AGNC Investment Corp. Depositary Shares, each representing a 1/1,000th interest in a share of 6.50% Series E Fixed-to-Floating Cumulative Redeemable Preferred Stock Q2 2026 Earnings Call

Good morning, welcome to the AGNC Investment Corp second quarter 2026 shareholder call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Katherine Turlington in Investor Relations. Please go ahead. Thank you all for joining AGNC Investment Corp's second quarter 2026 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 forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer, and Chief Investment Officer, Bernice Bell, Executive Vice President and Chief Financial Officer, and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico.

Good morning, thank you all for joining our second quarter earnings conference call. The investment environment in the second quarter continued to be challenging as escalating rhetoric and hostilities between the United States and Iran largely dictated financial market performance. With ship traffic through the Strait of Hormuz severely constrained, elevated energy prices and supply chain disruptions were the dominant macroeconomic concerns for the quarter. 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. Despite the elevated geopolitical and macroeconomic uncertainty and the bearish shift in fixed income sentiment during the quarter, AGNC generated a strong economic return of 6.7%, comprised of our attractive monthly dividend and improvement in our tangible book value per common share.

Also notable, the monthly common stock dividend that we paid at the beginning of this month marked the 75th consecutive monthly dividend payment of $0.12 per share, a track record of performance that we believe illustrates the value of AGNC's disciplined approach to risk management and portfolio construction over a wide range of investment environments. 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. Treasuries for the fifth consecutive quarter. This five-quarter track record of outperformance is unusual and particularly noteworthy given the similar credit quality of these two asset classes. The catalyst for the favorable performance of agency MBS was improving technical factors.

With the primary mortgage rate continuing to be above six and a half %, the net new supply of agency MBS this year will likely drop to about $150 billion, materially lower than the supply estimates at the beginning of the year. Elevated mortgage rates have also caused prepayment speeds to slow. As a result, MBS runoff from the Fed's portfolio will be lower than expected this year. Against the backdrop of falling supply, the demand for agency mortgage-backed securities has remained strong. Through the first six months of the year, bond fund inflows have totaled more than $400 billion and are running about double the pace of last year. A significant portion of these inflows get invested in agency mortgage-backed securities and are an important source of demand.

Banks, foreign investors, and REITs should also all continue to be net purchasers of agency MBS over the remainder of the year. 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 second half 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 and agency MBS. The Bloomberg Investment Grade Corporate Index and the Bloomberg U.S. High Yield Index ended the second quarter at spreads to U.S. Treasuries of 75 and 290 basis points, respectively, levels that were among the lowest on record. Surprisingly, these historically tight spread levels come at a time when corporate issuance this year is expected to exceed $1.1 trillion, making 2026 the largest corporate debt issuance year ever. 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.

Corporate spreads, on the other hand, have narrowed through the first half of the year and are tight by historical standards despite record issuance and rising credit concerns. Once the current elevated level of geopolitical and monetary policy uncertainty subsides, we believe these constructive dynamics will become more apparent and over time drive favorable agency MBS performance. Moreover, we believe AGNC is well-positioned to continue to deliver strong risk-adjusted returns for our shareholders in this environment. With that, I'll now turn the call over to Bernice Bell, our Chief Financial Officer, to discuss our financial results in greater detail.

Thank you, Peter. For the second quarter, AGNC reported comprehensive income of $0.52 per common share. Our economic return on tangible common equity was 6.7% for the quarter, consisting of $0.36 of dividends declared per common share and a $0.20 increase in tangible net book value per share due to mortgage outperformance relative to our interest rate hedges. Our total stock return for the quarter was even more favorable at 12.3% with dividends reinvested, which brings our one-year total stock return to 36.1%. As of late last week, our tangible net book value per common share was down about 1% or a little less than 2% net of our monthly dividend accrual for July. Both ending and average leverage were unchanged at 7.4 times tangible equity for the quarter.

We ended the period with $7.5 billion of unencumbered cash and agency MBS, representing 62% of tangible equity. Net spread and dollar roll income totaled $0.40 per common share for the quarter, down $0.02 from the first quarter. The decrease primarily reflects a six basis point decline in our net interest spread, driven by lower asset yields from portfolio repositioning, partly offset by modestly lower funding costs. The average projected life CPR of our portfolio decreased by 170 basis points to 8.6% at quarter end due to coupon and TBA versus specified pool repositioning. Actual CPRs were largely unchanged at 13% for the quarter.

Lastly, during the second quarter, we continued to actively manage our capital for the benefit of existing stockholders, issuing $167 million of common equity through our at the market offering program at a significant premium to tangible net book value per share, while maintaining a disciplined and opportunistic approach to capital issuance. With that, I will now turn the call back over to Peter to discuss our portfolio in greater detail.

Thank you, Bernie. In aggregate, agency MBS in the second quarter outperformed both Treasury and swap-based hedges, but the magnitude of the outperformance did vary considerably by coupon. Higher coupon and production coupon MBS experienced the greatest outperformance as the increase in interest rates curtailed both supply and prepayment concerns. The outperformance of higher coupons relative to lower coupons was also a reversal of the coupon performance in the first quarter. With swap spreads widening in the second quarter, MBS hedged with swaps also performed better than MBS hedged with Treasury securities. At quarter end, the spread differential between a current coupon mortgage-backed security and a blend of hedges across the swap curve was about 145 basis points. At this spread level, agency MBS are trading near the middle of our expected range of 120 to 160 basis points.

At quarter end, the market value of our asset portfolio totaled $97 billion. During the quarter, we purchased $2.2 billion of primarily intermediate coupon specified pools. Early in the quarter, we also sold some lower coupon MBS and bought higher coupon MBS to lock in gains from the strong performance of low coupons in the first quarter and to capture the yield benefit associated with higher coupon, given the expectations for a more benign prepayment environment. As a result, the weighted average coupon on our portfolio increased to 5.04%. The percentage of assets with favorable prepayment characteristics also increased slightly to 79%. The notional balance of our hedge portfolio totaled $66 billion at quarter end, up slightly from the prior quarter due to the addition of intermediate and longer-term Treasury-based hedges.

With the maturity of $3 billion of swap hedges and the additional Treasury-based hedges, our overall portfolio allocation to swap-based hedges declined to 66% at quarter end. Lastly, we ended the quarter with a duration gap of 0.7 years, unchanged from the prior quarter. We continue to favor operating with a positive duration gap, given the current level of interest rates, the convexity profile of our portfolio, and the expected correlation between mortgage spreads and interest rates. With that, we'll now open the call up to your questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Doug Harter with BTIG. Please go ahead. Thanks. Morning.

Hoping you could talk about where you're seeing returns today on incremental investments to kind of the current spread levels and how the ability to raise capital at your current valuation, how that impacts how you think about returns.

Sure. Good morning, Doug, and welcome back. Yeah. First off, in terms of marginal returns on new investment opportunities, as I mentioned, we ended the quarter with spreads. I like to look at them relative to the blend of the swap curve. I think that's an important comparison over time. I mentioned at 145 basis points. They're actually probably closer to 150 basis points this morning to treasuries. They're probably in the 120 basis point range. The returns will obviously depend on what combination of hedges we use in the current environment, given the fact that our swap-based hedges are now a little bit lower back toward 65%. Marginal investments going forward will likely be hedged more with swaps.

From that perspective, if you look at returns in the, say, 130 to 150 basis point range, you're getting ROEs when you leverage them the way we leverage them at 7 or 7.5 times, probably in the 15%-17% range. That aligns really well with the economics of our dividend. From a capital perspective, you'll notice that our capital activity was a little lighter this last in the second quarter relative to some previous quarters. As I mentioned before, that's not unexpected. We take a very disciplined, opportunistic approach to capital raising. It is not on any preset course. We'll let the economics of the market and the environment drive our decision.

In the second quarter, we felt like our stock was trading a little bit heavy. Obviously shareholder experience matters a lot to us. We don't want our ATM activity to interfere with the way our stock trades. In fact, Bernice mentioned in the second quarter our total stock return at a little over 12%, I think, is evidence that a lighter touch in the second quarter was appropriate. Going forward, we'll just take that same opportunistic approach. Returns are good in the market. We do have some volatility that we still have to contend with, which is always a negative. The underlying fundamentals look good from our perspective, and certainly if we can continue to raise capital in a way that is beneficial to our existing shareholders, we will do that.

At the same time, we already have great size and scale and liquidity. We're very happy with where we are, and we're happy to be in a position where we continue to use capital activities as a way to generate incremental value for our shareholders.

Great. I appreciate that answer, Peter. Thank you very much. Sure.

Thanks, Doug. Thank you. The next question comes from Crispin Love with Piper Sandler.

Please go ahead. Morning. Thank you.

Good morning, Peter. Appreciate you taking the question.

Sure In your remarks, you discussed how the investment environment has been challenging.

There's plenty of macro uncertainty, but results have been solid. The technicals for agency MBS are good. With that in mind, can you speak to just today's outlook with the landscape? Because a few things that we could see, could see elevated rate fall with Warsh as Fed chair, another added layer of uncertainty. The curve is flattened, could see some rate hikes. Curious what you think about how those factors could impact the outlook in the second half.

Yeah. There's no doubt that, in fact, if you go back to some of the comments I made at the beginning of the year, there's reasons to be optimistic and there's challenges in the market. The two challenges actually sort of, in my opinion, deteriorated, the two challenges are in the second quarter, it deteriorated. The two challenges are we do have elevated geopolitical risk, which is causing volatility in the market, all financial markets, and that's always a negative from a mortgage market perspective. The second, which I also believe sort of deteriorated, is the outlook for monetary policy, and it deteriorated in the second quarter because we clearly have more inflation concerns to price in, if you will, to deal with in the market with respect to energy prices related to the war and how that may feed into the Fed's monetary policy.

We also now know that we have a new Fed chairman who's taking a different approach, certainly communicated a much hawkish message initially than I think the market had anticipated. Putting all that together, we had monetary policy moving from two eases to two tightens. 100 basis point move in monetary policy expectations. Pretty dramatic in one quarter. Those are the negatives, those negatives are still with us for some period of time. As I mentioned in my prepared remarks, I think when you look beyond those negatives, I think the market is doing a really good job of looking beyond those, particularly as it relates to inflation in the war, you can see that because rates are higher but not materially higher, equity prices are still very elevated. All those things are positive. The market's looking beyond it.

The underlying fundamentals for the mortgage market have actually continued to improve sequentially through the first two quarters. It's more pronounced today than it has been, particularly because the supply outlook, as I talked about, is materially lower. We're talking about maybe $100 billion to $150 billion less supply of mortgages this year. I don't see any reason to think that demand is going to tail off in the second half of the year. I think demand will actually remain high. Now when you look at agency MBS relative to corporates, it's a pretty compelling backdrop. It just takes time to work through those. In addition, in the second quarter, the second quarter tends to be sort of the worst seasonal for mortgage activities, the highest mortgage activity quarter. The seasonal should improve later in the year.

Hopefully, those two negatives that I mentioned that you point out will ultimately quiet down. Once that happens, I think people will realize that the underlying fundamentals for mortgages are really attractive, and I think that will ultimately lead to tighter mortgage spreads. I'll pause there and let you ask a follow-up.

Great. No, thank you. I appreciate that. Just wanted to dig a little bit more into the stock issuance activity you covered in the prior- Yeah question.

In your words, you had a little bit of a lighter touch in the quarter. Was that based more on not seeing the right investment opportunities or not wanting to disrupt the stock? Just on that, does that change the strategy at all in capital raising over the intermediate term? I think this prior quarter had the least amount of issuance, versus- Yeah the last few years on any quarterly level, and the reaction was pretty good.

Just curious if that changes anything going forward.

Well, it wasn't a change in our behavior. We always look at those factors, and we always look at how our stock is trading. We want our ATM activity or our capital-raising activities to be complementary to what's happening with the stock. If we see a lot of reverse inquiry for our stock, if we see volumes trading really high, really strong, at the same time when mortgage investments are attractive, then that's sort of like the perfect environment to be able to issue without disrupting the way your stock is trading, be able to get capital, deploy it quickly at attractive levels. Those are the kind of things that we always look at and we will continue to look at. We just didn't feel like in the second quarter they kind of lined up as well as we wanted.

Great. Thanks there. Appreciate taking the question.

Sure. Okay. Thank you. The next question comes from Ameeta Lobo with UBS.

Please go ahead. Good morning.

Good morning, Ameeta. Thank you.

Thanks. Good morning. Just looking at TBA income came in better than expected. Can you speak to how that's changing the hurdle rate for owning specified pools in this rate environment?

Yeah. I talked about that last quarter, and it continues to be the case. TBA specialness has definitively improved this year relative to the last couple of years. The TBA specialness over the last couple of years at times has been a negative, and it's been more favorable to own pools on balance sheet than in TBA. We have continued to see specialness in particularly related to Ginnie pools, and I think that will continue, and that's a good opportunity for us in the TBA market. This last quarter, our overall dollar roll income was on a percentage basis, if you will, a little less than the previous quarter because of some long and short positions we had in the first quarter.

I do expect, generally speaking, going forward, I do expect TBA specialness to remain attractive relative to repo funding, perhaps more in line with, on average, more in line with the long-term averages of maybe 10 to 20 basis points of specialness generally for TBA. It's an opportunity for us going forward, for sure.

Okay, thank you. Just going back to the outlook for agency spreads. You talked about strong supply and demand driving- Yeah a lot of that outlook.

How much of that depends on GSE purchases? Could spreads tighten if GSE activity remains below market expectations?

Yeah, that's a really good question, that's important because if you look at what happened to mortgage spreads, obviously mortgage spreads did tighten in the second quarter. As I mentioned, in particular, the greatest tighten and the greatest outperformance, which I think made it a little more challenging of a quarter to evaluate mortgage performance. The higher coupons, I'll call it the 5% and 6% coupons, really performed really well if you look at them relative. The excess return on the Bloomberg index, it was somewhere close to 70 or 80 basis points. Whereas the lowest coupons, the 2% to 4% coupons, they only had 10 to 20 basis points of outperformance. Overall, that will continue to be the biggest driver. Tell me that question again because I just got a little distracted. Where were you going with that? With the- It's mostly to talk about GSE activity.

How much of Oh, yeah.

Sorry your outlook depend on them?

Thank you for that. What's important in the second quarter with the GSEs is the GSE purchases in the first two months of the quarter were only actually very slightly positive from what we know for the first two months. In the second quarter, mortgage spreads overall tightened, but the GSE purchase activity was actually relatively low. That's really important because I think that tells you that GSEs are responding to markets like we collectively, I think, would want them to, which is when markets get disrupted and spreads get wide, they step in and they buy at a more aggressive pace. When they don't, like in the second quarter, they actually take a much lighter touch to the market. Going forward, what we know, I believe the GSEs still have about $120 billion of purchase activity.

I think they have dry powder going forward, which as you point out, coupled with the underlying technicals, I think sets up a nice backdrop for mortgages.

Thank you for the answers, Peter.

Sure. Thank you. Thank you.

The next question comes from Jason Weaver with Jones Trading. Please go ahead. Hey, good morning.

Hey. Thanks for taking my question.

Sure. Hey, Peter. On the same point you just made on the prior question of Ameeta's, with what we've seen about the GSEs effectively using the purchase program to sort of cap spreads here, does that change you or maybe some of the other peers process in assessing what the appropriate amount of leverage is?

If there's limited risk downside of prices, can you effectively support a higher level for some short period of time?

Yeah, that's a great question, it's something we've talked about a lot. When you're thinking about leverage, what you're really the key driver of your leverage profile has to be your assessment of where mortgage spreads are and what the range of mortgage spreads are. We talk about that all the time. To the extent that there are forces in the market, whether it be government-related or GSE or actions from the Treasury that reduce spread volatility and limit the upside on spreads, all other things equal, that should bring more capital into the market and allow people to operate with greater leverage. Lower spread volatility, for whatever the reason, is a positive which would allow us and just generally the market to operate with greater leverage, all other things equal.

The challenge that we have, as you point out is, there are those forces in place that are reducing spread volatility. We do have to contend with the uncertainty of the macroeconomic environment, though, that it actually increases volatility, both interest rates and spreads. You're right, all other things equal, lower spread volatility would allow us to operate with greater leverage and would attract more private capital to the mortgage market.

All right. Thank you for that. On that same theme, actually on the regulatory front, any insight on SLR reform or the Basel endgame that unlocks more demand, or is that still farther over the horizon in your view?

No. From what we understand, on the SLR, I don't think there's any other changes than what have already been proposed. I think that issue sort of is closed. With respect to the Basel and the new capital regs that have come out for proposal, from what we're hearing, the final rule will likely look very much like the proposed rule, which is good for mortgages. As I mentioned this in last quarter, I think when you look at the new proposed rule, it is positive for mortgage credit. It should allow banks to hold more mortgage credit at a lower capital requirement, which will be positive. It could be in various forms. It could be in whole loan form. It could be in private label securities.

Either of those still are beneficial to the agency mortgage market because what it'll likely mean is that higher quality mortgage credit can now be held by banks in those two forms at a lower capital requirement than the previous capital rules. That is net positive for the mortgage market.

Got it. Thank you for that, congrats on the quarter.

Thank you. Thank you. The next question comes from Bose George with KBW.

Please go ahead. Hey, guys.

Good morning. Good morning, Bose.

Just one more on the GSEs.

Yeah The market expectation earlier was that they would hit those caps, I think, by year-end or just given the slower pace, what's your latest thought on when they get there?

I think, Bose, it's going to be driven by mortgage spreads and mortgage spread volatility. If we have a backup in mortgage spreads, if something happens in mortgage spreads, let's say they're at 150, and if they get to 160 or 170 basis points for the swap curve or the comparable spread versus the Treasuries, I think you'll see the GSE step in and buy them at a faster pace. If they don't, I think you'll see them maintaining their discipline and keeping their powder dry, which I think is just really positive for the market. I mean, it's exactly what the market would want out of that activity, and it ultimately is just good because it helps attract a more diversified bid to the mortgage market. Which from the administration's perspective is the end game.

You want their activity to be complementary, not squeezing out, and that's what it is. It's complementary. It's really helpful to mortgage affordability. Mortgage rates would be higher than they otherwise would be absent their behavior. It's really positive. I expect that to continue. They have the ability to now still have a lot of capacity. It's not clear that TBAs count toward their portfolio limits, so they may have even greater flexibility than the market maybe understands based on whether they hold mortgages in loan form or in TBA form. Those are all positives. Okay, great.

That's all for me. Thanks.

Sure. Thank you. The next question comes from Trevor Cranston with Citizens JMP.

Please go ahead. Hey, thanks.

Good morning. Good morning, Trevor.

Question on the hedge book, given the Yeah flattening of the yield curve and the prospects for potential Fed hikes later on this year.

It looks like the net duration exposure was pretty constant quarter-over-quarter, have you guys made any changes to kind of your exposure to curve steepening or flattening, or how are you approaching that given the prospects of potential Fed hikes? Thanks. We really haven't responded to this flattening.

The flattening was substantial, obviously, in the second quarter. Twos to tens flattened about 25 basis points or close to it. It was a really substantial move. As we have talked about in prior quarters, and it continues to be the case, we obviously hedge across the yield curve. We hedge with a mix of hedges, we don't have a lot of curve exposure. To the extent that we position our hedges sometimes more toward longer-dated hedges and less shorter-dated hedges in an environment where the yield curve will steepen. We do that with some intent to hedge our overall portfolio profile. We have not changed that sort of view.

The reason why we haven't changed it is even though the market is now pricing and tightening, from our perspective, we look at those and say, maybe the market has overpriced the current environment. I think it's going to be difficult for the Fed to raise interest rates, particularly in light of the fact that the Chairman has now announced these five task force. The work of those task force, as he said, largely won't be done until probably the end of the year. There's some really meaningful work that will be done related to how the Fed measures its performance relative to its inflation objectives. In addition, obviously the last inflation readings that we just got really give the Fed room, I believe, to certainly hold steady for some period of time.

I think that the Fed would want to see the work of that committee before it made any decisions on monetary policy. Our view is that once the war outlook stabilizes and inflation and energy prices stabilize, that the steepening or the flattening of the yield curve that occurred in the second quarter will likely not continue and likely revert to a more steeper yield curve.

Got it. Okay, that's helpful. Thank you. Thank you. The next question comes from Rick Shane with J.P.

Morgan. Please go ahead. Morning, Rick.

Yeah. Hi, this is Hong Zhang. Hi, this is Hong Zhang on for Rick. I guess with Yeah housing bill now passed and all the macro challenges that you cited, do you see an environment where housing demand could pick up by the end of the year?

If so, how do you think that could happen?

Oh. That's a hard question. From our perspective, it does not feel that way. When we look at sort of the economy and we look at where mortgage rates are at six and a half or six and a little higher than that. It does not feel like the second half of the year we'll see an uptick in demand. In fact, from a seasonal perspective, we would expect a sort of a downtick in demand through the remainder of the year. That would sort of be our core view right now.

Got it. Thank you. Sure.

Thank you. The next question comes from Harsh Hemnani with Green Street. Please go ahead. Thank you.

You mentioned the task forces that the Fed has now put in place. One of them is on the balance sheet makeup of the Fed. What changes, if any, are you expecting to see out of that task force in terms of the Fed's MBS holdings and Yeah how you would think that would impact the mortgage market?

Yeah. Thank you for that question, Harsh. That's related to the Fed's balance sheet. You're right, there is a task force on that. I think that's one of the two really interesting task forces. I think the one related to how they measure inflation and performance, that's obviously a really critical one to monetary policy. Then obviously from our perspective, the task force on the balance sheet. Just what I would say largely is that when you think about the balance sheet, the balance sheet peaked at $8.4 trillion, and today it's about a little under $6.4 trillion. The Fed now is growing their balance sheet again. What's important, and I think this is you can understand this from listening to Chairman Warsh, is there's two reasons why the Fed grows its balance sheet.

One is to respond to market instability, and they did that through all their QE. That's why they got to $8.4 trillion. Then once they reduced it down to about the current level, the purpose of the balance sheet shifted from monetary policy stimulation to reserve management. What they're using their balance sheet for now, and they're growing their balance sheet at $10 billion a month in treasury bills in order to maintain the right amount of reserves in the system. Bank reserves are at like $3 trillion, and they have now a $6.4 trillion balance sheet. What they're doing is they're making sure that there are, quote, "ample reserves in the system to allow for the funding markets to remain stable." When I saw funding markets, I'm talking the repo market for U.S. Treasuries and agency MBS. Make sure that that rate stays essentially within the Fed funds range.

They want that repo rate to be right in the middle of their Fed funds target. This last quarter, for example, for mortgages, it was a little elevated. For us, I think it was 3.74%. You would expect the repo rate to be somewhere right around 3.65%-3.68%. That's what the Fed wants. They're using their balance sheet to maintain that stability. In order for them to reduce their balance sheet going forward, and they have talked about this, the first thing they would have to do is they have to reduce the amount of bank reserves required in the system.

Like our previous question, they could change the bank requirements that would allow banks to hold less than $3 trillion of bank reserves, and that would allow them to reduce their balance sheet further. That would be important. The other thing that they could do, and this is really important from our perspective, is that rather than providing this excess liquidity to the market through their balance sheet like they are today, they could, in a sense, use their funding capabilities to provide liquidity in an alternative form. Like for example, rather than just buying mortgage securities and treasury securities and putting cash into the system, they could expand their repo facilities and allow greater access to those repo facilities, and the market could gain its funding from those facilities rather than the sort of the permanent injection of liquidity through their balance sheet.

They could do open market operations. They could do that. That would be really positive for the funding markets for U.S. Treasuries and agency MBS, and allow the Fed to have a lower balance. Those would be really important. The other last point would be that we'll be interested is what the Fed will decide about the long-term composition of their assets in their portfolio. Right now we know, and the market is pricing the expectation that the Fed will gradually allow their balances of mortgage-backed securities to decline organically, which is fine, and the market's priced that in, and that's not an issue for the market.

They could also conclude that it would be valuable to own some portion of mortgages in their portfolio sort of indefinitely because that would allow them to maintain the constant presence and keep all the sort of processes up and running, which they will need at some point, perhaps in the future because the Fed will continue to use its balance sheet for market stabilization if it needs it. It's always worth, I think, while having those processes up and functioning. Perhaps there's a scenario where they own mortgages, at least in some portion of their portfolio going forward.

I think the key is making sure that on the liquidity side, if they make changes to the liquidity market, that would allow them to have a lower balance sheet and not have any negative impact on the financial markets for the funding of both agency MBS and U.S. Treasuries. That would be a really great outcome.

Got it. That's really helpful. Thank you. Sure. Thank you very much.

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

Again, thank you everybody for participating on our second quarter earnings call. We're really happy with the quarter, and we look forward to speaking to you again at the end of the third quarter.

Thank you for joining the call.