our final question this morning comes from Ryan Carr from Jefferies.

Congratulations on the great quarter.

Just a quick question on capital allocation moving forward.

I'm curious to hear your thoughts for the balance of the year on your allocation between TBA spec pools and opportunities in non-agency as well?

Sure.

So first off, the spec pools will continue to pay down.

And just within the agency space, you're going to likely see -- and -- the additions to the portfolio will likely be in new production and -- and largely in TBAs or other new production bonds.

So I mean, that's straightforward.

Is there a situation where higher coupon spec pools become attractive enough for us to add them in material size and become available enough?

I doubt it.

So realistically, you're suppose to assume that, that portfolio is running off.

And even within the agency space, it's going to be replaced with TBAs and other lower coupons, which probably won't be specs.

Then with respect to the non-agency opportunities, I think, look, we don't expect any weakness in mortgage credit anytime soon.

I mean the fundamentals are incredibly strong for the housing market.

That's a clear tailwind.

But we also think that spreads sort of have -- are beginning to plateau, and you saw that in the last quarter.

And we've definitely been adding more in the non-agency space.

And I think incrementally, we will continue to do so, assuming spreads and returns stay in the current -- stay where they appear to be currently.

So I think you can look for incremental additions.

You'd have to see something change for us to significantly increase our capital allocated to credit at this point.

Again, incremental additions, not wholesale changes is kind of our baseline forecast there.

One thing to note on the credit side that given -- it's a small portfolio for us and with leverage on the agency side down, we get a unique benefit that other hybrid REITs really don't get, which is that we can borrow basically funding from the agency side, which essentially improves our ROEs on non-agencies or levered ROEs on non-agencies by a couple of percent or more because of the fact that it's not that big of a position.

Now that's not scalable, but it's something that certainly helps in the levels that we're talking about.

So hopefully, that answered your question.

And ladies and gentlemen, we have now completed the question-and-answer session.

I'd like to turn the floor back over to Peter Federico for any closing remarks.

Thank you, operator.

And most importantly, thank you to everybody who participated on the call today.

We very much appreciate it.

This concludes our first quarter 2021 earnings call.

We wish everybody well, and we look forward to talking to you all again at the end of the next quarter.

Thank you.

And ladies and gentlemen, with that, we'll conclude today's conference call.

We do thank you for attending.

You may now disconnect your lines.