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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the AGNC Investment Corp. Third Quarter 2022 Shareholder Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded.
I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.
Thank you all for joining AGNC Investment Corp.'s Third Quarter 2022 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 fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act.
Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are 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 obligations to update our forward-looking statements unless required by law.
Participants on the 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 of 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.
Thank you, Katie, and thank you to everyone for joining our call today. Financial markets experienced broad-based weakness in the third quarter as macroeconomic and monetary policy uncertainty intensified both domestically and abroad. This led to a sharp decline in investor sentiment and a significant repricing in both the equity and fixed income markets. With the S&P 500 Index falling 17% and the unlevered Bloomberg Aggregate Bond Index falling 7.5% from their respective inter-quarter highs.
In the early stages of market downturns, it is not uncommon for the U.S. Treasury and Agency MBS markets to underperform other fixed income products because these securities are the most liquid and thus easiest for investors to convert to cash. Bond fund outflows are an obvious example of this type of selling pressure. Agency MBS are the most liquid spread product across the entire fixed income spectrum. As such, in certain environments, particularly when investors favor liquidity, the selling pressure on Agency MBS can be greater than other asset classes further out the liquidity and credit spectrum. This was indeed the case in the third quarter.
On Page 7 of the investor presentation, we show the spread or yield differential between the 30-year current coupon MBS and the 10-year treasury since January of 2009. This graph is helpful because it provides historical context for the recent spread widening. As you can see, the spread recently widened to the extreme of 190 basis points. A significant portion of this widening occurred late in September following an unforeseen episode of instability in the U.K. bond market that led to a significant repricing and risk-off sentiment in our treasury and Agency MBS markets.
As we have discussed, wider spreads impact our business in two ways. First, as spreads widen, the book value of our existing portfolio declines as has been the case this year. On the positive side, however, wider spreads also enhance the future value of our business by improving the go-forward return on our portfolio. The supply outlook for Agency MBS has also continued to improve. With primary mortgage rates now well above 7%, origination volume over the remainder of the year will likely be very limited, and the runoff of the Fed's portfolio will also be materially slower than previously anticipated. Putting this all together, Agency MBS are undeniably attractive. Spreads are at unprecedented levels. The supply outlook is very favorable.
And finally, Agency MBS are guaranteed by the U.S. government and thus do not have the credit exposure in a recession scenario, which adds to their attractiveness relative to other fixed income alternatives. The recovery in valuation levels could happen rapidly. So as difficult as this year has been, given the spread widening that has already occurred, it is important to understand the unique opportunity that we believe is on the other side of this historic repricing event.
With that, I'll now turn the call over to Bernie Bell to discuss our financial results in greater detail.
Thank you, Peter. For the third quarter, AGNC had a comprehensive loss of $2.01 per share. Economic return on tangible common equity was negative 17.4% for the quarter comprised of the decline in tangible net book value of approximately 20% and dividends declared of $0.36 per common share. Given the very challenging market conditions during the third quarter, we continued to prioritize risk management, operating with a high interest rate hedge ratio, lower leverage and a strong liquidity position.
In addition, we opportunistically issued approximately $290 million of common equity through our at-the-market offering program at an average price of $10.10 per share and issued $150 million of fixed rate reset preferred equity.
Our average leverage for the quarter increased moderately to 8.1x tangible equity from 7.8x for the prior quarter. Our leverage at the end of the quarter was higher at 8.7x primarily as a function of book value declines late in the quarter. At quarter-end, we had cash and unencumbered Agency MBS totaling $3.6 billion, or 54% of our tangible equity and approximately $100 million of unencumbered credit securities.
Net spread and dollar roll income, excluding catch-up am was $0.84 per share for the quarter. The slight increase from $0.83 per share for the second quarter was the result of higher asset yields and our large interest rate swap position, which more than offset higher funding costs and declining dollar roll income.
Lastly, our average projected life CPRs as of the end of the quarter decreased modestly to 7%, while actual CPRs continue to slow meaningfully averaging 9% for the quarter.
I'll now turn the call over to Chris Kuehl to discuss the agency mortgage market.
Thanks, Bernie. As Peter discussed, Agency MBS spreads continued to widen during the third quarter and in particular in the month of September as rates and volatility surged higher. PAR coupon spreads to a blend of five and 10-year U.S. treasury debt ended the quarter at approximately 170 basis points. To put the degree of mortgage spread widening during the month of September into perspective, the Bloomberg Mortgage Index, which is an index of all Fannie Mae, Freddie Mac and Ginnie Mae MBS experienced its worst excess return versus treasuries on record going back more than 30 years.
Agency spreads to treasury, swaps and corporate debt are extraordinarily wide. Historically, the few times that PAR coupon spreads reached levels beyond 150 basis points, it was short-lived and importantly, the funding markets were in distress and prepayment risk was high, neither is the case today.
On our last call, we discussed the increasingly hawkish Fed sentiment and elevated interest rate volatility as being the primary headwinds to Agency MBS performance, and those headwinds remain today. However, even adjusting for the current level of rate volatility, spreads on Agency MBS are compelling. And when rate volatility ultimately settles, Agency MBS will materially outperform. Moreover, this recovery could be very rapid. The only way to reconcile current agency spread levels is to infer a lack of sponsorship due to bond fund outflows, the large percentage of passive index-based management in capital-constrained banks. As of September 30, our investment portfolio totaled $61.5 billion. During the quarter, we continued to reposition our holdings across the coupon stack.
Today's MBS market is particularly unique with more than 10 actively traded 30-year coupons, which speaks to the magnitude of recent interest rate moves. Our hedge portfolio totaled approximately $69 billion at quarter end, down about $3.5 billion from the previous quarter. Our duration gap as of September 30 was 1.2 years. And despite the 40 basis point increase in 10-year interest rates since quarter end, we have proactively reduced our duration gap to inside of one-year through rebalancing actions in both assets and hedges.
I'll now turn the call over to Aaron to discuss the non-agency markets.
Thanks, Chris. Spreads across the structured product space in the third quarter remained volatile, largely tracking the risk sentiment in broader markets. The repricing of the terminal rate and shifting expectations of the Fed's future path continue to drive the market's direction. After gradually firming up across the capital structure in the first six weeks of the quarter, the second half of Q3 largely reversed that spread tightening.
At this juncture, while credit spreads have leaked wider, trading has generally been quite orderly. However, some signs of stress are evident and liquidity is relatively low. These factors have, in part caused the credit curves in many products to be flatter than one would expect given the deteriorating economic outlook.
Housing activity has declined materially as significantly higher mortgage rates have stretched affordability to extreme levels, while reducing mobility as more homeowners are locked into their current residences with low fixed rate mortgages. While the structural supply imbalance will remain supportive of housing in the longer run, our expectation is that house prices will decline gradually and on relatively low transaction volume. This could reverse most of the prior year's gains over the coming 12 to 18 months.
Importantly, due to the sharp run-up in house prices from Q2 2021 to Q2 2022, there is relatively little credit risk embedded in loans originated more than a year ago. This coupled with the high percentage of fixed rate mortgage debt provides significant support from mortgage credit performance.
With respect to our holdings, the non-agency portfolio declined over the quarter, ending Q3 at $1.7 billion. We reduced our AAA holdings and rotated out of fixed-rate RMBS AAAs in favor of floating rate commercial back AAAs. In addition, we repositioned some of our more credit focused holdings.
We believe our non-agency portfolio is well positioned for the current environment. As a result of the seasoning of the loans back in our CRT and RMBS holdings, the average LTV across the portfolio is in the low 50s on a mark-to-market basis. As such, we would expect credit performance to be relatively insensitive to even moderate changes in house prices for the majority of our portfolio.
With that, I'll turn the call back over to Peter.
Thank you, Aaron. And with that, we'll now open the call up to your questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Doug Harter with Credit Suisse. Please go ahead.
Thanks. Can you talk about how you're looking to balance risk management and maintaining leverage with the near-term risk versus the opportunity for the snapback in Agency MBS that you talked about?
Sure, Doug. Good morning. Thank you for the question. It's a good place to start. We ended the quarter with leverage at 8.7, as you know, and as we reported, which was up from the prior quarter. But as of last Friday, our leverage was around 8.4. And we really think that, that's a good place to be. If you think about a leverage level that is sort of right in the middle of our normal operating range, very comfortable position from a leverage perspective.
But more importantly, I think it strikes the right balance, which I think is sort of at the heart of your question, between the challenges that we face in terms of the overall bond market and the illiquidity and volatility, and we have to respect that. But at the same time, we also have to respect the fact that we're looking at the best returns that we've ever seen in the Agency MBS market.
So we've obviously gone through a really sharp repricing. A lot of illiquidity late in September. The market has been challenged since then. But when you look at returns where they are today, you have to say this is potentially a once-in-a-lifetime return opportunity. So we like where we are right now. It's a very comfortable leverage position. Our liquidity position is strong, and we can talk about that in greater detail. But from -- just from an overall risk position, we're trying to balance right now, both offense and defense, and we think that, that's really important given how attractive returns are. So I'll pause there and let you ask a follow-up.
And just on the once-in-a-lifetime or the ability for them to snap back. I mean, I guess -- is there enough buyers? Kind of -- you mentioned kind of the supply demand. Who is the incremental buyer to kind of snap spread back?
Yes. It's a great point. And what I would say when you're in these sort of really illiquid markets like global bond markets have entered, you have the real risk of overshooting in both directions. And unfortunately, for Agency MBS, because they are so liquid and because they are the most liquid spread product, they tend to lead in the overshoot, and we certainly saw that.
The flip side of that is also that you can have a really sharp recovery as well. One of the issues that the sort of macro bond market, and this is both treasuries and Agency MBS is facing, is that there's the preponderance of passive investors. So what we've seen as the Fed has tightened monetary policy is that the flows in both the treasury and Agency MBS market are dominated by bond fund managers. And there's obviously been huge amounts of bond fund outflows as the Fed has tightened and rates have risen. It's a bare market in demand market, and you would expect that. And they are the source of selling pressure and the buying is relatively limited.
You can also look at that and say the opposite is undoubtedly going to be the case because there are no natural sellers either of mortgages once that flow stops, right? And we've already begun to see, I think, some of that with returns where they are both on an absolute and relative basis in the Agency MBS market. For example, on an absolute basis, investors could get a government guaranteed power price bond at a 6% yield, 200 basis points over the treasury for the same credit in an environment where you're looking at a recession, that is a really attractive return.
So I think you're going to start to see inflows into the Agency MBS market. I noticed that last week when it was a Bloomberg story where the MBS ETF had its largest inflow in a single day ever. So as the market stabilizes, I think you'll see the opposite effect, which is there's going to be buyers emerging, and there are no natural sellers because there's no natural supply of Agency MBS at this level of REIT. So that's the technical that you're looking at that will be really favorable once the bond market stabilizes. And I think ultimately, as we all know, it is going to stabilize, and I think that there's a real opportunity ahead of us.
We've seen that in the past, and you may look at spreads where they are today and say at 200 basis points over. That's not the worst that they've ever been because you can look back at the great financial crisis. But if you look at the great financial crisis for us to say, it is nothing alike. The Agency MBS market is not the problem here. There's no liquidity problems, there's no selling problems. There's no prepayment risk problems. There's no risk out of the Fed.
In the great financial crisis when spreads were wider, you had the GSEs at the heart of the problem. The very credit of the Agency MBS was in question. Bank Capital was in question, huge funding problems. So you could justify potentially wider spreads in that environment. When you look at spreads today at close to 200 off, I would say they're the best risk-adjusted returns that the Agency MBS market has ever seen.
Great. I appreciate that, Peter.
Sure. Thank you for the question.
Our next question comes from Bose George with KBW. Please go ahead.
Hey everyone. Good morning.
Hey Bose. How are you?
Good. Thanks. Can I get your updated book value?
Sure. As of last week, our book value at this end of last week was down about 15%. Let me just sort of put that in context, because I think this particular month-to-date update, I think the market has been so volatile. I think it's challenging for people to sort of get a good handle on that. But in fact, if you look at like for example, our stock performance, I think our stock performance has actually tracked our book value very, very well. So down about 15%. I think you can break that down into really two components. It's first is you got to look at mortgage performance, obviously and how much spreads have widened, I would say sort of on average spreads have widened probably about 15%.
So if you look at our sensitivity, that's probably about 11% in book value. But it's really challenging because if you look at -- and most people do look at the performance of current coupon. Current coupon performance has actually been the best performance. But by the way, the current coupon at the end of September was a 5.5% coupon. Now it's a 6% coupon. So you have to look further down into coupon stack and the performance is materially different across different coupons. If you look at the 2.5% coupon, for example, that was down 3.5 points. The 4.5% coupon was down around 2.5 points.
And you look at the five-year treasury, that was only down one point so far. So when you look at it from that perspective, if you hedge your portfolio across the curve with two years and five years and 10 years like we do and the curve steepened as much as the 10-year part of the curve was the best performing part of the curve at up 40 basis points from a hedge perspective, you could have very different results based on where your curve and your hedges were across the curve. If you had all 10-year hedges, for example, which we wouldn't be uncomfortable with, given the size of our portfolio and our desire to hedge across the curve, you would have a much different outcome.
So from our perspective, hedging across the curve and particularly in the belly of the curve, the underperformance of the five year really led to the overall underperformance. And then based on our own disclosures that we put out, we had at the beginning of the -- of this quarter, a duration gap like we announced in our prerelease of about a year given the fact that rates moved 20 basis points on five years and 40 on 10, so on average maybe 30 basis points, that would translate to about 3% hit to book value.
So the combination of about 15 basis points wider in spreads, particularly in the belly of the coupon stack load to the belly of the coupon stack, plus that gives you about 15%. That's why we're looking at returns today that are the best we've ever seen. So that's the update as we sit right now.
Okay, great. Thanks. That's helpful.
Sure, thank you for the question.
Given the current dividend, about 44 on your implied book value, which is, I guess, in the high 7s, suggest the dividend yield, I guess very high teens. I mean does your portfolio generate that to cover that dividend?
Yes, this is the really key point. Thank you for the question. Obviously, when we think about our dividend, we are constantly evaluating a whole range of considerations, the composition of the portfolio, the volatility of interest rates, alternative uses of capital, things like that general market conditions, the expected leverage. But what's really, I think critical to understand, I think is the heart of your question is you have to understand what drove the decline in our book value. And if you look at the performance of mortgages and you look at that graph that we show, I think it's clear to everybody when you look on Page 7, that mortgage spreads have gone in one direction only for the better part of the last 18 months, 65 basis points wider, if you will from August to now.
So the decline in our book value is driven primarily by wider spreads. So while it hurts your book value currently because the decline in book value came from wider spreads, it also enhances the go-forward return on our portfolio. So said another way, as our dividend yield has gone up with the decline in our book value, the return on our portfolio has gone up in a commensurate way. So if you looked at our portfolio today, you sold it, bought it all back, our portfolio is marked to today's valuations.
So if you looked at that and you said what do mortgages earn at this dollar price at this spread, you would conclude that the go-forward return on our portfolio actually matches very nicely the current dividend yield. So that's one of the key things that we always look at. We talked about that a lot. So going forward, I still believe that those two things are reasonably well aligned. And obviously, conditions change and markets are volatile. We're going to continue to be diligent about monitoring that. But the go-forward return on our portfolio still is consistent with our dividend.
Okay, great. That's very helpful. Thanks a lot.
Yes, thank you, Bose.
The next question comes from Trevor Cranston with JMP Securities. Please go ahead.
Hey, thanks. Good morning.
Good morning, Trevor.
A question on the historical spread chart you guys have on Slide 7. Generally, I was just curious when you guys look at spread versus historical levels, have you guys sort of adjust for the fact that either the Fed or the GSEs have been sort of a huge buyer and backs up on the market for much of the last 20 years? And how kind of comparable do you think spreads are today versus levels where those guys have been in the market?
Yes. You're 100% right. I mean, obviously, the chart that we show doesn't really have any impact of the GSE's portfolio that was all prior to the Great Financial Crisis in terms of any kind of meaningful impact. But certainly, prior to that, they did have an impact on the overall valuations. And then post Great Financial Crisis, there's no doubt, starting with QE1 in 2008 or '09, whenever it was, the Fed has basically participated in this market for 11 out of 14 years or something like that, whether they're either buying mortgages or reinvesting their paydowns.
So they did have an impact, and they are obviously exiting the market. On the flip side of that, you could also conclude that the Agency MBS market is forever foundational to the Fed's monetary policy, right? They're not going to stay out of the market forever, and they clearly care, and you can see that in the words that they communicated even as late as last week, where they are monitoring and paying attention to the functioning of both the U.S. agency and the U.S. treasury market.
So they have had an impact. But the flip side is, when you think about the Fed's portfolio running off, it's really critical to think about the environment in which the portfolio is running off. If it's a low rate environment, then it would be much more challenging for Agency MBS because you would be facing the Fed running off its balance sheet and you'll be facing an increasing amount of supply.
Frankly, that was the risk that we saw at the beginning of 2022. At mortgage rates at 7.25%, there is effectively almost no supply of mortgages. And even though the Fed is running off, I don't think that, that's going to be a material impact. So you're right that it's a factor and it's something you have to think about. But I don't think the new norm is where we are today. It may be higher than the average, the 80 basis points that I've showed on this one, on this chart. And if you looked at this chart, I call it a sort of forever, the maximum function. If you looked at this chart on Bloomberg, the average would be about 90 basis points since the 80s to now and the range would be 75 to 125 basis points.
We may settle out somewhere closer to the high point of the average range of 125, but I don't think we're going to settle out here at 200 basis points. It's just too much absolute return for the same credit. I think you're going to get levered buyers and you're going to get unlevered buyers buying Agency MBS at these levels once market conditions stabilize. I know Chris wants to add something to that.
I would just add, I mean, just put into perspective how extraordinarily wide current spread levels are, the last time the Fed was running off its balance sheet in 2018 and 2019, current spreads averaged levels about 100 basis points tighter than where they are today.
Yes, okay, that's helpful.
The other -- one final point I forgot to mention, Trevor, is that you have to also look at the ownership of the market, right? The Fed, even though it's running this portfolio, the Fed owns 30% of the -- essentially of the Agency MBS market. And with rates are where they are now, you're looking at the end of next year, the Fed's runoff is going to probably be less than $15 billion a month. It's going to be back to essentially the level that when they phased in the runoff. So the Fed's runoff is going to be really slow. They're going to own a huge amount of the stock for a long time.
And then, of course, banks own another 40%. And that's pretty much out of the trading supply as well. So those are two key points as well to consider going forward, even though they are backing out of the market.
Yes, for sure. Okay. And then the -- so in your prepared remarks, you sort of highlighted the two big headwinds for MBS. One was the sort of technical supply demand backdrop, which you talked a lot about. The second piece is high volatility. I guess -- so the question is, I mean, do you guys see any catalysts for realized volatility to decline at all in the near term? Or do you think that piece of things is likely to stay pretty high for the near future?
I do see catalysts and maybe we're starting to see them just in the last few days. Obviously, you need more data points, and you have to really be respectful of the market conditions in the bond market. There's no doubt about that. They are really challenging market conditions and have been now for some period of time. But we are also -- can't lose sight of the fact that we're deep into the tightening process. And sort of it's always sort of darkest before dawn. And the Fed obviously wants to go a little higher. The market last week and still today, if you think about the Fed funds futures is topped out at around 490 in March or April of next year. And the Fed may or may not get there.
In fact, I think some of the comments out of the Fed was maybe the market has even overshot. They are certainly seem to be starting to indicate that they might ultimately get to that level, but they also seem to be recognizing that a more measured path to getting there may be something that is appropriate. So we have a Fed meeting, obviously, at the beginning of November, we have one in December. It will be really important to sort of hear what they have to say about the pace going forward. One of the things that sort of destabilized in the market so much, was you had a bad inflation print that was followed by really sort of hawkish destabilizing comments from the Fed and sort of the market lost confidence.
Well, I think the Fed has done a lot to make monetary policy restrictive. They will do a little bit more at this next meeting, probably 75, maybe even 50. And maybe they'll say at that time that look, we're going to take a little bit more measured approach and allow the rate moves that we've already made have the full effect on the economy. So that's, I think, one of the key changes that will come over the next couple of months, which I think will be really positive for the market.
And then, of course, we had a lot of international instability with what happened in the U.K., and that was really sort of tumultuous for our bond market for weeks now and maybe that has gained some footing with the new Prime Minister this morning, the market seems to like that. Bond levels are rallying across the globe. And so you can get stabilization from a number of different ways. And I think -- while we're not there yet, I'm hopeful that we're going to be there soon.
Okay. I appreciate the comment. Thank you guys.
Sure. Thank you for the question.
Our next question comes from Vilas Abraham of UBS. Please go ahead.
Hey everyone. How are you? I just wanted to start with the -- just the duration gap. You guys are up, it looks like 1.2 years. Just how are you thinking about that given where rates are now? And are you looking to put that down?
Sure. Yes. So you're right. Our duration gap was there, Vilas. Today, it's really around three quarters of a year. So we've reduced our exposure a little bit, but we still think the duration gap where it is seems to be a reasonable place to be. Part of what goes into that is how do we think mortgages are going to perform and Chris can talk a little bit about this in a minute, I'll turn it over to him to talk a little bit about the sort of convexity profile has improved.
So obviously, that goes into our duration gap position, but also where we are in the sort of rate repricing process. And obviously, with 10 years at 4.25, two years at 2.5. While certainly, higher rates are possible, we feel like those rates are probably pretty fairly priced right now. So maybe not quite as much upside risk as we were facing a few weeks ago given where 10 years are today. So we've reduced our overall sensitivity a little bit, but we kind of like where we are. Chris, do you want to talk about the complexity of the market?
Yes, sure. So as Peter mentioned, given some of the actions that we took since quarter end on both the hedging sides as well as on the asset side, our duration gap is currently around three quarters of a year. The motivation for shortening the duration gap in the current environment is that we expect mortgages to trade long for moderate moves in rates, widening into higher rates, outperforming into lower rates. And this is just driven by overall sentiment around Fed policy and bond fund flows. The portfolio does still have more contraction risk than extension risk into very large rate moves. And so for that reason, we're still likely to carry a positive duration gap, just not as long as we were as of 9/30.
Okay. And just back on the leverage, it sounds like you're comfortable where you are now for now. But when you -- when we do the lessening of volatility and potential Fed pause, what do you think the cadence of potentially moving that leverage up it would be?
Yes. Well, I think the cadence is probably faster than -- I guess I would have expected one way or the other. That's a thing with the market. I think we've hit levels where, as I mentioned in my prepared remarks, that I think that there's a greater risk now of a sharp move better in valuation. If you -- we talked about this on the second quarter call where when mortgages were 125 to 150 spread that there was a chance that mortgages would stay wide for a meaningful period of time and just sort of stabilize. At this sort of rate level, I don't know that we have that same sort of durability in the spread. So there is certainly a risk that just as quickly as mortgage spreads widen, they could tighten.
Now clearly, there's a risk that they could go wider as well. There's just no doubt about that. So we have to be really mindful of the moves in both directions. And I think the moves potentially could be a little bit sharper, which would mean that all other things equal, leverage could move faster. But one of the things that I think is also really important is that from a leverage perspective, it's important to remember that the investor experience and for investors to make money doesn't have to coincide with us taking more leverage, right?
At the end of the day, when you invest in AGNC today, for example, you are investing in a pool of Agency MBS at current valuation levels at the widest spreads on a risk-adjusted basis that I would say we've ever had. So the investment today stands on its own that there is certainly risk the spreads could widen further, and there are certainly risks and spreads could tighten a lot and the economic experience will be just as good, whether we take more leverage or not. So I don't think we can lose sight of that fact.
You're investing today, our portfolio is mark-to-market. And like the question we had with dividends, the go-forward return profile just from a carry perspective, is really attractive and that doesn't take into account the potential upside that would follow a tightening scenario. If you look back in history, for example, and obviously, every environment is different. But if you look back in history and you say, following 2020, for example, what was our best period. It was following 2020 when we had a significant tightening or if you look back when spreads were 250 basis points, AGNC generates its best returns.
As you would expect, there's nothing -- there's no science to that. You would expect us to generate our best returns following huge widening events. And this obviously is one of the most historic widening events that the market has ever experienced.
And you think that one of the big catalysts of that kind of snapback would be the bid from money managers and bond fund managers coming back in quickly?
Yes, I think that's a really key one. And I also think that -- I think that there's sort of a rotation that's going to occur, right? And you could just turn on CNBC and you hear people talk about 60:40 portfolios now going forward with bond prices where they are. I think real money investment back into bonds, whether it's insurance companies or money managers or pension funds, you're getting returns that you just haven't had the opportunity to have for the kind of credit quality.
So I think that there's real money investing, unlevered money that will come into the bond market in a number of different forms that I think will really benefit Agency MBS. And that, of course, is against the outlook of very little supply. Chris, do you want to add to that?
I was just going to make that point. I mean, look, at 7% mortgage rates. There's been a ton of demand destruction on the housing market. And so from a supply perspective, we're about to enter a period of record's lowest supply relative to the last two years, where in 2021, we saw $850 billion of mortgage net supply organically. And last year -- or this year around $550 billion. Next year, it's likely to be around 200 to 250. And importantly, reduced slower turnover, weaker housing market means that runoff from the Fed's portfolio is going to be much lower than where it's been running as well. And so to Peter's point, when bond fund flows do stabilize, it's not going to take much for mortgages to be incredibly well bid relative to the amount of supply that's available.
Got it, thanks everyone. I'll hop back in the queue.
Yes, thank you for the question.
Our next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.
Hi, good morning. Thanks for taking my question. Wondering if you could share your thoughts on your liquidity position? And perhaps talk about how AGNC handled the volatility that you saw in the quarter? And relatedly, what gives you comfort that you can handle the potential future volatility in the markets? Thanks.
Yes, thank you for the question. That was one I expected today. So as we sit sort of right now, I would say our liquidity position, if you think about it on a percentage of equity basis, it's basically unchanged. So I would put our liquidity position this morning at about $3.1-ish billion. And if you think about that on a percentage basis of our tangible equity, it's probably 52, 53-ish percent of our equity. And if you look back at that over the last eight quarters, you would see that, that percent has ranged right around there, somewhere between on average, probably about 55% over that time period. So what's important is you have to think about that liquidity position said another way, is our normal operating liquidity position.
Now obviously, a lot has changed and the absolute dollars have come down. But on a percentage of our equity basis, it's still really, really strong and consistent with where we normally operate. And you have to think about that in the context of what's already occurred, right? If you think about the amount of book value decline and amount of spread widening, we've been able to maintain the same amount of percentage of liquidity, and that's really key.
So what that means is that obviously, over time, as the environment changes, we take actions to change the composition of our hedge portfolio, or the asset portfolio and take steps to maintain a really strong liquidity position to give us strength to continue to navigate through these difficult market conditions. And that's what we'll continue to do. But as we sit today, we have basically a normal liquidity position.
Got you. Very helpful there. And then in terms of the funding cost side and given the rapidly rising rate environment, what's your outlook for funding costs? And perhaps you could just remind us again the potential impact you have for lock in some rates using interest rate swaps? Thanks.
Well, you could see the benefit of our hedge portfolio and obviously from a cost of funds perspective, the type of hedges we have has an impact on our overall cost of funds. If you look at the amount of swaps that we have outstanding versus our repo, we actually have more than 100% swaps versus repo balance. So said another way, all of our short-term debt in the form of our repo is synthetically converted to a longer-term debt through our swap portfolio.
So as our repo costs have gone up and they'll continue to rise as the Fed makes its last few moves, the return leg on our swap, which is also indexed off either the OIS or Fed funds rate is going to move up in the same rate. So overall, you're seeing a relatively stable cost of funds and that relatively stable cost of funds, there's some timing differences and our cost of funds went up maybe 30 basis points from 18 to 50 last time. But what's important is overall, that will all sort of work out and the timing of those hedges. That will be a relatively stable funding cost. And you layer that on to the repricing that's going on the asset side, and that's what's leading to our margin -- our net interest margin actually increasing and now up to 281 basis points. So I would expect general stability and our cost of funds as we go forward given the amount of swap hedges that we have.
Got you. Very helpful there. Thanks again.
Yes, sure. Thank you for the question, Ken.
Our next question comes from Eric Hagen with BTIG. Please go ahead.
Hey, thanks. Good morning. I think I just have a couple. In the rebalancing that you -- hey good morning guys. In the rebalancing that you did in October, have you raised any capital this month? Or has the reduction in leverage been a function of asset sales? Can you say how big your portfolio is right now? And then how are you guys thinking about using TBAs as a substitute for repo in this environment? Like what kind of relative value do you think investors are picking up from a heavier TBA position right now?
Yes. Well, I don't want to talk about inter-month activity with respect to capital markets, but you know that we're always looking for opportunities to use the capital markets in a way that we believe is enhancing to our shareholders. I think we've demonstrated that in the past, and we'll continue to adhere to that philosophy. And when you think about from an asset portfolio perspective, I sort of gave you the book value and the leverage number. So I think you can conclude what the asset balance is. Now with respect to TBA, Chris can talk a little bit about the TBA because clearly, there is an up in liquidity value there.
Yes. And generally speaking, I mean roll specialness moderated early during the third quarter to levels that are more in line with long-run historical norms. During the third quarter, our position averaged around 10 basis points or so through repo. And again, as I've said in the past, I mean, 10 basis points of a financing advantage relative to repo against the backdrop of an incredibly low prepayment risk environment is compelling. And so it's likely we'll continue to maintain a fairly large TBA position for the foreseeable future.
I think in the current environment, 5 to 10 basis points of specialness is a reasonable assumption with some potential upside to better levels. There's a huge range of tradable coupons with thin floats in the current environment. And so with active Fed sales off the table for the foreseeable future, and a large percentage of float and certain coupons tied up and held to maturity classified accounts and banks. I think there's probably, if anything, upside to those levels relative to longer run historical averages. So it's likely we'll continue to maintain a pretty sizable TBA position.
Got it. Appreciate you guys. Thank you.
Yes, thank you for the question.
And our last question is a follow-up from Bose George from KBW. Please go ahead.
Hey guys just wanted to ask about the Series C preferred shares. They switched to floating on the 15th. Historically, you've called the converts when they switch, but is the thought here just to hold on to that capital and then see what things look like when the market stabilizes?
Yes. Thank you for the question. That's exactly that we sort of look at that as, obviously, it is effectively callable. But you can also -- just like we would evaluate any new preferred, you look at the return factor -- the question you asked about sort of prevailing returns today are really attractive relative to that level, even though that is resetting at a higher rate. There is a huge spread differential between the return that we can get at the margin right now and that cost of capital. So from a common shareholder perspective, that is significantly accretive even though it's resetting at a higher rate. But as market conditions change, then we'll, of course, continue to evaluate that. But yes, thank you for that question. But it's still, from that perspective, relative to return on Agency MBS really beneficial to our common shareholders.
Okay. Great. Thanks.
Thank you.
This does conclude the question-and-answer session. I'd like to turn the call back over to Peter Federico for concluding remarks.
Thank you, operator, and thank you for everybody for your participation on the call today. I'll just leave you with one final thought, which was what I said in my prepared remarks is while we know that this has been a very challenging year from an investor perspective, given the spread widening that has already occurred. I think it's important that we continue to understand that we have, we believe, a very unique opportunity still ahead of us given where Agency MBS are today. So we appreciate your participation, and we look forward to talking to you again after our fourth quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.