AGNC earnings name for the interval ending June 30, 2024.
Picture supply: The Motley Idiot.
AGNC Funding Corp. (AGNC 0.68%)
Q2 2024 Earnings Name
Jul 23, 2024, 8:30 a.m. ET
Contents:
- Ready Remarks
- Questions and Solutions
- Name Members
Ready Remarks:
Operator
Good morning, and welcome to the AGNC Funding Corp. second quarter 2024 shareholder name. [Operator instructions] Please notice, this occasion is being recorded. I might now like to show the convention over to Katie Turlington in investor relations.
Please go forward.
Katie Turlington — Investor Relations
Thanks, all, for becoming a member of AGNC Funding Corp.’s second quarter 2024 earnings name. Earlier than we start, I might wish to evaluate the protected harbor assertion. This convention name and corresponding slide presentation comprises statements that, to the extent they aren’t recitations of historic details, represent forward-looking statements throughout the that means of the Non-public Securities Litigation Reform Act of 1995. All such forward-looking statements are meant to be topic to the protected harbor safety supplied by the Reform Act.
Precise outcomes and outcomes may differ materially from these forecast because of the affect of many elements past the management of AGNC. All forward-looking statements included on this presentation are made solely as of the date of this presentation and are topic to vary with out discover. Sure elements may trigger precise outcomes to vary materially from these contained within the forward-looking statements are included in AGNC’s periodic reviews filed with the Securities and Trade Fee. Copies can be found on the SEC’s web site at sec.gov.
We disclaim any obligation to replace our forward-looking statements, except required by regulation. Members on this name embrace Peter Federico, director, president, and chief government officer; Bernie Bell, government vice chairman and chief monetary officer; Chris Kuehl, government vice chairman and chief funding officer; Aaron Pas, senior vice chairman, non-agency portfolio administration; and Sean Reid, government vice chairman, technique and company improvement. With that, I am going to flip the decision over to Peter Federico.
Peter J. Federico — President and Chief Working Officer
Good morning, and thanks for becoming a member of our second quarter earnings name. The robust mounted revenue momentum that started within the fourth quarter of 2023 abated within the second quarter because the Federal Reserve and market members search for indications that the economic system was slowing and inflation moderating. On stability, the info confirmed that shopper spending and confidence had been weakening, the labor market was transferring into higher stability, and most significantly, inflation measures had been trending towards the Fed’s long-run goal. From a financial coverage perspective, this was a welcome improvement.
Nonetheless, the Federal Reserve was unwilling to undertake a extra accommodative financial coverage stance. In opposition to this backdrop of diverging financial and financial coverage outlooks, mounted revenue markets turned extra cautious, and intra-quarter volatility elevated. In mixture, rates of interest edged increased, and company mortgage-backed safety spreads widened, driving AGNC’s unfavourable financial return of just below 1%. Within the present atmosphere, every financial launch carries elevated significance because the Fed seeks larger confidence earlier than easing financial coverage circumstances.
This was clearly the case within the second quarter with rates of interest and spreads reacting sharply to every labor and inflation report. The ten-year treasury, for instance, ended the quarter simply 20 foundation factors increased however skilled a number of sharp sell-off and rally episodes in the course of the quarter that drove a cumulative every day yield change of greater than 300 foundation factors. For company MBS, the second quarter was a push and pull between evolving provide and demand dynamics. On the demand facet, financial institution and international demand moderated within the second quarter, whereas demand from bond funds remained regular however restricted given an already overweighed place.
The modest weakening of MBS demand and related widening of mortgage spreads was additionally considerably anticipated as spreads ended the primary quarter on the tighter finish of the current buying and selling vary. On the provision facet, favorable seasonal dynamics typically result in a notable uptick in mortgage provide within the second quarter of the yr. This was certainly the case this yr with $52 billion in provide within the second quarter, double the tempo of the primary quarter. Provide was particularly heavy over the last week of the quarter.
Consequently, company MBS spreads to treasuries widened 5 to 10 foundation factors throughout the coupon stack with an excellent portion of that unfold widening occurring during the last a number of days of the quarter. Manufacturing coupons, specifically 5.5 and 6s, skilled the best unfold widening given the uptick in provide. Importantly, nevertheless, company MBS proceed to commerce in the identical comparatively slim unfold vary that has emerged during the last 9 months. For the present coupon, that buying and selling vary has been 140 to 160 foundation factors to a mix of five- and 10-year treasury hedges.
Utilizing an analogous mixture of swap hedges, that vary has been 170 to 190 foundation factors. Spreads at quarter finish to treasuries and swaps had been 150 and 180 foundation factors, respectively, proper in the course of the current vary. We proceed to view this range-bound buying and selling habits as a really constructive improvement for company MBS. Since quarter finish, financial information has continued to be supportive of the Fed transferring towards a extra accommodative financial coverage stance.
That shift will doubtless happen over the subsequent a number of months and must be seen as the start of a brand new, extra favorable financial coverage cycle. Thus far, in its most up-to-date abstract of financial projections, the Fed short-term fee forecast confirmed a complete of 9 fee cuts over the subsequent two years. As at the least a few of these fee cuts turn out to be a actuality, the chance of meaningfully increased charges will decline, rate of interest volatility will decline, and the yield curve will steepen. These will all be constructive developments for the company MBS market particularly and for mounted revenue extra broadly.
Lastly, the long-term fundamentals for company MBS stay very favorable and proceed to provide us purpose for optimism. In mild of persistent affordability challenges and traditionally gradual prepayment speeds, the online provide of company MBS over the intermediate time period will doubtless stay beneath earlier expectations. On the identical time, from a requirement perspective, company MBS present traders with a significant quantity of incremental yield relative to each U.S. treasuries and investment-grade company debt at present valuation ranges.
For these causes, we proceed to be very optimistic about each the present returns and the long run prospects for our enterprise. With that, I’ll now flip the decision over to Bernie Bell to debate our monetary ends in larger element.
Bernice E. Bell — Govt Vice President, Chief Monetary Officer
Thanks, Peter. For the second quarter, AGNC had a complete lack of $0.13 per share given the reasonable unfold widening that occurred for the quarter. Financial return on tangible frequent fairness was unfavourable 0.9% for the quarter, comprised of $0.36 of dividends declared for frequent share and a decline in our tangible internet ebook worth of $0.44 per share. As of late final week, our tangible internet ebook worth per share was up about 2% for July or 1% after deducting our month-to-month dividend accrual.
Leverage elevated modestly for the quarter to 7.4 instances tangible fairness as of the top of Q2 from 7.1 instances as of Q1. On the identical time, our liquidity remained very robust with unencumbered money and company MBS of $5.3 billion or 65% of our tangible fairness as of quarter finish. In step with the rise in rates of interest, the common projected life CPR for our portfolio at quarter finish decreased 120 foundation factors to 9.2%. Seasonal elements drove a rise in our precise CPRs for the quarter to a mean of seven.1%, up from 5.7% for the prior quarter.
Web unfold and greenback roll revenue for the quarter remained effectively above our dividend at $0.53 per share. The $0.05 per share decline for the quarter was because of a lower in our internet rate of interest unfold of roughly 30 foundation factors to simply beneath 270 foundation factors for the quarter as increased swap prices greater than offset the rise within the common yield on our asset portfolio. Lastly, within the second quarter, we issued $434 million of frequent fairness by way of our aftermarket providing program. Our capital administration framework offers us the flexibility to opportunistically create incremental worth for present stockholders by way of ebook worth and earnings accretion.
Within the second quarter, we issued inventory at a considerable price-to-book premium and invested these proceeds in attractively priced belongings. And with that, I am going to now flip the decision over to Chris Kuehl to debate the company mortgage market.
Christopher Jon Kuehl — Govt Vice President, Company Portfolio Investments
Thanks, Bernie. From a macro perspective, the second quarter was just like the primary quarter in some ways with financial information repricing Fed expectations and closely influencing mounted revenue market sentiment. Sturdy financial information at first of the quarter brought on the market to decrease its expectations for Fed easing in 2024. Fed rhetoric additionally turned hawkish in April with Chair Powell expressing disappointment within the current progress towards the Fed’s inflation goal.
Consequently, fee volatility elevated as 10-year yields moved by way of the higher finish of the year-to-date vary, in the end reaching simply over 4.7% in late April. These macro and market dynamics, coupled with increased seasonal provide, negatively impacted company MBS efficiency early within the quarter. Market sentiment shifted, nevertheless, in Could and June following weaker labor and inflation information. Notably, headline unemployment elevated from 3.8% within the April nonfarm payroll launch to 4% in June.
Softer labor information and favorable CPI reviews in each Could and June allowed for a extra balanced market concentrate on the Fed’s twin mandate of most employment and steady costs. Consequently, treasury yields and company MBS spreads partially retraced the unfavourable efficiency by the top of the quarter. Regardless of elevated fee volatility, company MBS traded in a a lot tighter vary than they did during times of stress seen final yr. That is encouraging and is a results of many elements, together with a lot stronger high-grade mounted revenue inflows yr thus far.
The Fed’s resolution to begin tapering QT, stability in financial institution deposits, and most significantly, a rising consensus firmly rooted in financial information that the Fed could start normalizing charges over the subsequent couple of months. Throughout the second quarter, we added roughly $3 billion in company MBS. And in consequence, the funding portfolio elevated to $66 billion as of June 30. Our TBA place declined by $3 billion as typical rolls traded considerably weaker, and we opportunistically added roughly $6 billion in specified swimming pools, most of which in decrease pay-up classes.
Our Ginnie Mae TBA holdings in mixture had been largely unchanged as of June 30 as valuations remained engaging and roll implied financing charges continued to supply a big benefit versus repo funding. Our hedge portfolio elevated to $58.8 billion as of June 30, largely because of the improve in our asset portfolio. Throughout the second quarter, we continued to steadily shift the hedge composition to a heavier allocation of swap-based hedges. Consequently, swap-based hedges presently symbolize roughly 65% of our hedge portfolio on a length {dollars} foundation.
Our swap-based hedges had been a drag on our ebook worth efficiency within the second quarter as swap spreads tightened 5 to eight foundation factors throughout the yield curve. Lastly, as Peter mentioned, the data-dependent nature of Fed coverage will doubtless proceed to create volatility in markets, however the earnings atmosphere for company MBS stays very favorable with traditionally vast spreads low ranges of prepayment threat in liquid financing markets. I am going to now flip the decision over to Aaron to debate the non-agency markets.
Aaron Joshua Pas — Senior Vice President, Non-Company Portfolio Administration
Thanks, Chris. Credit score unfold efficiency within the second quarter was blended with some areas widening marginally, whereas others had been a bit firmer. Early within the quarter, spreads throughout credit score merchandise usually weakened as charges check at native highs. Subsequently, the backdrop of bettering inflation scores and a softer employment outlook, mixed with comparatively excessive issuance within the structured product market, led to the divergent efficiency of credit score merchandise in the course of the quarter.
As an indicator of credit score spreads in Q2, the artificial investment-grade and high-yield indices widened by roughly 3 and 14 foundation factors, respectively. This widening retraced simply over half of the tightening we noticed within the first quarter. Credit score fundamentals stay in step with previous tendencies we have now famous, exhibiting a bifurcated shopper base. Decrease-income households are presently stretched as mirrored by rising auto mortgage and bank card delinquency charges.
Conversely, higher-income or wealthier households look like in fairly fine condition. Turning to our portfolio. Our portfolio of non-agency securities ended the quarter at $940 million, down roughly 10% from the prior quarter finish. This decline was largely anticipated and pushed primarily by our participation within the GSE tender presents for its excellent credit score threat switch securities.
Moreover, a good portion of our CMBS holdings paid off or paid down in Q2. In each segments of the non-agency portfolio, we had been in a position to opportunistically redeploy a portion of the freed-up capital. Lastly, the funding panorama for non-agency securities stays steady and comparatively engaging by historic requirements. With that, I am going to hand the decision again to Peter.
Peter J. Federico — President and Chief Working Officer
Thanks, Aaron. With that, we’ll now open the decision as much as your questions.
Questions & Solutions:
Operator
[Operator instructions] Our first query comes from Crispin Love with Piper Sandler. Please go forward.
Crispin Love — Piper Sandler — Analyst
Thanks. Good morning, everybody. Peter, simply with the extra presidential election information cycle ramping up the potential for a Trump versus Harris election, are you able to simply talk about the way you may count on the election to affect you from each the pre- and post-election standpoint, what you have skilled in previous elections, the way it may affect funding positioning, volatility, after which what you may count on post-election, simply relying on who’s within the White Home in January and the way that might affect form of company MBS regulation? And what may very well be form of favorable or unfavorable out of your seat?
Peter J. Federico — President and Chief Working Officer
Certain. There’s lots there. Thanks for the query. Clearly, that is on lots of people’s minds.
You are proper. For those who return and also you have a look at earlier elections, like take, for instance, 2016, we did have a really important fee transfer following that election. This one in all probability is a bit of bit harder to learn. Clearly, it is a very evolving scenario now by way of the political panorama, nonetheless a bit of unclear, I feel, from a financial coverage perspective and from a fiscal coverage what the implications could also be.
So we’ll have to look at this develop over the subsequent a number of quarters. However usually talking, we strategy it as going into episodes like that with type of a decrease threat profile, you may see us actually not take loads of rate of interest threat in that atmosphere. We’ll wait and see what the result is and place the portfolio a bit of bit extra cautiously, heading right into a high-volatility atmosphere. From GSE perspective, you are proper.
There’s clearly some speak. And going again to that fiscal level, it isn’t clear from both celebration which is best or worse for U.S. treasuries. Clearly, after we have a look at what occurred with the treasury market, and particularly, what occurred with the swap spreads ultimately of the second quarter, one of many explanation why swap spreads widened like they did type of late within the quarter was the priority because the Republican celebration began to realize momentum and the chance that either side of the Congress had been going to shift towards Republican to that will result in extra treasury issuance that places some downward strain on swap spreads.
So these are the sorts of issues that we’ll have to look at extra intently. On the GSE facet, I might say it is undoubtedly too early to inform which approach that will go. I do know that from the Republican celebration facet, there’s a view that can return extra towards the motion to attempt to transfer the GSEs out of conservatorship ought to Trump win. However what I might say is, look, if you have a look at the housing market general and also you have a look at the place homeownership charges are, it is clear that our housing finance system is basically the envy of the world.
And it is clear that the housing finance system is functioning very effectively submit nice monetary disaster with the involvement of presidency in it. I do know each events are speaking about making an attempt to cut back the price of homeownership within the present atmosphere, so it looks like an agenda for each events. And I am unable to see a state of affairs the place disrupting the extremely liquid, extremely fascinating market that we have now could be an excellent factor for making homeownership extra reasonably priced and reducing the price of housing. We have now an $8.5 trillion market that is functioning very effectively.
And by the way in which, I might additionally add, if you have a look at the job that FHFA does and Director Thompson, particularly, she’s a really extremely regarded regulator. I feel she’s executed an amazing job disrupting the liquidity that we have now would not appear to make a complete lot of sense if you happen to’re making an attempt to make homeownership extra reasonably priced, so it is one thing that is going to bounce round. We’ll hear about it. We’ll speak about it.
However on the finish of the day, issues are working rather well. So it appears to me it is extra like an answer in search of an issue, and fewer is extra in the case of that entrance. So I do not count on loads of change there, actually not over the close to time period.
Crispin Love — Piper Sandler — Analyst
Thanks, Peter. That is all actually useful. After which additionally, I feel you talked about some feedback on demand for company MBS in your ready feedback, financial institution demand moderating I feel you see as staying constant. Are you able to simply dig a bit of deeper there in your views on the incremental purchaser right here for company MBS at this time?
Peter J. Federico — President and Chief Working Officer
Yeah. Whenever you have a look at the second quarter, it was actually an attention-grabbing quarter as a result of there was some actually important constructive elementary improvement for the mounted revenue market. And if you have a look at our efficiency, it type of bought masked by the truth that spreads moved a bit of bit wider, and our financial return was type of unchanged. However the elementary outlook for mounted revenue improved dramatically within the second quarter.
And the explanation why it would not really feel that approach is as a result of many of the mounted revenue markets began the second quarter and actually went by way of all the second quarter type of taking a wait-and-see strategy, proper? What occurred within the first quarter is we had surprisingly robust financial information that put the Consumed guard and put all market members on guard, and all people approached the second quarter saying, all people, that means mounted revenue market members, usually, simply take a wait-and-see strategy. We wanted to see the financial information, the underlying fundamentals change, whether or not they had been going to deteriorate additional, that means that the economic system was going to reaccelerate, inflation was going to turn out to be an issue. Fed was going to should be extra restrictive or the converse which is definitely what materializes. Now that appears like they’re broad slowing within the economic system.
Inflation is trending again within the Fed now’s clearly, I feel, shifting to a extra accommodative financial coverage, however that did not present itself actually in the way in which spreads behave and the way in which rates of interest behave. That may, I feel, happen over time. The third quarter and summer time tends to be a bit of skinny and a bit of risky from a hard and fast revenue market members. And as you level out, we have now the election coming.
However over time, the demand, I feel, for mortgage-backed securities will turn out to be a lot clearer. And there is a few sources of it. One is that it is now, I feel, clear. Despite the fact that we do not know the ultimate guidelines, the financial institution regulation is probably going going to be a constructive or actually much less unfavourable from a financial institution demand perspective.
That is going to materialize over the top of the yr and in the end implement it early subsequent yr. After which simply the elemental shift from a financial coverage perspective, that may be a a lot better atmosphere for mounted revenue. Broadly, the yield curve steepening, for instance, could be a really constructive improvement for the demand of mortgage-backed securities because the yield curve turns into steep, short-term charges come down, there’s some huge cash in cash market funds that can in the end transfer out of cash market funds. So I count on the demand for mortgages to enhance because the financial coverage outlook improves as we get by way of this summer time interval, as we get by way of the election, I feel financial institution regulation will in the end show to be much less onerous than we had feared, and that really could result in demand for mortgages, significantly if that regulation comes out, such that banks should hedge extra rate of interest threat then I feel that will push banks truly to mortgage-backed securities and away from U.S.
treasury. So these are issues that can evolve over time, however I feel these are the explanation why the demand for company MBS ought to enhance.
Crispin Love — Piper Sandler — Analyst
Thanks. Respect you taking my questions.
Operator
The following query comes from Doug Harter with UBS. Please go forward.
Peter J. Federico — President and Chief Working Officer
Good morning, Doug.
Douglas Harter — Analyst
Good morning, Peter. Are you able to remind us, Peter, how you consider setting the dividend? What are form of a very powerful elements and form of the way you see the present dividend degree in mild of these elements?
Peter J. Federico — President and Chief Working Officer
Certain. So clearly, lots goes into it by way of the atmosphere and the outlook for our enterprise by way of the place we will function from a leverage perspective. And the place we expect rate of interest volatility is in mortgage unfold volatility, these are clearly very, crucial by way of us setting our threat parameters for our portfolio. However type of foundational to the choice is at all times begins with what’s our complete value of capital, what’s our required breakeven, if you’ll, and the way does that examine to the economics of our enterprise at this time? For those who have a look at our portfolio on present valuation ranges, what do we expect the economics of our enterprise are going to generate from a return-on-equity perspective going ahead? From a complete value of capital, for instance, if you take the price of our frequent dividend, for instance, within the second quarter, the price of our most popular dividend and our working prices annualized these as I did and divide it by our complete capital place, you may get a quantity one thing round 16.3% or, name it, 16.5% In order that’s the quantity of return that we have to earn to cowl all of these prices in our enterprise.
For those who examine that to what are the economics of our enterprise at present valuation ranges, and I might say when you consider the place spreads are, as I talked about 150, on common 180, to illustrate, if spreads are within the present spreads for mortgage-backed securities are within the 165-basis-point vary if you use a mix of hedges, leverage at about the place we function proper now given our value of capital, given the place the present coupon yield is that might translate into an anticipated return on an financial foundation of, name it, someplace between 16% to 19%, so very a lot aligned with that complete value of capital. Now what’s vital to level out, what that does not embrace once I try this calculation, it would not embrace the price of ongoing rebalancing which might be a drag on that. In order that’s one thing you must think about over time. However on the identical time, what it additionally doesn’t embrace is the constructive profit we get, which is about 2%, for instance, on our most popular inventory place.
So it isn’t probably the most full measure, however it’s actually an excellent indication. And I feel these two issues stay actually fairly effectively aligned, and that is actually vital from a dividend sustainability perspective. In order that’s the way in which we give it some thought and on this present atmosphere. We additionally should bear in mind the constructive profit that we get from issuing frequent inventory at an accretive degree.
In order that’s an incremental supply of return that has been out there to us now for some time period. In order that’s the way in which we take into consideration the dividend. I feel they’re — I feel our dividend and our complete value of capital are fairly effectively aligned with the economics of the place mortgage-backed securities are leveraged and hedged the way in which we hedge and leverage them at this time.
Douglas Harter — Analyst
Nice. I admire that reply, Peter. Thanks.
Peter J. Federico — President and Chief Working Officer
Respect the query.
Operator
The following query comes from Bose George with KBW. Please go forward.
Bose George — Analyst
Hey, guys. Good morning. So I wished to ask about — once I have a look at OAS, seemed prefer it widened in April, then it type of got here again fairly absolutely, and phenomenal spreads widened and did not come again as a lot. Is that — I suppose, is that proper? And simply are you able to speak about a number of the drivers?
Peter J. Federico — President and Chief Working Officer
Yeah. Let me have Chris speak a bit of bit about that, however it’s actually the motive force of the distinction between nominal spreads and —
Christopher Jon Kuehl — Govt Vice President, Company Portfolio Investments
Yeah. It’s largely simply the rise in implied volatility earlier that began early within the quarter, the distinction between these two.
Peter J. Federico — President and Chief Working Officer
That means when implied volatility goes up, OASs will go down, and that can result in a bit of little bit of confusion there.
Bose George — Analyst
OK, OK. Yeah, that is sensible. After which truly switching over to the funding markets, it appears to be like like SOFR was fairly elevated on the finish of the quarter, was a bit of extra pronounced within the first quarter. Is there something you are keeping track of there? And simply may you simply speak about a few of what’s occurring?
Peter J. Federico — President and Chief Working Officer
Yeah. There’s something to control there, and I feel that is precisely what the Fed is keeping track of, which is the Fed is clearly persevering with to empty reserves from the system by way of its stability sheet runoff. It is working off at about $45 billion, $50 billion a month. And what the Fed is doing is clearly draining reserves from the system, they usually’ve bought — I feel, now beginning to see the affect of the discount, which I am unable to bear in mind what the quantity is.
I feel they’ve taken out about $1.5 trillion out of the system already, however they’re attending to the purpose the place they’re transferring from the plentiful financial institution reserve to the ample goal. And if you hearken to the way in which the chairman is speaking about it, they will watch these indicators. And in the end, that can inform them as to when reserves are plentiful, and that can in the end cause them to cease their stability sheet runoff, which I count on them to do — cease their stability sheet runoff maybe someplace within the neighborhood of the subsequent 5 – 6 months as a result of that might put financial institution reserves at this tempo, which are actually $3.3 trillion, right down to round $3 trillion. And I feel at that quantity, that is in all probability a quantity that maybe aligns on a proportion foundation of GDP with their goal.
However clearly, we do not know any of these numbers with specificity. However what we noticed on the finish of final quarter was a bit of little bit of strain at type of quarter finish which is regular in a market. It was not regular when reserves had been as ample and as plentiful as they had been. However as we get a bit of nearer to that concentrate on, we’ll see that period-end strain present up once more.
That is nothing significantly troubling. It is only a regular market, and the Fed actually has plenty of instruments to take care of liquidity within the repo marketplace for U.S. treasuries and company MBS, so I do not view that as a priority. The truth is, I view it as a sign that the Fed can be stopping its stability sheet runoff pretty quickly.
Bose George — Analyst
OK, nice. Thanks.
Operator
The following query comes from Terry Ma with Barclays. Please go forward.
Terry Ma — Barclays — Analyst
Hello. Thanks. Good morning. So your internet curiosity margin was down about 30 foundation factors quarter over quarter.
It appears to be like like that was only a perform of placing on longer-dated swaps when the shorter-dated ones wrote off. And I feel you form of highlighted this dynamic on the NIM final quarter. So I suppose, trying ahead, you guys have one other $10.5 billion of swaps doubtlessly rolling off quickly. So ought to we form of count on the identical magnitude of NIM decline every quarter? Or how ought to we take into consideration that?
Peter J. Federico — President and Chief Working Officer
Nicely, Terry, that is a very good query, and I am glad you requested it as a result of the runoff of our shorter-term swaps, which was about $2 billion, did have an effect directionally, clearly, on our NIM, however that was clearly not the most important affect as a result of we did add $6.5 billion, as you level out, in longer-term swaps. About half of these swaps and the common pay fee on that $6.5 billion was 4.2%, so clearly a way more important value. About half of these swaps that we added had been used to hedge new mortgages due to the inventory that we issued and the mortgages that we purchased with that inventory we, in a way, accelerated a few of that NIM decline. On the identical time, we additionally added about $3 billion.
The opposite half of that $6 billion of swaps, as Chris has talked about this in his ready remarks, we have now rotated out of treasury hedges into swap-based hedges. In order that, once more, as a result of these swap-based hedges present up in our internet curiosity margin led to maybe a extra important decline in our internet curiosity margin that individuals would have anticipated. For those who simply anticipated the discount in our swap portfolio because of the maturity of our short-term swaps. So to the extent that we develop our portfolio and ready to take action at actually engaging funding returns that can change the timing, if you’ll, of NIM.
However you are proper. Over time, the shorter-term swaps that we have now, and we have now about $6 billion of maturing within the second half of the yr, then that can have some affect on our internet curiosity margin. However once more, it is transferring our internet curiosity margin again into alignment. If you consider our internet curiosity margin at round 270 foundation factors, giving us the online unfold revenue we have now, that return on capital for the second quarter was 24%.
That’s not the economics of our enterprise, and that is why they will come again into alignment. As we simply talked about within the query from Doug, the economics of our enterprise are extra within the 18% vary, not 24% vary.
Terry Ma — Barclays — Analyst
Nice. That is useful. Thanks.
Peter J. Federico — President and Chief Working Officer
Certain.
Operator
Subsequent query comes from Rick Shane with J.P. Morgan. Please go forward.
Rick Shane — JPMorgan Chase and Firm — Analyst
Good morning, all people. Thanks for taking my query. Look, in the course of the quarter, it appears to be like such as you issued about 45 million shares, and that is sensible. Inventory was buying and selling at a premium to tangible ebook persistently, spreads widened, which creates a horny funding alternative.
I’m curious when you consider issuing shares off the ATM, how dynamic is that? Is it one thing that you simply set out initially of the quarter and say, hey, the place we wish to situation 40 million shares, plus or minus 5 million? Or do you, each day, have a look at this and say, “Wait a second, we have a horny — we’re buying and selling at a horny premium. Spreads have widened. It is a good time,” and actually lean into it? I am making an attempt to know the dynamics all through the quarter.
Peter J. Federico — President and Chief Working Officer
Yeah. No, that is a very nice query. I admire it. However I might say, simply to begin with, is we by no means begin out with a set expectation.
So there is no such thing as a resolution initially of the yr we have to or wish to or we’ll increase this quantity of capital. It is based mostly on what’s occurring with our portfolio and based mostly on what’s occurring with the market. And also you’re proper. One of many actual values of utilizing the ATM or at-the-market program is that it permits you loads of flexibility.
So it permits you flexibility to situation inventory, for instance, on days when there’s excessive quantity in your inventory or when there’s distinctive demand in your inventory. And we regularly see reverse inquiry, if you’ll, from institutional or giant traders in search of transactions. In order that’s one thing that we may think about as they arrive in. On the identical time, it lets you situation inventory in increments, if you’ll, that make it environment friendly to deploy versus elevating loads of capital and having to deploy that over time in belongings with out driving asset costs.
This provides us the flexibility to situation inventory in a approach that does not disrupt, if you’ll, the belongings that we’re buying. For instance, within the second quarter, we did increase a bit of over $400 million, and we purchased over $3 billion value of mortgages, shopping for them over the quarter because the coincident with the inventory issuance permits us to try this in a approach that’s — offers us higher economics. So it is one thing that we strategy from a dynamic perspective and from a flexibility perspective.
Rick Shane — JPMorgan Chase and Firm — Analyst
Acquired it. And, Peter, that is useful. And after we take into consideration you making these investments, it is elevating the capital. It is buying the — levering that capital, buying the belongings, and hedging them.
Is probably the most cumbersome a part of that the hedging as you are deploying capital? I am simply curious the place the friction is from a timing perspective given the ATM, tremendous environment friendly, the repo markets are tremendous environment friendly, your markets commerce extremely liquid. Curious if there’s any — on the hedging facet, if there’s any type of friction there.
Peter J. Federico — President and Chief Working Officer
No, there isn’t any situation there. I imply, there’s loads of liquidity. However actually, it is the comparability of, for instance, doing a bot deal. So let’s simply take the second quarter for instance.
If we did a purchased transaction for that quantity of $450 million, you’ll get that every one in in the future, after which you would need to exit and purchase that might assist the acquisition of a bit of over $3 billion value of mortgages. It will be clear that if you happen to did that transaction that AGNC would both have had to purchase these mortgages upfront or purchase them thereafter, and that might doubtless doubtlessly result in a change in valuation of mortgages versus simply merely doing it at a really measured disciplined place, making an attempt to attach the liquidity in our inventory with the richness or least expensive of mortgages. And that is why we try this all through the quarter. It is not constant.
It is — when these type of align and the liquidities in our inventory and mortgages we expect are low cost, then we’ll purchase mortgages. For instance, initially of the quarter, mortgages had been on the tight facet of the vary, they usually weren’t as engaging to us is that they turned later within the quarter when mortgages moved again into the center of the vary. And in reality, our ebook worth accretion was higher on the finish of the quarter. And so the ATM program truly labored higher for us on the finish of the quarter slightly than the start of the quarter.
Rick Shane — JPMorgan Chase and Firm — Analyst
Acquired it. OK. Very useful. Thanks.
Peter J. Federico — President and Chief Working Officer
Certain.
Operator
The following query comes from Eric Hagen with BTIG. Please go forward.
Eric Hagen — Analyst
Hey, thanks. Good morning. So if the vary for mortgage spreads is tighter as a result of the narrative is basically centered on Fed cuts, do you’re feeling like that perhaps drives extra flexibility to take your leverage increased? And what do you’re feeling like that vary on your leverage is? And do you’re feeling like we will perhaps take into consideration 7.5 instances being extra of a minimal leverage over, name it, the close to or medium time period?
Peter J. Federico — President and Chief Working Officer
Nicely, I feel these are all factors in concerns after we take into consideration our leverage. We actually have the capability, as you level out. Whenever you have a look at our money and unencumbered place that Bernie talked about at 65% of our fairness, that might point out that we have now loads of capability to take leverage increased if we so selected. And clearly, our outlook for mortgage unfold volatility is basically vital in that equation, and each Chris and I discussed that in our ready remarks is a crucial improvement.
It is an vital improvement for our enterprise due to simply that time that you simply’re making, which is — if you return and also you have a look at how mortgage spreads have behaved, we went by way of a really troublesome repricing interval from 2022 to 2023 to search out this new vary. And the problem in 2023 was that we did not know the place the prime quality was. And clearly, we hit it on plenty of holidays of near 200 foundation factors. After which in the end, that prime hill, what we have seen subsequently, and this can be a actually wholesome sign, I feel, is that there is a new vary throughout the vary.
And the narrower the unfold vary, the extra capability we have now basically to take larger threat. Clearly, as we talked about already on this name, we’re going right into a interval the place volatility tends to extend a bit of bit. We clearly have some huge macro points coming that we’ll should cope with. However over time, these will definitely inform our place in regards to the applicable quantity of leverage.
Eric Hagen — Analyst
That is actually useful shade. Thanks. OK. So we’re trying on the forecasted prepayment velocity over the subsequent 12 months.
I feel that is 7 CPR. It is the identical because the paydown that we noticed final quarter. Is there a strategy to drill down there? I imply, does that assume that mortgage charges are flat? How do you assume mortgage charges form of development right here? And if we noticed a pickup in speeds, do you’re feeling like that might be constructive for complete return? Or is it perhaps depending on different variables?
Peter J. Federico — President and Chief Working Officer
I am going to let Chris reply that.
Christopher Jon Kuehl — Govt Vice President, Company Portfolio Investments
That forecast simply assumes that the forwards are realized. It is a base case single path forecast alongside the forward-rate curve. With respect to convexity threat on the portfolio or managing prepayment threat given our coupon and pool composition, peak unfavourable convexity on our portfolio is about 150 foundation factors decrease than at this time’s fee ranges, so important transfer in charges to get to that type of degree. Specified swimming pools, higher-quality specs symbolize about 45% of our holdings.
The following class of specified swimming pools even have favorable money stream traits. That represents about 30% of our holdings. And importantly, within the increased coupons the place we have now probably the most prepayment threat. These two classes mix symbolize about in 6s and 6.5 to about 85% of our holdings.
And so convexity threat prepayment threat on this atmosphere continues to be very manageable.
Peter J. Federico — President and Chief Working Officer
And, Eric, simply to return and spherical up the dialogue on spreads, type of the way in which I might characterize the outlook proper now’s count on mortgages to type of keep vary certain over the nearer time period. However long run, I feel what we now are seeing is a state of affairs the place there’s extra causes for mortgages to tighten than they’re to widen. They’re actually the catalysts for mortgages to maneuver to the excessive finish of the unfold vary. The very excessive finish of the unfold vary are tougher to see, and there are beginning to be extra causes to imagine that mortgages may tighten over time.
Eric Hagen — Analyst
Proper. Good perspective. We admire you. Thanks.
Peter J. Federico — President and Chief Working Officer
Certain.
Operator
And the ultimate query comes from Jason Stewart with Janney. Please go forward.
Peter J. Federico — President and Chief Working Officer
Hello, Jason.
Jason Stewart — Janney Montgomery Scott — Analyst
Hey, Peter. Thanks for taking the query. Only a follow-up on Eric’s query there. Going again to the excessive, name it, mid-quality spec swimming pools up in coupon, what is the common pay-up on that, say, 85%, if you happen to may give us an thought of what that appears like?
Christopher Jon Kuehl — Govt Vice President, Company Portfolio Investments
Yeah. We do not have that damaged out in our disclosures, however the common pay-up on our mixture portfolio, together with the TBA place which is comparatively small, is simply over — it is just below 1 level. It is round 30 ticks. Excluding the TBA place, it is barely over 1 level, so round 33 ticks.
Jason Stewart — Janney Montgomery Scott — Analyst
OK. All proper. Yeah, I suppose I wished to ask just a bit bit extra perspective on coupon choice. I imply, you’ve gotten a variety of coupons to select from on this atmosphere and actually the push and pull between complete return and carry sufficient in coupon given your outlook for the refi, some new packages on the market for the refi outlook.
Possibly you may simply drill down into what kind of drives your coupon choice over the subsequent two or three quarters, that might be useful. Thanks.
Christopher Jon Kuehl — Govt Vice President, Company Portfolio Investments
Certain. So inside throughout the coupon stack manufacturing coupons nonetheless, by far, supply probably the most engaging spreads. And in order that’s the place we have been investing marginal capital assuming present relationships throughout the stack stay that can be the place we proceed to speculate marginal capital. Greater coupons have very totally different technicals than decrease coupons.
It is the place all of the natural provide is towards comparatively anemic bid from banks and abroad. And so naturally — or if you happen to examine that to the bottom coupons, that are 300, 400 foundation factors away from being produced, and many of the float is tied up on the Fed. And so when you’ve gotten passive index fund inflows that want to purchase belongings that are not being produced, you may get fairly dislocated relative valuations throughout the stack, and so it is logical why this relative worth relationship has been persistent. Greater coupons, as we mentioned earlier, I imply, actually have extra prepayment threat, worse convexity, however I might say that is greater than within the worth.
You are accumulating loads of unfold that can be utilized to handle that threat in plenty of alternative ways. You should buy choices on charges. You may spend it on pay-ups and supply again convexity by way of asset choice and shopping for specified swimming pools. After which — and you’ll delta hedge.
And within the present atmosphere, the latter two are extra engaging, and flight volatility continues to be extraordinarily elevated, and so choices are costly. And so usually talking, it is less expensive to supply convexity by — by way of pool choice and coupon choice. So roughly about two-thirds of the place is in 5s and better. The positions in 3.5 by way of 4.5, the so-called stomach coupons, have nonetheless engaging spreads and intensely steady money stream profiles.
And so we like the range of that, and that retains the convexity threat within the mixture portfolio very manageable.
Jason Stewart — Janney Montgomery Scott — Analyst
Nice. That is good suggestions. Thanks for that.
Christopher Jon Kuehl — Govt Vice President, Company Portfolio Investments
Certain.
Operator
We have now now accomplished the question-and-answer session. I might like to show the decision again over to Peter Federico for concluding remarks.
Peter J. Federico — President and Chief Working Officer
Once more, we admire all people collaborating on our name this morning, and we stay up for chatting with you once more on the finish of the third quarter.
Operator
[Operator signoff]
Length: 0 minutes
Name members:
Katie Turlington — Investor Relations
Peter J. Federico — President and Chief Working Officer
Bernice E. Bell — Govt Vice President, Chief Monetary Officer
Christopher Jon Kuehl — Govt Vice President, Company Portfolio Investments
Aaron Joshua Pas — Senior Vice President, Non-Company Portfolio Administration
Peter Federico — President and Chief Working Officer
Crispin Love — Piper Sandler — Analyst
Douglas Harter — Analyst
Doug Harter — Analyst
Bose George — Analyst
Chris Kuehl — Govt Vice President, Company Portfolio Investments
Terry Ma — Barclays — Analyst
Rick Shane — JPMorgan Chase and Firm — Analyst
Eric Hagen — Analyst
Jason Stewart — Janney Montgomery Scott — Analyst
