These concerns caused Treasury yields to increase, the yield curve to flatten, and the market's outlook for monetary policy to pivot from rate cuts to rate hikes by year-end. The improvement in our tangible book value was driven by the solid performance of agency MBS, which generated a positive excess return to U.S. This five-quarter track record of outperformance is unusual and particularly noteworthy given the similar credit quality of these two asset classes. Against the backdrop of falling supply, the demand for agency mortgage-backed securities has remained strong.
A significant portion of these inflows get invested in agency mortgage-backed securities and are an important source of demand. Lastly, with the outlook for private credit deteriorating and equity valuation stretched by many measures, the demand for high-quality fixed income assets should remain strong or perhaps even increase over the near term. We expect these favorable supply and demand dynamics to become more apparent over time and to benefit agency MBS performance in the H2 of the year. Another important consideration that shapes the outlook for agency MBS is the compelling value that this asset class offers relative to corporate bonds.
In the second quarter, corporate bonds were the best performing fixed income sector by a wide margin, significantly outperforming both U.S. Treasuries of 75 and 290 basis points, respectively, levels that were among the lowest on record. In light of the approved technical backdrop, and despite elevated geopolitical risk, our outlook for agency MBS remains encouraging. Agency MBS spreads have moved little this year and continue to be wide by historical standards, despite supply being lower than expected and demand being greater than expected.
| Metric | Period | Current guidance |
|---|---|---|
| Net new agency MBS supply (full year) | FY2026 | ~$150 billion (materially lower) |
| Marginal ROE on new investments | forward | ~15%-17% at 7-7.5x leverage, spreads 130-150bps |
| Current-coupon agency MBS spread to swap blend | forward | expected range 120-160bps (near mid at ~145bps) |
| TBA dollar-roll specialness | forward | ~10-20bps, in line with long-term averages |
| Housing/mortgage demand | H2 2026 | expected seasonal downtick; no uptick foreseen with rates above 6.5% |
| Duration gap posture | forward | continue to favor a positive duration gap (0.7 years) |
| Metric | YoY | Note |
|---|---|---|
| Economic return on tangible common equity | 6.7% for the quarter | $0.36 dividends plus $0.20 TBV increase from agency MBS outperformance vs hedges |
| Comprehensive income per share | $0.52 | mortgage outperformance relative to interest-rate hedges |
| Net spread and dollar roll income per share | $0.40, down $0.02 QoQ | 6bp decline in net interest spread from lower asset yields, partly offset by lower funding costs |
| At-risk leverage | 7.4x tangible equity, unchanged QoQ | ending and average both flat |
| Tangible net book value per share | +$0.20 in quarter; down ~1% quarter-to-date since period end | agency MBS outperformance in quarter; subsequent rate/spread volatility |
| Projected life CPR | 8.6%, down 170bps | coupon and TBA vs specified-pool repositioning; actual CPRs unchanged at 13% |
| Weighted average portfolio coupon | 5.04%, higher | sold lower coupons and bought higher coupons for yield and a more benign prepayment outlook |
| Swap-based hedge allocation | 66%, down QoQ | maturity of $3B of swaps plus addition of intermediate/longer Treasury-based hedges |
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Agency MBS spreads vs corporates | wide by historical standards | still wide despite lower supply/higher demand, compelling vs record-tight corporate spreads | — |
| Supply/demand technicals | higher supply expected at start of year | supply down to ~$150B, strong bond-fund/bank/foreign/REIT demand; constructive | — |
| GSE purchase activity | market expected caps hit by year-end | GSEs disciplined, keeping ~$120B dry powder, stepping in only when spreads widen | — |
| Capital raising / ATM | heavier issuance in prior quarters | lighter, opportunistic touch as stock traded heavy; only $167M issued | — |
| Leverage strategy | driven by spread level and volatility | lower spread volatility from GSE backstop could support higher leverage, offset by macro uncertainty | — |
| Duration/curve positioning | positive duration gap, longer-dated hedge tilt | unchanged; view flattening as overdone, expect curve to re-steepen | — |
| Regulation (SLR / Basel endgame) | awaiting final rules | SLR closed; Basel final likely near proposal, net positive for bank mortgage-credit holdings | — |