AGNC Investment Corp

NASDAQ:AGNC

Earnings Call Analysis

AGNC Investment Corp Faces Narrow Spreads and Volatile Rates

In the second quarter, AGNC Investment Corp experienced a comprehensive loss of $0.13 per share due to moderate spread widening, leading to a negative economic return of 0.9%. Despite this, there was a 2% increase in tangible net book value per share for July. Leverage increased slightly from 7.1x to 7.4x, and liquidity remained strong with $5.3 billion in unencumbered cash and Agency MBS. The company remains optimistic about the fundamentals for Agency MBS, supported by favorable economic data and potential future Fed rate cuts.

Quarterly Performance Amid Market Volatility

AGNC's performance this second quarter was marked by mixed financial results influenced by heightened interest rate volatility and a reluctant stance from the Federal Reserve to ease monetary policy. While AGNC reported a comprehensive loss of $0.13 per share, their tangible net book value showed resilience, increasing by 2% in July even after accounting for dividend disbursements . The company's leverage increased modestly from 7.1x to 7.4x, and liquidity remained strong with $5.3 billion in unencumbered cash and Agency MBS, representing 65% of tangible equity .

Impact of Economic Trends

The quarter's landscape reflected an interplay of economic signals suggesting a weakening consumer spending, better-balanced labor markets, and an easing inflation trend towards the Fed's targets. Despite these positive economic undercurrents, the Fed refrained from adopting a more accommodative stance, resulting in interest rates edging higher and broader vulnerability in the fixed income market . AGNC experienced a tug-of-war with supply-demand dynamics in their Agency MBS, noticing higher supply during peak seasonal dynamics which led to spread widening by 5 to 10 basis points across different coupon rates .

Navigating Interest Rate and Spread Volatility

During the quarter, the 10-year Treasury witnessed volatility, moving through a cumulative daily yield change of over 300 basis points. AGNC managed these fluctuations with strategic shifts in their hedge portfolio, leaning more towards swap-based hedges which comprised approximately 65% of their hedge positioning by the quarter's end . Swap spread tightening of 5 to 8 basis points across the yield curve partially impacted book value performance, yet AGNC maintained a strategic advantage by seamlessly integrating liquidity with asset acquisition .

Sustaining Dividend and Returns

AGNC aimed to keep returns above dividends, achieving net spread and dollar roll income of $0.53 per share despite seeing a $0.05 per share decline due to a compression in net interest rate spread by roughly 30 basis points . The company’s capital management approach through their aftermarket offering program enabled them to issue $434 million in common equity, further investing in attractively priced assets . This helped sustain robust economic returns despite modest rises in leverage and prevailing market uncertainties .

Optimistic Outlook Amid Evolving Monetary Policies

Despite the challenges, AGNC remains optimistic about the longer-term prospects, particularly given the positive developments in fixed income inflows and likely shifts to a more favorable monetary policy environment. The Fed's forecasts hinting at possible interest rate cuts over the next two years bode well for AGNC's strategic positioning . As the economy moves towards a potentially steepened yield curve, AGNC sees opportunities for compressing spreads and aligning asset values, cultivating an encouraging environment for future investments .

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to the AGNC Investment Corp. Second Quarter 2024 Shareholder Call. [Operator Instructions].

Please note, this event is being recorded. I would now like to turn the conference over to Katie Turlington in Investor Relations. Please go ahead.

[Katherine Turlington, executive]

Thank you all for joining AGNC Investment Corp.'s Second Quarter 2024 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors could cause actual results to differ materially from those contained in the forward-looking statements or included in 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 this call include Peter Federico, Director, President and Chief Executive Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; Chris Kuehl, Executive Vice President and Chief Investment Officer; Aaron Pas, Senior Vice President, Non-Agency Portfolio Management; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.

[Peter Federico, executive]

Good morning, and thank you for joining our second quarter earnings call. The strong fixed income momentum that began in the fourth quarter of 2023 abated in the second quarter as the Federal Reserve and market participants look for indications that the economy was slowing and inflation moderating. On balance, the data showed that consumer spending and confidence were weakening, the labor market was moving into better balance and most importantly, inflation measures were trending toward the Fed's long-run target. From a monetary policy perspective, this was a welcome development. Nevertheless, the Federal Reserve was unwilling to adopt a more accommodative monetary policy stance.

Against this backdrop of diverging economic and monetary policy outlooks, fixed income markets became more cautious and intra-quarter volatility increased. In aggregate, interest rates edged higher and agency mortgage-backed security spreads widened, driving AGNC's negative economic return of just under 1%. In the current environment, each economic release carries elevated importance as the Fed seeks greater confidence before easing monetary policy conditions.

This was clearly the case in the second quarter, with interest rates and spreads reacting sharply to each labor and inflation report. The 10-year treasury, for example, ended the quarter just 20 basis points higher, but experienced several sharp sell-off and rally episodes during the quarter that drove a cumulative daily yield change of more than 300 basis points.

For Agency MBS, the second quarter was a push and pull between evolving supply and demand dynamics. On the demand side, bank and foreign demand moderated in the second quarter, while demand from bond funds remained steady but limited given an already overweighed position. The modest weakening of MBS demand and associated widening of mortgage spreads was also somewhat expected as spreads ended the first quarter at the tighter end of the recent trading range.

On the supply side, favorable seasonal dynamics often lead to a notable uptick in mortgage supply in the second quarter of the year. This was indeed the case this year with $52 billion in supply in the second quarter, double the pace of the first quarter. Supply was especially heavy during the last week of the quarter. As a result, Agency MBS spreads to treasuries widened 5 to 10 basis points across the coupon stack with a good portion of that spread widening occurring over the last several days of the quarter.

Production coupons, namely 5.5 and 6s experienced the greatest spread widening given the uptick in supply. Importantly, however, Agency MBS continue to trade in the same relatively narrow spread range that has emerged over the last 9 months. For the current coupon, that trading range has been 140 to 160 basis points to a blend of 5- and 10-year treasury hedges. Using a similar combination of swap hedges, that range has been 170 to 190 basis points.

Spreads at quarter end to treasuries and swaps were 150 and 180 basis points, respectively, right in the middle of the recent range. We continue to view this range-bound trading behavior as a very positive development for Agency MBS. Since quarter end, economic data has continued to be supportive of the Fed moving toward a more accommodative monetary policy stance.

That shift will likely occur over the next several months and should be viewed as the beginning of a new, more favorable monetary policy cycle. To this point, in its most recent summary of economic projections the Fed short-term rate forecast showed a total of 9 rate cuts over the next 2 years. As at least some of these rate cuts become a reality, the risk of meaningfully higher rates will decline, interest rate volatility will decline and the yield curve will steepen. These will all be positive developments for the Agency MBS market specifically and for fixed income more broadly.

Lastly, the long-term fundamentals for Agency MBS remain very favorable and continue to give us reason for optimism. In light of persistent affordability challenges and historically slow prepayment speeds, the net supply of Agency MBS over the intermediate term will likely remain below previous expectations. At the same time, from a demand perspective, Agency MBS provide investors with a meaningful amount of incremental yield relative to both U.S. treasuries and investment-grade corporate debt at current valuation levels.

For these reasons, we continue to be very optimistic about both the current returns and the future prospects for our business. With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail.

[Bernice Bell, executive]

Thank you, Peter. For the second quarter, AGNC had a comprehensive loss of $0.13 per share, given the moderate spread widening that occurred for the quarter. Economic return on tangible common equity was negative 0.9% for the quarter comprised of $0.36 of dividends declared for common share and a decline in our tangible net book value of $0.44 per share.

As of late last week, our tangible net book value per share was up about 2% for July, or 1% after deducting our monthly dividend accrual. Leverage increased modestly for the quarter to 7.4x tangible equity as of the end of Q2 from 7.1x as of Q1. At the same time, our liquidity remained very strong with unencumbered cash and Agency MBS of $5.3 billion or 65% of our tangible equity as of quarter end.

Consistent with the increase in interest rates, the average projected life CPR for our portfolio at quarter end decreased 120 basis points to 9.2%. Seasonal factors drove an increase in our actual CPRs for the quarter to an average of 7.1%, up from 5.7% for the prior quarter. Net spread and dollar roll income for the quarter remained well above our dividend at $0.53 per share.

The $0.05 per share decline for the quarter was due to a decrease in our net interest rate spread, of approximately 30 basis points to just under 270 basis points for the quarter as higher swap costs more than offset the increase in the average yield on our asset portfolio. Lastly, in the second quarter, we issued $434 million of common equity through our aftermarket offering program. Our capital management framework provides us the ability to opportunistically create incremental value for existing stockholders through book value and earnings accretion.

In the second quarter, we issued stock at a substantial price-to-book premium and invested those proceeds in attractively priced assets. And with that, I'll now turn the call over to Chris Kuehl to discuss the agency mortgage market.

[Christopher Kuehl, executive]

Thank you, Bernie. From a macro perspective, the second quarter was similar to the first quarter in many ways, with economic data repricing Fed expectations and heavily influencing fixed income market sentiment. Strong economic data at the start of the quarter caused the market to lower its expectations for Fed easing in 2024. Fed rhetoric also turned hawkish in April with Chair Powell expressing disappointment in the recent progress against the Fed's inflation objective. As a result, rate volatility increased as 10-year yields moved through the upper end of the year-to-date range ultimately reaching just over 4.7% in late April.

These macro and market dynamics, coupled with higher seasonal supply negatively impacted Agency MBS performance early in the quarter. Market sentiment shifted, however, in May and June following weaker labor and inflation data. Notably, headline unemployment increased from 3.8% in the April nonfarm payroll release to 4% in June. Softer labor data and favorable CPI reports in both May and June allowed for a more balanced market focus on the Fed's dual mandate of maximum employment and stable prices.

As a result, treasury yields and Agency MBS spreads partially retraced the negative performance by the end of the quarter. Despite elevated rate volatility Agency MBS traded in a much tighter range than they did during periods of stress seen last year. This is encouraging and is a result of many factors, including much stronger high-grade fixed income inflows year-to-date. The Fed's decision to start tapering QT, stability in bank deposits, and most importantly, a growing consensus firmly rooted in economic data that the Fed may begin normalizing rates over the next couple of months.

During the second quarter, we added approximately $3 billion in Agency MBS. And as a result, the investment portfolio increased to $66 billion as of June 30. Our TBA position declined by $3 billion, as conventional rolls traded somewhat weaker, and we opportunistically added approximately $6 billion in specified pools, most of which in lower pay-up categories.

Our Ginnie Mae TBA holdings in aggregate were largely unchanged as of June 30 as valuations remained attractive and roll implied financing rates continued to offer a significant advantage versus repo funding. Our hedge portfolio increased to $58.8 billion as of June 30, largely due to the increase in our asset portfolio. During the second quarter, we continued to gradually shift the hedge composition to a heavier allocation of swap-based hedges. As a result, swap-based hedges currently represent approximately 65% of our hedge portfolio on a duration dollars basis.

Our swap-based hedges were a drag on our book value performance in the second quarter as swap spreads tightened 5 to 8 basis points across the yield curve. Lastly, as Peter discussed, the data-dependent nature of Fed policy will likely continue to create volatility in markets, but the earnings environment for agency MBS remains very favorable with historically wide spreads low levels of prepayment risk in liquid financing markets.

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

[Aaron Pas, executive]

Thank you, Chris. Credit spread performance in the second quarter was mixed with some areas widening marginally, while others were a bit firmer. Early in the quarter, spreads across credit products generally weakened as rates test at local highs. Subsequently, the backdrop of improving inflation ratings and a softer employment outlook, combined with relatively high issuance in the structured product market led to the divergent performance of credit products during the quarter.

As an indicator of credit spreads in Q2, the synthetic investment grade and high-yield indices widened by approximately 3 and 14 basis points, respectively. This widening retrace just over half of the tightening we saw in the first quarter. Credit fundamentals remain consistent with past trends we have noted showing a bifurcated consumer base. Lower income households are currently stretched as reflected by increasing auto loan and credit card delinquency rates.

Conversely, higher income or wealthier households appear to be in reasonably good shape. Turning to our portfolio. Our portfolio of non-agency securities ended the quarter at $940 million, down roughly 10% from the prior quarter end. This decline was largely anticipated and driven primarily by our participation in the GSE tender offers for its outstanding credit risk transfer securities. Additionally, a significant portion of our CMBS holdings paid off or paid down in Q2.

In both segments of the non-Agency portfolio, we were able to opportunistically redeploy a portion of the freed-up capital. Lastly, the funding landscape for non-agency securities remains stable and relatively attractive by historical standards. With that, I'll hand the call back to Peter.

[Peter Federico, executive]

Thank you, Aaron. With that, we'll now open the call up to your questions.

[Operator]

[Operator Instructions] Our first question comes from Crispin Love with Piper Sandler.

[Crispin Love, analyst]

Peter, just with the more Presidential election news cycle ramping up the potential for a Trump versus Harris election. Can you just discuss how you might expect the election to impact you from both the pre and post-election standpoint? What you've experienced in past elections? How it might impact investment positioning, volatility and then what you might expect post election just depending on who's in the White House in January and how that could impact kind of Agency MBS regulation? And what could be kind of favorable or unfavorable from your seat?

[Peter Federico, executive]

Sure. There's a lot there. Thank you for the question. Obviously, that's on a lot of people's mind. You're right, if you go back and you look at previous elections, like take, for example, 2016, we did have a very significant rate move following that election. This one probably is a little bit more difficult to read. Obviously, it's a very evolving situation now in terms of the political landscape, still a little unclear, I think, from a monetary policy perspective and from a fiscal policy, what the implications may be.

So we're going to have to watch this develop over the next several quarters. But generally speaking, we approach it as going into episodes like that with sort of a lower risk profile, you'll see us really not take a lot of interest rate risk in that environment. We'll wait and see what the outcome is. And position the portfolio a little bit more cautiously heading into a high volatility environment.

From GSE perspective, you're right, there's obviously some talk. And going back to that fiscal point, it's not clear from either party, which is better or worse for U.S. treasuries. Obviously, when we look at what happened with the treasury market and in particular, what happened with the swap spreads in the end of the second quarter. One of the reasons why swap spreads widened like they did sort of late in the quarter was the concern as the Republican party started to gain momentum and the risk that both sides of the Congress were going to shift towards Republican to that may lead to more treasury issuance that puts some downward pressure on swap spreads.

So those are the kinds of things that we'll have to watch more closely. On the GSE side, I would say it's definitely too early to tell which way that may go. I know that from the Republican party side, there is a view that will go back more toward the movement to try to move the GSEs out of conservatorship, should Trump win. But what I would say is, look, when you look at the housing market overall, and you look at where homeownership rates are, it's clear that our housing finance system is really the envy of the world.

And it's clear that the housing finance system is functioning very well post great financial crisis with the involvement of government in it. I know both parties are talking about trying to reduce the cost of homeownership in the current environment. So it seems like an agenda for both parties. And I can't see a scenario where disrupting the highly liquid, highly desirable market that we have would be a good thing for making homeownership more affordable and lowering the cost of housing.

We have an $8.5 trillion market that's functioning very well. And by the way, I would also add, when you look at the job that FHFA does and Director Thompson in particular, she's a very highly regarded regulator. I think she's done a great job disrupting the liquidity that we have doesn't seem to make a whole lot of sense if you're trying to make homeownership more affordable. So it's something that's going to bounce around. We're going to hear about it. We're going to talk about it. But at the end of the day, things are working really well.

So it seems to me it's more like a solution looking for a problem. And less is more when it comes to that front. So I don't expect a lot of change there, certainly not over the near term.

[Crispin Love, analyst]

Peter. That's all really helpful. And then also, I think you mentioned some comments on demand for Agency MBS in your prepared comments bank demand moderating. I think you see as staying consistent. Can you just dig a little deeper there in your views on the incremental buyer here for Agency MBS today?

[Peter Federico, executive]

Yes. When you look at the second quarter, it was really an interesting quarter because there was some really significant positive fundamental development for the fixed income market. And when you look at our performance, it sort of got masked by the fact that spreads moved a little bit wider and our economic return was sort of unchanged. But the fundamental outlook for fixed income improved dramatically in the second quarter.

And the reason why it doesn't feel that way is because most of the fixed income markets started the second quarter and really went through the entire second quarter, sort of taken a wait-and-see approach, right? What happened in the first quarter is we had surprisingly strong economic data that put the Fed on guard and put all market participants on guard and everybody approached the second quarter saying, everybody meaning fixed income market participants generally, just take a wait-and-see approach.

We needed to see the economic data, the underlying fundamentals change, whether they were going to deteriorate further, meaning that the economy was going to reaccelerate, inflation was going to become a problem. Fed was going to have to be more restrictive or the converse, which is actually what materializes.

Now that looks like they're broad slowing in the economy. Inflation is trending back in the Fed now is clearly, I think, shifting to a more accommodative monetary policy but that didn't manifest itself really in the way spreads behave and the way interest rates behave. That will, I think, occur over time. The third quarter and summer tends to be a little thin and a little volatile from a fixed income market participants.

And as you point out, we have the election coming. But over time, the demand, I think, for mortgage-backed securities will become much clearer. And there's a couple of sources of it. One is that it's now, I think, clear, even though we don't know the final rules, the bank regulation is likely going to be a positive or certainly less negative from a bank demand perspective. That's going to materialize over the end of the year and ultimately implement it early next year.

And then just the fundamental shift from a monetary policy perspective, that is a much better environment for fixed income. Broadly, the yield curve steepening, for example, would be a very positive development for the demand of mortgage-backed securities as the yield curve becomes steep, short-term rates come down, there's a lot of money in money market funds that will ultimately move out of money market funds.

So I expect the demand for mortgages to improve as the monetary policy outlook improves as we get through this summer period as we get through the election, I think bank regulation will ultimately prove to be less onerous than we had feared, and that actually may lead to demand for mortgages, particularly if that regulation comes out such that banks have to hedge more interest rate risk then I think that may push banks actually to mortgage-backed securities and away from U.S. treasury.

So those are things that will evolve over time. But I think those are the reasons why the demand for Agency MBS should improve.

[Operator]

The next question comes from Doug Harter with UBS.

[Douglas Harter, analyst]

Can you remind us, Peter, how you think about setting the dividend? What are kind of the most important factors and kind of how you see the current dividend level in light of those factors?

[Peter Federico, executive]

Sure. Obviously, a lot goes into it in terms of the environment and the outlook for our business in terms of where we can operate from a leverage perspective. And where we think interest rate volatility is in mortgage spread volatility, those are obviously very, very important in terms of us setting our risk parameters for our portfolio.

But sort of foundational to the decision is always starts with what is our total cost of capital? What is that required breakeven, if you will? And how does that compare to the economics of our business today if you look at our portfolio on current valuation levels, what do we think the economics of our business are going to generate from a return on equity perspective going forward?

From a total cost of capital, for example, when you take the cost of our common dividend, for example, in the second quarter, the cost of our preferred dividend and our operating costs annualized those as I did and divide it by our total capital position, you'll get a number something around 16.3% or, call it, 16.5% So that's the amount of return that we need to earn to cover all of those costs in our business.

If you compare that to what are the economics of our business at current valuation levels. And I would say when you think about where spreads are, as I talked about 150 on average 180, let's say, if spreads are in the current spreads for mortgage-backed securities are in the 165 basis point range when you use a blend of hedges, leverage at about where we operate right now given our cost of capital, given where the current coupon yield is that would translate into an expected return on an economic basis of, call it, somewhere between 16% to 19%.

So very much aligned with that total cost of capital. Now what is important to point out. What that doesn't include when I do that calculation, it doesn't include the cost of ongoing rebalancing, which would be a drag on that. So that's something you have to consider over time. But at the same time, what it also does not include is the positive benefit we get, which is about 2%, for example, on our preferred stock position.

So it's not the most complete measure, but it's certainly a good indication. And I think those 2 things remain really reasonably well aligned, and that's really important from a dividend sustainability perspective. So that's the way we think about it and in this current environment. We also have to take into account the positive benefit that we get from issuing common stock at an accretive level. So that's an incremental source of return that has been available to us now for some period of time.

So that's the way we think about the dividend. I think they're -- I think our dividend and our total cost of capital are reasonably well aligned with the economics of where mortgage-backed securities are leveraged and hedged the way we hedge and leverage them today.

[Operator]

The next question comes from Bose George with KBW.

[Bose George, analyst]

I wanted to ask about -- when I look at OAS looked like it widened in April, then it sort of came back pretty fully and phenomenal spreads widened and didn't come back as much. Is that -- I guess, is that right? And just can you talk about some of the drivers?

[Peter Federico, executive]

Yes. Let me have Chris talk a little bit about that. But it's really the driver of the difference between nominal spreads and...

[Christopher Kuehl, executive]

Yes. It is largely just the increase in implied volatility earlier that started early in the quarter, the difference between those two.

[Peter Federico, executive]

Meaning when implied volatility goes up, OASs will go down, and that will lead to a little bit of confusion there.

[Bose George, analyst]

Okay. Okay. Yes. That makes sense. And then actually switching over to the funding markets. It looks like SOFR was pretty elevated at the end of the quarter was a little more pronounced in the first quarter. Is there anything you're keeping an eye on there? And just could you just talk about some of what's happening?

[Peter Federico, executive]

Yes. There is something to keep an eye on there. And I think this is exactly what the Fed is keeping an eye on, which is the Fed is clearly continuing to drain reserves from the system through its balance sheet runoff. It's running off at about $45 billion, $50 billion a month. And what the Fed is doing is obviously draining reserves from the system and they've got -- I think, now starting to see the impact of the reduction, which I can't remember what the number is.

I think they think they've taken out about $1.5 trillion out of the system already. But they're getting to the point where they're moving from the abundant bank reserve to the ample target. And when you listen to the way the Chairman is talking about it, they're going to watch these indicators and ultimately, that will inform them as to when reserves are abundant, and that will ultimately lead them to stop their balance sheet runoff, which I expect them to do -- stop their balance sheet runoff perhaps somewhere in the neighborhood of the next 5 or 6 months because that would put bank reserves at this pace, which are now $3.3 trillion, down to around $3 trillion.

And I think at that number, that's probably a number that perhaps aligns on a percentage basis of GDP with their target. But obviously, we don't know any of those numbers with specificity. But what we saw at the end of last quarter was a little bit of pressure at sort of quarter end, which is normal in a market. It was not normal when reserves were as ample and as abundant as they were. But as we get a little closer to that target, we'll see that period end pressure show up again.

That's nothing particularly troubling. It's just a normal market, and the Fed certainly has lots of tools to maintain liquidity in the repo market for U.S. treasuries and Agency MBS. So I don't view that as a concern. In fact, I view it as an indication that the Fed will be stopping its balance sheet runoff fairly soon.

[Operator]

The next question comes from Terry Ma with Barclays.

[Terry Ma, analyst]

So your net interest margin was down about 30 basis points quarter-over-quarter. It looks like that was just a function of putting on longer-dated swaps when the shorter dated ones rode off. And I think you kind of highlighted this dynamic on the NIM last quarter. So I guess, looking forward, you guys have another $10.5 billion of swaps potentially rolling off soon. So should we kind of expect the same magnitude of NIM decline each quarter? Or how should we think about that?

[Peter Federico, executive]

Terry, that's a really good question, and I'm glad you asked it because the runoff of our shorter-term swaps, which was about $2 billion, did have an impact directionally, obviously, on our NIM, but that was obviously not the biggest impact because we did add $6.5 billion, as you point out in longer-term swaps. About half of those swaps and the average pay rate on that $6.5 billion was 4.2%.

So obviously, a much more significant cost. About half of those swaps that we added were used to hedge new mortgages because of the stock that we issued and the mortgages that we bought with that stock we, in a sense, accelerated some of that NIM decline. At the same time, we also added about $3 billion. The other half of that $6 billion of swaps as Chris has mentioned this in his prepared remarks, we have rotated out of treasury hedges into swap-based hedges.

So that again, because those swap-based hedges show up in our net interest margin led to perhaps a more significant decline in our net interest margin that people would have expected. If you just anticipated the reduction in our swap portfolio due to the maturity of our short-term swaps. So to the extent that we grow our portfolio and able to do so at really attractive investment returns that will change the timing, if you will, of NIM.

But you're right, over time, the shorter-term swaps that we have, and we have about $6 billion of maturing in the second half of the year then that will have some impact on our net interest margin. But again, it's moving our net interest margin back into alignment. If you think about our net interest margin, at around 270 basis points, giving us the net spread income we have, that return on capital for the second quarter was 24%. That is not the economics of our business, and that's why they're going to come back into alignment. As we just talked about in the question from Doug, the economics of our business are more in the 18% range, not 24% range.

[Operator]

Next question comes from Rick Shane with JPMorgan.

[Richard Shane, analyst]

Look, during the quarter, it looks like you issued about 45 million shares, and that makes sense. Stock was trading at a premium to tangible book consistently, spreads widen, which creates an attractive investment opportunity. I am curious when you think about issuing shares off the ATM, how dynamic is that? Is it something that you set out at the beginning of the quarter and say, hey, where we want to issue 40 million shares, plus or minus 5 million?

Or do you, on a daily basis, look at this and say, wait a second, we've got an attractive -- we're trading at an attractive premium. Spreads have widened. It's a good time and really lean into it. I'm trying to understand the dynamic throughout the quarter.

[Peter Federico, executive]

Yes. No, that's a really great question. I appreciate it. But I would say just to start with, is we never start out with a set expectation. So there is no decision at the beginning of the year, we need to or want to or we're going to raise this amount of capital. It's based on what's happening with our portfolio and based on what's happening with the market.

And you're right, one of the real values of using the ATM or at-the-market program is that it allows you a lot of flexibility. So it allows you flexibility to issue stock, for example, on days when there's high volume in your stock or when there's unique demand in your stock. And we often see reverse inquiry, if you will, from institutional or large investors looking for transactions. So that's something that we could consider as they come in.

At the same time, it allows you to issue stock in increments, if you will, that make it efficient to deploy as opposed to raising a lot of capital and having to deploy that over time in assets without driving asset prices. This gives us the ability to issue stock in a way that doesn't disrupt if you will, the assets that we're acquiring. For example, in the second quarter, we did raised a little over $400 million, and we bought over $3 billion worth of mortgages, buying them over the quarter as the coincident with the stock issuance allows us to do that in a way that is -- gives us better economics.

So it's something that we approach from a dynamic perspective and from a flexibility perspective.

[Richard Shane, analyst]

Got it. And Peter, that's helpful. And when we think about you making those investments, it's raising the capital it's acquiring the -- levering that capital, acquiring the assets and hedging them. Is the most cumbersome part of that, the hedging as you're deploying capital?

I'm just curious where the friction is from a timing perspective, given the ATM super efficient, the repo markets are super efficient, your markets trade incredibly liquid. Curious if there's any -- on the hedging side, if there's any sort of friction there.

[Peter Federico, executive]

No, there's no issue there. I mean there's plenty of liquidity. But really, it's the comparison of, for example, doing a bought deal. So let's just take the second quarter as an example, if we did a bought transaction for that amount of $450 million, you would get that all in one day, and then you would have to go out and buy that would support the purchase of a little over $3 billion worth of mortgages.

It would be clear that if you did that transaction that AGNC would either have had to buy those mortgages in advance or buy them thereafter. And that would likely potentially lead to a change in valuation of mortgages as opposed to just simply doing it at a very measured disciplined place, trying to connect the liquidity in our stock with the richness or cheapest of mortgages.

And that's why we do that throughout the quarter, it's not consistent. It's -- when those sort of align and the liquidities in our stock and mortgages, we think are cheap, then we'll buy mortgages. For example, at the beginning of the quarter, mortgages were at the tight side of the range, and they were not as attractive to us. Is they became later in the quarter when mortgages moved back into the middle of the range.

And in fact, our book value accretion was better at the end of the quarter. And so the ATM program actually worked better for us at the end of the quarter rather than the beginning of the quarter.

[Operator]

The next question comes from Eric Hagen with BTIG.

[Eric Hagen, analyst]

So if the range for mortgage spreads is tighter because the narrative is really focused on Fed cuts, you feel like that maybe drives more flexibility to take your leverage higher? And what do you feel like that range for your leverage is? And do you feel like we can maybe think about 7.5x being more of a minimum leverage over, call it, the near or medium term?

[Peter Federico, executive]

Well, I think those are all points in considerations when we think about our leverage. We certainly have the capacity, as you point out, when you look at our cash and unencumbered position that Bernie mentioned at 65% of our equity, that would indicate that we have a lot of capacity to take leverage higher if we so chose.

And obviously, our outlook for mortgage spread volatility is really important in that equation. And both Chris and I mentioned that in our prepared remarks, is an important development. It's an important development for our business because of just that point that you're making, which is -- when you go back and you look at how mortgage spreads have behaved, we went through a very difficult repricing period from 2022 to 2023 to find this new range.

And the challenge in 2023 was that we didn't know where the top of the range was. And obviously, we hit it on a number of vacations of close to 200 basis points. And then ultimately, that top hill, what we've seen subsequently, and this is a really healthy signal, I think, is that there's a new range within the range. And the narrower the spread range, the more capacity we have essentially to take greater risk.

Obviously, as we talked about already on this call, we're going into a period where volatility tends to increase a little bit. We obviously have some big macro issues coming that we'll have to contend with. But over time, those will certainly inform our position about the appropriate amount of leverage.

[Eric Hagen, analyst]

That was really helpful color. Okay. So we're looking at the forecasted prepayment speed over the next 12 months, I think that's 7 CPR. It's the same as the paydown that we saw last quarter. Is there a way to drill down there? I mean, does that assume that mortgage rates are flat? How do you think mortgage rates kind of trend here?

And if we saw a pickup in speeds, do you feel like that would be positive for total return? Or is it maybe dependent on other variables?

[Peter Federico, executive]

I'll let Chris answer that.

[Christopher Kuehl, executive]

That forecast just assumes that the forwards are realized. It's a base case single path forecast along the forward rate curve. With respect to convexity risk on the portfolio or managing prepayment risk given our coupon and pool composition, peak negative convexity on our portfolio is about 150 basis points lower than today's rate levels.

So significant move in rates to get to that sort of level. Specified pools, higher quality specs represent about 45% of our holdings. The next category of specified pools also have favorable cash flow characteristics. That represents about 30% of our holdings. And importantly, in the higher coupons where we have the most prepayment risk. Those 2 categories combined represent about in 6s and 6.5 to about 85% of our holdings. And so convexity risk prepayment risk in this environment is still very manageable.

[Peter Federico, executive]

And Eric, just to go back and round up the discussion on spreads, sort of the way I would characterize the outlook right now is expect mortgages to sort of stay range bound over the nearer term but longer term, I think what we now are seeing is a scenario where there's more reasons for mortgages to tighten than they are to widen. There are certainly the catalyst for mortgages to move to the high end of the spread range, the very high end of the spread range are harder to see, and they're starting to be more reasons to believe that mortgages could tighten over time.

[Operator]

And the final question comes from Jason Stewart with Janney.

[Jason Stewart, analyst]

Just a follow-up on Eric's question there. Going back to the high, call it, mid-quality spec pools up in coupon, what's the average pay up on that, say, 85%, if you could give us an idea of what that looks like.

[Christopher Kuehl, executive]

We don't have that broken out in our disclosures, but the average pay up on our aggregate portfolio, including the TBA position, which is relatively small is just over -- it's just under 1 point. It's around 30 ticks. Excluding the TBA position, it's slightly over 1 point, so around 33 ticks.

[Jason Stewart, analyst]

Okay. All right. Yes, I guess I wanted to ask just a little bit more perspective on coupon selection. I mean you have a wide range of coupons to pick from in this environment and really the push and pull between total return and carry enough in coupon given your outlook for the refi, some new programs out there for the refi outlook. Maybe you could just drill down into what sort of drives your coupon selection over the next 2 or 3 quarters, that would be helpful.

[Christopher Kuehl, executive]

Sure. So within across the coupon stack production coupons still, by far, offer the most attractive spreads. And so that's where we've been investing marginal capital assuming current relationships across the stack remain that will be where we continue to invest marginal capital.

Higher coupons have very different technicals than lower coupons. It's where all the organic supply is against relatively anemic bid from banks and overseas. And so naturally, or if you compare that to the lowest coupons, which are 300, 400 basis points away from being produced, and most of the float is tied up at the Fed.

And so when you have passive index fund inflows that need to buy assets that aren't being produced, you can get pretty dislocated relative valuations across the stack. And so it's logical why this relative value relationship has been persistent. Higher coupons, as we discussed earlier, I mean, certainly have more prepayment risk, worse convexity, but I would say that's more than in the price.

You're collecting a lot of spread that can be used to manage that risk in a number of different ways. You can buy options on rates, you can spend it on pay ups and source back convexity through asset selection and buying specified pools. And then -- and you can delta hedge. And in the current environment, the latter 2 are more attractive and flight volatility is still extremely elevated, and so options are expensive.

And so generally speaking, it's much cheaper to source convexity by through pull selection and coupon selection. So roughly about 2/3 of the position is in 5s and higher. The positions in 3.5 through 4.5, the so-called belly coupons, have still attractive spreads and extremely stable cash flow profiles. And so we like the diversity of that, and that keeps the convexity risk in the aggregate portfolio very manageable.

[Operator]

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

[Peter Federico, executive]

Again, we appreciate everybody participating on our call this morning, and we look forward to speaking to you again at the end of the third quarter.

[Operator]

The conference has now concluded. You may now disconnect.