Invesco Mortgage Capital Inc. Stock

Welcome to the Invesco Mortgage Capital Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. I would like to turn the call over to Greg Seals in Investor Relations. Mr. Seals, you may begin the call.

Thanks, operator, and to all of you joining us on Invesco Mortgage Capital's Second Quarter 2026 Earnings Call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today.

The press release and presentation are available on our website, invescomortgagecapital.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP.

Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings. Teleconference transcripts provided by third parties. The only authorized webcasts are located on our website.

Again, welcome, and thank you for joining us today. I'll now turn the call over to IVR's CEO, Kevin Collins, for his comments.

Good morning, and welcome to Invesco Mortgage Capital's Second Quarter Earnings Call. I'll provide a few comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail.

Also joining us on the call this morning for Q&A is our President, David Lyle; and our CFO, Mark Gregson. Before I speak to market developments and our performance for the quarter, I would like to emphasize that our management team remains focused on disciplined investment management, prudent risk taking and delivering attractive risk-adjusted returns for our shareholders.

We believe our platform is differentiated by a deep expertise in agency mortgage markets, strong risk management and access to extensive resources, market insights and the global perspectives of Invesco. These advantages, combined with the long-standing counterparty relationships that enhance our ability to source to finance and to hedge investments position us well to navigate challenging markets -- market environments and capitalize on attractive opportunities.

Importantly, our portfolio remains concentrated in Agency RMBS, along with the meaningful allocation to Agency CMBS. These sectors continue to offer compelling risk-adjusted value supported by attractive carry, strong liquidity and credit protection provided by agency guarantees.

Now turning to market developments. The second quarter was characterized by improving financial conditions despite some periodic balance of volatility driven by geopolitical developments in the Middle East and by shifting expectations for monetary policy. Resilient economic growth, strong labor markets and an elevated inflation contributed to the bear-flattening of the U.S. treasury yield curve as short-term interest rates rose more than the longer-dated yields amid growing expectations that the FOMC's next policy move would be a hike rather than a cut.

Although the second quarter was characterized by higher interest rates and more restrictive monetary policy expectations, it's important to note that interest rate volatility declined notably from March levels, while inflation expectations moderated despite ongoing uncertainty surrounding energy prices. The 2-year breakeven fell sharply to 2% at quarter end from 3.25% at the end of the first quarter, and these developments supported risk assets broadly and they contributed to higher coupon Agency RMBS outperformance relative to U.S. treasuries.

Our Agency RMBS and TBA investments performed well, driven by attractive carry and contracting risk premiums and our Agency CMBS contributed -- and our Agency CMBS continue to provide notable stability supported by attractive relative valuations and predictable cash flows. Against this backdrop, we generated an economic return of 3.8%, consisting of monthly dividends of $0.12 per share and a modest decline in book value per share of 0.6%.

Our estimated book value quarter-to-date is down roughly 2.5%, which that dollar accrued dividend given recent mortgage underperformance. So at quarter end, our economic debt-to-equity ratio remained unchanged and our $8.2 billion investment portfolio consisted of $6 billion of Agency RMBS, $1.2 billion of Agency TBA and $0.9 billion of Agency CMBS. We also maintained a sizable balance of unrestricted cash and unencumbered investments totaling $548.3 million.

Our earnings available for distribution declined from $0.55 in the first quarter to $0.50 in the second quarter. And as of quarter end, we hedged 97% of our borrowing costs with interest rate swaps and U.S. treasury futures. Regarding capital activities, we raised approximately $118 million during the quarter and more than $250 million year-to-date, enabling us to meaningfully expand our investment portfolio and capitalize on attractive opportunities across the agency mortgage market. We're encouraged by the growth of the company, which has enhanced our scale, it's improved operating efficiency and it's reduced expenses on a per share basis.

In addition, we believe our larger equity base and our increased market capitalization will improve the liquidity profile of our common stock, which should ultimately broaden our appeal to investors and support long-term shareholder value. As we continue to grow, we believe these benefits, combined with our disciplined investment approach, position us to generate attractive returns and create value for shareholders over time.

So entering the third quarter, we remain constructive yet measured in our outlook for Agency RMBS and Agency CMBS as attractive valuations and supportive market fundamentals are balanced against ongoing uncertainty surrounding monetary policy as well as inflation and geopolitical developments. Despite these uncertainties, we believe valuations for our target assets remain compelling as interest rate volatility and inflation expectations have moderated from their first quarter peaks. Supply and demand dynamics remain favorable as constrained net supply continues to be absorbed by broad-based investor demand.

Additionally, we believe the sustained deescalation of geopolitical tensions in the Middle East will likely benefit our target assets through reduced volatility, but also through improved risk sentiment. Agency CMBS is also well positioned, supported by its attractive risk-adjusted yields, its relatively low sensitivity to interest rate fluctuations and its diversification benefits. Taken together, these macroeconomic and market technical factors create a supportive backdrop for our investment strategy as we enter the second half of 2026.

Further, we believe our capital structure and our financing profile provide us with flexibility needed to pursue opportunities, while navigating continued uncertainty surrounding monetary policy, economic growth and geopolitical developments. Away from market developments and our outlook, we remain committed to providing our investors with monthly financial summaries and paying monthly dividends to enhance transparency and deliver more consistent cash flows to income-oriented investors and to strengthen investor engagement.

So to summarize, we believe our team, our capital structure, our investment portfolio are all well positioned for the future. So looking ahead, we're excited to leverage our core competencies in Agency MBS and to continue delivering attractive outcome for our investors.

So now I'll turn the call over to Brian to go through our portfolio and our performance for the quarter in greater detail.

Thanks, Kevin, and good morning to everyone listening to the call. I'll begin on Slide 5, which provides detail on interest rates over the past year. As Kevin noted in his opening remarks, the treasury yield curve bear flattened in the second quarter as expectations for near-term monetary policy shifted from easing to tightening.

Approximately 1/3 of the flattening occurred in the last 2 weeks of the quarter in response to new Federal Reserve Chairman, Kevin Warsh's first FOMC meeting as the ensuing statement and press conference were more hawkish than initially anticipated. The Chairman sought to cement a tough stance on inflation, emphasizing the price stability portion of the Fed's mandate over that of employment.

Financial markets responded accordingly, pricing in tighter near-term monetary policy and lower future inflation expectations as inflation breakevens declined quarter-over-quarter. Conversely, treasury yields ended the quarter near their highest levels since early 2025, resulting in 30-year mortgage rates near 6.5% at quarter end and further limiting housing activity as affordability remains challenged. Positively, interest rate volatility recovered from the sharp Iran conflict-driven increase in March, supporting agency mortgage valuations.

Lastly, funding markets remained stable throughout the quarter as lending capacity for our target assets remained ample and financing spreads over SOFR largely unchanged in the low teens. Slide 6 provides more detail on the Agency MBS markets over the past year, with the second quarter highlighted in gray.

Despite the bear flattening move in treasury yields, both Agency RMBS and CMBS spreads tightened over the quarter, consistent with the improved tone in financial conditions and risk sentiment. Although the entire 30-year coupon stack outperformed treasury hedges during the quarter, the outperformance was more pronounced in higher coupons, which were primarily supported by the decline in volatility and constructive supply and demand dynamics.

Net supply and Agency RMBS remained muted with year-to-date issuance of just $81 billion through June. On the demand front, investor interest remained broad-based with overseas investors, banks, money managers and mortgage REITs all increasing their allocations during the quarter. Demand from Fannie Mae and Freddie Mac continued to underwhelm initial expectations, however, as their combined retained portfolios were little changed during the second quarter.

The 2 entities still have over $100 billion of additional capacity under their portfolio caps, providing some comfort for investors with the expectation that the GSEs could provide support if valuations were to soften materially. The dollar roll market for higher coupon agency TBAs benefited from favorable technical conditions with implied financing rates for production coupons remaining below 1-month SOFR for much of the quarter, enhancing levered return potential.

These constructive supply and demand dynamics also supported the Agency CMBS sector, where issuance volumes moderated during the second quarter, while robust demand from banks, money managers and mortgage REITs contributed to modestly tighter spreads. Higher mortgage rates, however, weighed on specified pool payups and higher coupons as refinancing activity remains subdued and demand for prepayment protection softened accordingly.

Despite this near-term pressure, we continue to view prepayment protection obtained through carefully selected specified pools particularly in premium priced holdings as an attractive investment for mortgage investors and an effective tool for mitigating the convexity risk inherent in Agency Mortgage portfolios.

Slide 7 summarizes the changes in our portfolio over the course of the second quarter. Our portfolio increased 12.4% quarter-over-quarter as we invested proceeds from ATM issuance. Most of our net purchases occurred in specified pools focused across collateral stories in 30-year 4.5% through 6% coupons.

In our view, the decline in specified pool pay-ups during the second quarter created a compelling opportunity to add exposure at more attractive valuations as we continue to prioritize income protection in the portfolio, with nearly 85% of the portfolio allocated to securities with some form of prepayment protection via specified pools and Agency CMBS.

Levered gross returns on higher coupon specified pools hedged with swaps were in the mid- to high-teens with the current coupon spread to the 5- and 10-year SOFR blend ending the quarter at 143 basis points. Modest widening in July has improved those returns into the high teens as of today. Given the growth in specified pools within the portfolio, our allocation to Agency TBA and Agency CMBS declined modestly from 16.9% to 14.7% in Agency TBA and 11.9% to 11.1% in Agency CMBS.

Both remain core holdings in our portfolio despite the decline in allocations with Agency TBA continuing to provide attractive levered gross returns in the high teens as implied financing rates persist near or below 1-month repo rates and production coupons. Agency CMBS spreads tightened modestly during the quarter, largely performing in line with lower coupon Agency RMBS and continue to provide notable stability to the portfolio.

Despite limited new purchases, we continue to believe the Agency CMBS offers many benefits, mainly through its inherent prepayment protection and fixed maturities, which reduce our sensitivity to interest rate volatility. Levered gross returns are in the low double digits and remain consistent with lower coupon Agency RMBS, while financing capacity has been robust as we continue to fund our positions with multiple counterparties at attractive levels.

We will continue to monitor the sector for opportunities to increase our allocation to the extent the relative value between Agency CMBS and lower coupon Agency RMBS is attractive, recognizing the overall benefits as the sector diversifies risks associated with Agency RMBS.

Slide 8 details our funding book at quarter end. Repurchase agreements collateralized by our Agency RMBS and Agency CMBS investments increased from $5.3 billion to $6.2 billion as we funded most of our net purchases via repo, while the total notional of our hedges increased from $4.9 billion to $6 billion. Excluding the implied funding via our Agency TBA allocation, we kept our hedge ratio elevated at 97% given the increased uncertainty regarding the path of monetary policy.

In addition, we continue to maintain significant liquidity with approximately $550 million of cash and unencumbered investments at quarter end, equating to 55% of our total equity. Slide 9 provides detail on our hedge book at quarter end. The composition of our hedges remain weighted towards interest rate swaps with 79% of our hedges consisting of interest rate swaps on a notional basis and 65% on a dollar duration basis.

Swap spreads widened 2 to 4 basis points during the quarter, serving as a modest tailwind for our performance. We remain comfortable focusing the majority of our hedges and interest rate swaps as we believe swap spreads are historically tight and offer an attractive hedge profile relative to treasury futures.

Slide 10 is a new addition to the presentation and provides our model-based estimates of book value sensitivity to instantaneous shocks in interest rates and mortgage spreads. Looking first at the table at the top of the slide, we reduced our duration gap from approximately 1/2 year to 1/4 year, reflecting a more cautious stance on the direction of interest rates.

While this chart assumes a parallel shift in the yield curve, the more significant market development during the second quarter was a pronounced flattening of the yield curve with 2-year treasury rates rising nearly 40 basis points, while the 10-year rose 15 basis points, which was a headwind for our performance.

On the bottom table, the impact of changes in mortgage OAS is largely unchanged quarter-over-quarter as our portfolio leverage remains consistent. We continue to view current leverage at levels of 9x debt to common equity as appropriate in this environment of elevated uncertainty.

To conclude our prepared remarks, the management team remains committed to delivering exceptional investment performance for our shareholders. We are pleased with the performance of our Agency MBS portfolio through a challenging backdrop as the combination of higher coupon Agency RMBS and our Agency CMBS position has performed well.

We are also excited about the recent growth of the company, recognizing the significant benefits this growth has for our shareholders through the efficient deployment of proceeds into attractive investments, lower expenses per share and better liquidity for our stock.

Although elevated risks in the Middle East and the path of monetary policy may create near-term volatility in mortgage valuations, we continue to believe the medium- to long-term outlook for our target assets remains constructive, supported by favorable supply and demand dynamics.

Additionally, our liquidity position remains ample, providing substantial cushion to withstand additional market stress, while maintaining the flexibility to capitalize on opportunities in our target assets as the investment environment improves.

Thank you for your continued support for Invesco Mortgage Capital, and now we will open the line for Q&A.

Our first question comes from Marissa Lobo with UBS.

On the book value move in the second quarter, could you talk to us about the attribution of that decline? How much was spread moves on lower coupons versus hedge performance versus the ATM issuance?

Sure, Marissa. It's Brian. Yes, thanks for the question. Yes, as we mentioned, our higher coupon agency mortgages performed pretty well. Agency CMBS also modestly tightened on the quarter. I think our slight book value decline can be attributed to a couple of different factors.

We have a modestly positive duration gap, which served -- which as interest rate growth on the quarter was a little bit of slight detractor. And then also maybe the modest flattening of the yield curve also had a minor impact on portfolio. As far as ATM issuance, yes, I mean, we are issuing relatively close to par. So it's a modest impact to book value as well.

Got it. And just thinking about the pace of ATM issuance, what is the remaining capacity? And what should we look for in Q3 given your current portfolio growth targets and the spread environment?

Sure. Yes. Thanks for your question, Marissa. So yes, as you know, we raised roughly $118 million in Q2, all [indiscernible] at ATM at levels close to book value and that at a pretty steady run rate. We'll look to continue to do that to the extent that we can do so responsibly and where it makes sense.

Just given the low cost associated with our ATM, we think it's a clear benefit to our stockholders, continue focus around looking to reduce our fixed cost per share and improve liquidity in our stock to the extent that we can. So our plan is to look for windows of opportunity to do that in the weeks ahead and the quarters ahead.

Our next question comes from Trevor Cranston, Citizens JMP.

A follow-up question on the ATM. Can you give any update on capital that may have been raised in July so far? And if so, where you guys have been deploying that within the coupon stack?

Yes. We continue to look for opportunities to do that and deploy capital. It's been, as I said, prior levels close to book value where we've been able to do that and kind of held our portfolio composition steady to what we were doing in Q2.

Yes, Trevor, it's Brian. I would also just add, I mean, we do include share count in our monthly updates that will be forthcoming as well. And then also, as far as deployment of proceeds, it's been still kind of in that higher coupon range, 30-year 5 through, 6s primarily.

And again, as I mentioned in my opening remarks, I think specified pool valuations have become more attractive relative to TBA, just given the softness in pay-ups that we've seen into higher rates. And so I think moving forward, if this environment were to persist, then that would be where we would deploy most assets.

Got it. Okay. That's helpful. And then one question, looking at Slide 6 on dollar roll financing. There's been quite an improvement in financing on 6s in particular. Can you guys just talk about what you think has been driving that improvement, particularly on the 6 coupon dollar roll financing?

Yes, Trevor, that was -- as you can see a pretty significant squeeze on the coupon there at the end of the quarter. That did -- if we were to extend that chart another week or so, it kind of bounced back into a more reasonable range. So -- but there is -- like I said, there's pretty strong supply and demand technicals going on in that coupon. That coupon tends to be one that CMO desks participate in the most to create floaters and inverse IO and those kind of things.

So I think in particular, maybe there was a large money manager or something of that nature, putting a bit of a squeeze on that coupon, but it has bounced back to a more reasonable level. We still think it's like we said, dollar roll financing is still fairly attractive in those higher coupons. So we like the allocation that we have there. But yes, that's a bit of an unusual kind of thing that happened at the end of the quarter.

Our next question comes from Doug Harter with BTIG.

Hoping you could talk a little bit about your expectations for kind of the shape of the yield curve, direction of rates under Chair Warsh and kind of how you think you're positioned and kind of what you're watching for in case you might need to change any of that hedging strategy?

Doug, it's Brian. Yes, certainly, we've had 2 very different responses or reactions to the 2 Fed meetings under Chair Warsh. I mentioned what happened in June. But just a couple of days ago, we've had a pretty significant steepening move as the -- I guess, the press conference was certainly more dovish than expectations.

So I think for the most part, our house view is that the Fed will be on hold in monetary policy for the foreseeable future. But I think also the kind of the renewed geopolitical risks that we've seen over the last few weeks could or does make that outlook a bit more cloudy than it otherwise would have been.

So there's certainly a chance that there could be a hike in the latter half of 2026. But again, our house view is that they'll be keeping monetary policy on hold for the foreseeable future.

Great. And with less forward guidance from Warsh, kind of how does that impact kind of how you think about volatility, how you think about risk positioning? Is there anything that, that changes?

Sure. It does, yes. Our expectations are that volatility, particularly in the front end, will increase or it has increased. And that tends to be a bit of a headwind for agency mortgages. And I really think that's why you've seen some modest widening over the last month or 1.5 months in mortgages.

And so I think current coupon spread to the 5- and 10-year SOFR blend was 143 basis points at quarter end, and it's more like 150 basis points now. So we've seen, call it, 7 basis points of widening since quarter end. And I think that's largely a reflection of the potential increased volatility, both due to reduced forward guidance or the elimination of forward guidance and also the renewed kind of Middle East risks that we've seen. So as far as putting a spread range on that, I think we're towards the wider end.

In March of this year, we kind of hit the 160s area as the Middle East conflict really started to escalate. And so I think that's probably a pretty good estimate of where we could get at the widest moments here, if we were to kind of continue to see those risks escalate. But right now, we're at, call it, 150 basis points. And I think, again, there's more room for tightening, I think, just based on how much -- how supportive the supply and demand technicals are...

That's worth noting as well, Doug, that just given a more uncertain path of monetary policy, we have kept our hedge ratio at the high level at 97% at quarter end.

Our next question comes from Jason Weaver with JonesTrading.

Just one for me. It looks like net economic investment spread is vulnerable to additional swap roll-off ahead over the next several quarters. How do you see the EAB run rate evolving from there just on that factor? And also when the Board set dividend policy, approximately how far out are they looking?

Yes. So thanks for your question. Yes, certainly something that we're mindful of as we think about our hedge portfolio. I think the important point here is to really note that we're evaluating the dividend each quarter in context to the EAD because I assume that's where a lot of people's thinking goes, and we're evaluating that each quarter based on current earnings as well as expected earnings, our portfolio composition and market opportunities.

So just to get out in front of it, I do think at present, we believe our dividend is competitive. It's in line with long-term levered Agency MBS returns, which we talked about being important for us. It's also well covered at this point by the EAD. But I think as was noted as our hedge portfolio changes, that will be impacted. But I think the way we think about it overall, to summarize is that we believe that we have a dividend that's supported by the long-term earnings power of our portfolio, and that's how we think about it conceptually.

Our next question comes from Jason Stewart with Compass Point.

Following up on Doug's question about curve shape. And I guess if you're in a camp where the Fed is on hold, you can make the argument that you'll see a steeper curve and more upside potential in and mortgage rates. If we follow that logic, one, disagree if you do?

And two, how do you think about premium at risk or spec pools in that environment? Do they still offer compelling values? And I think you touched a little bit on convexity profile, but maybe dig a little bit more into which subsectors are a focal point, which ones you're avoiding, how are you thinking about overall premium at risk?

Yes. Jason, the first answer is, yes, we would agree that if the Fed is on hold, we would expect to see some steepening in the yield curve. So that's the first part. And I guess the second part is more about specified pools. Our weighted average payups at quarter end was about [ 28 ]-- so that equates to about $50 million of market value.

So that -- if they all went to 0, that's about the impact would be. But I think this kind of also goes into kind of what we've talked about in the past about the deliverability of generic collateral and the value of specified pools.

In the current environment, we would agree that specified pool payups could soften. But as we mentioned, we think that's a pretty compelling opportunity to add because we do think that going forward, the valuations of generic collateral will continue to deteriorate and for a number of reasons.

I think obviously, loan balance has continued to increase, which makes them more susceptible to refinance activity. And then also with the proliferation of more technology in the refinancing process. We think that, that makes specified pool selection significantly more important. And that's kind of what our bread and butter is. And so that's what we're going to stick to, particularly, as we said, as those payoffs kind of soften and provide attractive opportunities to add in the current environment, I think that will serve us well as we move forward.

I think we've seen it even over the last couple of years, just how much technology has improved the refinancing process and how much quicker the impact is felt. We saw it last fall and again in February of this year. And so I think to a certain extent, loan balance continues to be a significantly important aspect.

So choosing lower loan balances that are less impacted. We like the first-time homebuyer story as well. But I think away from loan balance, we like being relatively well diversified across the collateral stories. So whether that be geography or high LTV or low FICO and first-time homebuyer, those are all things that we're kind of looking at on a relative value basis.

Okay. I guess first-time homebuyer would be in this bucket, but are there any new -- without giving away sort of, I guess, your secret sauce on where you're focused on deploying capital. Are there any new spec pool stories that are being developed that are interesting?

Yes. I wouldn't -- as far as being added to the portfolio yet, no. But we're obviously certainly continuing to kind of look at things. So there's nothing that I would point to right off the bat, other than -- I mean, first-time homebuyer can be included in all of those buckets. It's typically in kind of a high LTV bucket. So that's something that we've been finding quite attractive here lately.

Our last question comes from Marissa Lobo with UBS.

I just had a quick follow-up on how you're thinking about using swaps versus treasuries for hedging in this rate environment?

Marissa, yes, so we're still very comfortable with most of our hedge book being in interest rate swaps. So again, that's kind of been in the 75% to 80% range on a notional basis.

And so yes, I think going forward, we see -- we saw a modest improvement in swap spreads during the second quarter. But year-to-date, they're still a little bit tighter. So we still feel like that, that's a pretty attractive entry point to use for our hedge book.

Thank you. At this time, I'll turn the call back over to the speakers.

Thanks to everyone that joined our call this morning. We appreciate your interest in Invesco Mortgage Capital and look forward to connecting in the quarters ahead.

Thank you. And that does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.

Welcome to the Invesco Mortgage Capital First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded.

Now I would like to turn the call over to Greg Seals in Investor Relations. Mr. Seals, you may begin the call.

Thanks, operator, and to all of you joining us on Invesco Mortgage Capital's First Quarter 2026 Earnings Call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website, invescomortgagecapital.com. This information can be found by going to the Investor Relations section of the website.

Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding these statements and measures, as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website.

Again, welcome. Thank you for joining us today. I'll now turn the call over to IVR's CEO, Kevin Collins, for his comments. Kevin?

Good morning, and welcome to Invesco Mortgage Capital's first quarter earnings call. I'll provide a few comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning for Q&A is our President, David Lyle; and our CFO, Mark Gregson.

Look, I'll begin by saying that I'm very excited to assume the role of Chief Executive Officer of Invesco Mortgage Capital. And I would like to thank and congratulate our retiring CEO, John Anzalone, for his 17-year tenure with the company. John began his service as our CIO at the time of our IPO back in 2009, and he spent the past 9 years as CEO, leading the company through a range of market environments and its transition more recently to an agency-focused strategy. So, John, please know our entire team is grateful for your leadership.

And I'd also like to thank -- I'd also like to congratulate Dave on his recent appointment to President. Dave, Brian and I have all worked very closely with John since IVR's inception, and we're really looking forward to building on our positive momentum alongside Mark, our CFO.

Importantly, we all have a shared commitment to disciplined investment management, to consistent performance, strong governance and expanded investor engagement. And we believe our current team, our capital structure and our investment portfolio are incredibly well positioned for the future. And looking ahead, we're excited to leverage our core competencies in Agency RMBS, but also Agency CMBS to continue delivering attractive outcomes for our investors.

In addition to our team's long track record and experience managing residential and commercial agency mortgages, we benefit from the insights of a global investment manager which inform our views on macroeconomic conditions, interest rate dynamics, policy developments and broader market risks. Additionally, our deep counterparty relationships enhance our ability to source, to finance and to hedge attractive investment opportunities. And we believe these advantages really differentiate us from our peers, and our entire management team remains committed to fully leveraging the resources and capabilities of Invesco.

Now turning to market developments. So, look, during the first quarter, we operated in a more challenging market environment following the strong recovery in Agency MBS valuations experienced in the second half of 2025. Financial conditions tightened as you had rising geopolitical tensions, you had higher energy prices, and renewed inflation concerns drove increased interest rate volatility and pushed U.S. Treasury yields higher across the curve. Short-term yields rose more sharply than longer-dated yields, largely reflecting a pullback in expectations for near-term monetary policy easing. And at the same time, inflation expectations moved higher, with 2-year TIPS breakevens rising to approximately 3.25% by quarter end, up from about 2.3% at the beginning of the year.

So all these dynamics weighed on risk assets broadly and resulted in higher coupon Agency RMBS underperformance relative to treasuries. Although our Agency CMBS investments performed, I would say, quite well during the quarter, the benefit was outweighed by a couple of things, increased Agency RMBS risk premiums, but also notable swap spread tightening. So against this backdrop, book value declined by 7.9% to $8.08 at quarter end, and when combined with our dividend of $0.12 per month, resulted in an economic return of negative 3.2% for the quarter.

In the context of evolving market conditions, our economic debt-to-equity ratio increased to 7.5 turns as of quarter end from 7 turns at the beginning of the year. And that largely reflects the decline in book value per share, but it also reflects our more constructive outlook on Agency RMBS as we enter the second quarter. At quarter end, our $7.3 billion investment portfolio consisted of $5.2 billion Agency RMBS, $1.2 billion Agency TBA and $0.9 billion Agency CMBS, and we maintained a sizable balance of unrestricted cash and unencumbered investments totaling $493.1 million.

Our earnings available for distribution declined modestly from $0.56 in the fourth quarter of last year to $0.55 in the first quarter. And as of quarter end, we hedged 96% of our borrowing costs with interest rate swaps and U.S. Treasury futures. Entering the second quarter, agency mortgages have performed well as the risk sentiment has improved and interest rate volatility has moderated. While near-term inflation concerns remain elevated, they've eased somewhat with 2-year TIPS breakevens now below 3%, suggesting a modest stabilization in inflation expectations. And as a result, positively, our book value has improved by approximately 2% since the end of the first quarter.

So looking ahead, I'll note that we believe a further reduction in geopolitical tensions would likely provide additional support for risk assets. And from a supply and demand perspective, Agency RMBS net issuance should remain manageable, the GSEs continue to provide steady demand, and bank participation is likely to increase, supported by recent Basel capital framework proposals that improve capital efficiency of high-quality mortgage assets.

So together, these macro and market technical factors create a more constructive backdrop for Agency RMBS holdings, particularly as wider spread levels relative to the prior quarter offer more attractive entry points. In addition, despite elevated supply, Agency CMBS continues to offer attractive risk-adjusted yields and diversification benefits, just given its stable cash flow profile and its lower sensitivity to interest rate fluctuations.

And so away from market developments and away from our outlook, it's, I think, also worth highlighting that we successfully reduced preferred equity to less than 20% of our total equity. So that's reduced costs, but it's also benefited returns for common stockholders. We've also taken steps to deepen alignment with investors, including transitioning this year from quarterly to monthly dividend distributions. And so on that note, I want to highlight that we have received positive feedback that our capital structure positions us competitively within the sector and that our monthly dividend approach better aligns the cash flow needs of income investors, but it also provides important monthly touch points regarding our key financial metrics.

So with that, I'll now turn the call over to Brian to go through more details regarding the portfolio.

Thanks, Kevin, and good morning to everyone listening to the call. I'd like to begin by also congratulating John on his well-deserved retirement and Kevin and Dave on their newly appointed roles. As Kevin noted, the four of us have worked closely together for nearly 20 years, including the almost 17 years since IVR's IPO in June 2009. I and the rest of the team are very excited for him as he enters the next phase of his life, and I'd like to express my sincere gratitude for his immeasurable contributions to IVR over the past 17 years.

These transitions clearly illustrate the advantages of the relationship with Invesco, our external manager, given the vast resources and deep bench from which our team benefits. Kevin and Dave bring a wealth of experience, consistency and familiarity to their new roles, and I have no doubt that they, along with Mark and I, have all the resources necessary to continue the strong momentum that IVR has enjoyed in recent years. I'm extremely excited for the future of IVR as we embark on the next chapter in our company's leadership.

So switching gears to financial markets on Slide 4. Interest rate volatility moved notably higher during the first quarter as expectations for near-term monetary policy shifted amid concerns regarding AI's impact on employment in February, to the inflationary impact of the conflict in the Middle East in March. The 10-year treasury yield traded in a 50 basis point range, closing at a low of 3.94% on February 27 before closing sharply higher at 4.43% on March 27 and finishing the quarter at 4.32%.

As depicted in the chart on the lower left, 2 cuts to Fed funds were anticipated for 2026 at the beginning of the year. Those expectations were largely priced out in March amid escalating oil prices and a robust economy that shows little sign of impact from the conflict. This led to a flattening of the yield curve as 2-year yields ended the quarter 32 basis points higher, while 30-year yields increased just 7 basis points. Positively, as shown in the upper right chart, repo markets for our assets have been remarkably stable despite broader market volatility, with financing readily available and spreads over 1-month SOFR remaining within a tight range.

Slide 5 provides more detail on the agency mortgage market. The sector enjoyed a strong start to the quarter as the positive momentum from the second half of 2025 carried over into the new year, aided by low interest rate volatility, a steeper yield curve and supportive supply and demand technicals. Although the GSEs have been adding to their retained portfolios throughout the second half of 2025, the announcement of a $200 billion mortgage purchase program on January 8 ignited a sharp response as investors rushed to get ahead of the program, leading to significantly higher valuations and lower mortgage rates in a matter of days. However, the new tighter spreads faded the rest of January and into February as further details on the program were scarce, yet the prescribed presence of the GSEs as a buyer in the market was a clear indication that the supportive supply and demand technicals are on even stronger footing in the coming months and quarters.

As interest rate volatility increased in February and March, agency mortgage performance continued to wane, but the resulting underperformance was much more orderly than in previous episodes of market stress in recent years. Lower coupons fared best in this environment, outperforming treasury hedges for the quarter despite the volatility. Meanwhile, higher coupons lagged throughout the period, initially due to investor concerns on prepayment risk given the administration's focus on mortgage rates and subsequently because of their elevated sensitivity to interest rate volatility as compared to lower coupons.

Positively, pay-ups improved during the quarter, offsetting some of the underperformance of higher coupons relative to lower coupons given increased investor demand for additional prepayment protection in premium dollar priced bonds. We continue to believe that owning prepayment protection via carefully selected specified pools, particularly in premium priced holdings, remains an attractive opportunity for mortgage investors and helps mitigate convexity risk inherent in agency mortgage portfolios.

In addition to the GSEs, bank and overseas demand also improved in the quarter, providing additional support for the sector, while money managers and mortgage REITs were also steady contributors. The supply and demand technicals improved the economics for the dollar roll market, with most coupons enjoying attractive implied financing rates. Although this dynamic faded for conventional coupons in the latter half of the quarter, dollar rolls on production coupon Ginnie Mae TBA remain quite attractive, with implied financing rates well below 1-month SOFR.

Slide 6 details our Agency RMBS investments as of March 31. Our portfolio increased 19% quarter-over-quarter as we invested proceeds from common stock ATM issuances. We sold our modest allocation to 6.5% coupons early in the quarter as efforts to reduce mortgage rates increased prepayment risk in our holdings, while purchases were primarily focused in 4.5% through 5.5% coupons. The decline in our 6% allocation is a result of paydowns and the overall growth in the portfolio, as we had limited trading activity in the coupon during the quarter.

Agency TBA securities represented the majority of our purchases on the quarter as we sought to benefit from the attractive environment in the dollar roll market, ultimately increasing our allocation to approximately 17% of the total portfolio. Despite the increase in our TBA allocation, our total portfolio continues to benefit from significant prepayment protection, with over 80% of the portfolio allocated to securities with some form of prepayment protection via over $5 billion of specified pool Agency RMBS and nearly $900 million of Agency CMBS. We continue to favor specified pools with lower loan balances given their superior predictability of future cash flows, while we remain well diversified across collateral [ rates ] with limited changes during the quarter.

Levered returns on Agency RMBS hedged with swaps remain attractive, with the current coupon spreads to the 5- and 10-year SOFR blend ending the quarter near 165 basis points, 25 basis points wider than year-end and equating to levered gross returns in the high teens. April's outperformance has since narrowed the spread by 10 basis points, with levered returns remaining attractive in the mid- to upper teens.

Slide 7 provides detail on our Agency CMBS portfolio. Risk premiums tightened meaningfully in January, consistent with Agency RMBS spreads, but also proved resilient amid the sharp increase in interest rate volatility in the latter half of the quarter, only modestly widening in February and March. Our Agency CMBS position performed in line with expectations, providing stability in times of stress and outperforming Agency RMBS across the coupon stack for the quarter. Despite the lack of new purchases, we continue to believe Agency CMBS offers many benefits, mainly through its inherent prepayment protection and fixed maturities, which reduce our sensitivity to interest rate volatility.

Levered gross returns are in the low double digits and remain consistent with lower coupon Agency RMBS, while financing capacity has been robust as we continue to fund our positions with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation to the extent the relative value between Agency CMBS and Agency RMBS is attractive in order to provide additional stability to the portfolio, recognizing the overall benefits as the sector diversifies risks associated with Agency RMBS.

Slide 8 details our funding and hedge book at quarter end. Repurchase agreements collateralized by our Agency RMBS and Agency CMBS investments decreased from $5.6 billion to $5.3 billion as most of our purchases during the quarter were in Agency TBA, while the total notional of our hedges increased from $4.9 billion to $5.1 billion. Our hedge ratio increased from 87% to 96%, primarily due to the increased allocation to Agency TBA.

The composition of our hedges remained weighted towards interest rate swaps, with 81% of our hedges consisting of interest rate swaps on a notional basis and 65% on a dollar duration basis. Swap spreads tightened during the quarter, creating a modest headwind to performance. Despite the recent tightening, we remain comfortable maintaining the majority of our hedges and interest rate swaps as we believe swap spreads are relatively tight and offer an attractive hedge profile relative to treasury futures.

To conclude our prepared remarks, the sector experienced a more challenging environment in the first quarter as the supportive trend of moderating financial market volatility reversed amid escalating geopolitical tensions. While higher coupon agency mortgage valuations recovered a portion of their first quarter underperformance in April, developments in the Middle East conflict will continue to drive interest rate markets in the near term, leaving the sector somewhat vulnerable to headlines and further bouts of increased volatility.

Positively, the supply and demand environment for the sector is at its most supportive in a number of years, with money managers, mortgage REITs, banks, overseas investors and the GSEs providing more than enough demand to absorb net supply, both organic and runoff, from the Fed's balance sheet. This supportive environment has resulted in, and should continue to result in, reduced spread volatility from the levels experienced in recent years, producing opportunities to benefit from episodes of cheaper valuations with reduced risk of a more significant or a more protracted dislocation.

Lastly, our liquidity position remains ample, providing substantial cushion to withstand additional market stress while also allowing sufficient capital to deploy into our target assets as the investment environment improves. While we view near-term risks as balanced, we believe that agency mortgages are poised to perform well as geopolitical tensions moderate and their impact on the U.S. economy becomes more clear.

Thank you for your continued support of Invesco Mortgage Capital, and now we will open the line for Q&A.

[Operator Instructions] Our first question comes from Marissa Lobo with UBS.

On the equity issuance this quarter, can you speak a little to the timing of those raises and how you're thinking about future ATM activity?

Yes, sure. So I guess I'll start by saying that we raised nearly $134 million net of issuance costs in Q1 through our ATM. I would say that those were timed pretty steadily throughout the quarter. And I would say that one of the things as we're thinking about future issuance is that our capital structure is now well positioned to support IVR's long-term success.

But we do plan to selectively access the ATM to raise common stock when it provides a clear benefit to our shareholders. We do continue to think that the ATM is the most efficient mechanism for raising capital. And I guess lastly, I would emphasize that responsible growth really reduces our fixed cost per share and it improves liquidity in our stock. So it's all things that we think are beneficial for the company.

Got it. And just on risk management, can you speak to some of the decisions that were made for the portfolio during the volatile period in March? And would you describe upcoming periods of volatility as a trading opportunity or a constraint on your risk taking?

Marissa, this is Brian. Yes, I think the improved environment for agency mortgages that we've seen really over the past, call it, 10 to 11 months gave us more comfort that the volatility that we saw in March would pass and that mortgage valuations or spreads would be much less volatile than, for example, what we saw last April and in previous episodes.

And so we've decided -- we were able to raise ATM throughout the first quarter, which allowed us to absorb some of that volatility as well. And we did not sell assets as a result of any increased volatility, and we're able to kind of invest along with -- and put money to work at wider levels as that volatility occurred.

Our next question comes from Jason Weaver with JonesTrading.

First of all, congrats on Kevin and David on the elevation. And well, thanks to John on his transition after a long tenure there. First of all, I was curious about the plan for the TBA position. Is this a structural hold part of the portfolio or planned more or less as a placeholder for rolling into specified cash pools over time?

Jason, it's Brian. Yes, I think TBAs certainly have a place in the portfolio structurally. I think probably right now, because they're so attractive, that our allocation is a little bit heavier or at the higher end of what you'd be comfortable with. Naturally, I think our inclination is to own more specified pools as it's a bit more durable of a profile -- return profile. But right now, I think we're very comfortable with where TBA dollar roll markets are, and we think it's quite attractive. And so I think, at least in the near term, our plan is to keep that allocation where it is.

Got it. Thanks for that.

Sorry, I would just also add, I mean, agency TBAs do offer increased liquidity for the portfolio that allow us to shift leverage as we see fit in a very efficient manner. So like I said, I think structurally, they do have a place in the portfolio as long as they're not too punitive from a return perspective.

That's helpful color. And then I see the swap book maturity termed out a bit, particularly in the 5-year bucket. Was that largely a function of rolling down from those shorter duration 6.5s into the 5 and 5.5?

Yes. Well, I think the swap maturities were kind of rolling down the curve themselves. I think moving from 6.5s into lower coupons would actually require us to extend hedges. And that was largely done, well, really through a mixture of both treasury futures and swaps. So we tend to own a bit more longer duration treasury hedges than we do in swaps. A lot of our swaps are kind of at the front end of the curve.

Got it. And one more, if I may. Do you have an updated book value, quarter-to-date?

Yes. We're up about 2% since the end of the quarter.

[Operator Instructions] Our next question comes from Doug Harter with BTIG.

Just following up on the risk/reward. How are you thinking about what is the range that we're likely to be in for spreads and how to think about the risks that we either break out on either side of -- on the high end or the low end of that range?

Hey, Doug, and welcome back. Yes. I think mortgage spreads, particularly relative to swaps, again, are quite attractive. They're maybe not quite as attractive as they were in previous years when volatility was much higher. But in the current environment, they're attractive, and we could see a little bit of further spread tightening.

I think that could come from actually wider swap spreads, as opposed to necessarily tighter mortgage spreads versus treasuries. Because I think from a mortgage to treasury basis, valuations are, call it, fair to slightly tight. So there's not a lot of spread compression in that basis. But in the mortgage to swap basis, I think that there is some room for compression there.

[Operator Instructions] Our next question comes from Trevor Cranston.

Can you just talk about how the GSEs are performing as a backstop buyer of MBS impacts your thinking on leverage and having sort of a lower level of downside risk necessarily equates to being willing to run at a higher leverage level going forward?

Yes. Sure, Trevor. It's Brian. The GSEs, I think, particularly in March, we did see Fannie Mae kind of come in and act as that backstop. They added, I believe, $18 billion in March alone. The GSEs did add about $35 billion to their retained portfolios in the first quarter. So they still have about $117 billion left under their current [ cap ].

And so we do think that while they are much more opportunistic than, say, the Fed during times of quantitative easing and they are being a bit more selective on coupons and actual specified pool story, they're certainly -- at least in March, they did help absorb a lot of that volatility.

And you're right, that does -- that reduces spread volatility, that does give us more comfort. Like I said, we did let leverage drift higher in March without selling assets because we did feel more comfortable in this environment, and we will continue to be that way. But again, I think the outperformance in April has brought leverage back down to closer to where we were at the beginning of the year. And I think that's probably a more normal long-term run rate for us as we feel very comfortable from a liquidity and risk perspective there.

Got it. Okay. Then on the hedge portfolio, you just mentioned that a lot of the sort of longer tenor hedges are in the treasury bucket currently. Can you talk about how you think about the balance between swap spreads being more negative the further up the curve you go and potentially using longer-dated swaps to capture some of the negative swap spreads versus the liquidity and using treasury hedges on that side of the curve?

Yes. Sure, Trevor. Yes, definitely, swap spreads, particularly in the 30-year portion of the curve are quite negative here, negative 80, whereas in the front end, like 5s and 10s are more like 30 to 45 on the negative side. So you're right, certainly more attractive from a negative spread perspective. But you also get a lot of spread duration out there. And so modest changes will add a lot more volatility to the portfolio in that regard.

So I think we're much more comfortable, just given that spread versus swaps across the curve are still very attractive. We're much more comfortable kind of reducing that swap spread volatility by hedging with swaps at the front end of the curve, call it, between 0 and 10 years as opposed to going out as far as 30 years. We do own some 30-year swaps. But to the extent that we hedge out there, it's mostly in treasury futures.

Thank you. And at this time, I'll turn the call back over to the speakers.

With no other questions, I just want to note that we appreciate everyone on the call's interest in Invesco Mortgage Capital, and we look forward to future engagement.

Thank you. And that does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.

Welcome to the Invesco Mortgage Capital Fourth Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded.

Now I'll turn the call over to Greg Seals in Investor Relations. Mr. Seals, you may begin the call.

Thanks, operator, and to all of you joining us on Invesco Mortgage Capital's quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website at invescomortgagecapital.com. This information can be found by going to the Investor Relations section of the website.

Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding these statements and measures as well as the appendix for appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcast are located on our website. Again, welcome and thank you for joining us today.

I'll now turn the call over to Invesco Mortgage Capital's CEO, John Anzalone. John?

Good morning, and welcome to Invesco Mortgage Capital's fourth quarter earnings call. I will offer brief remarks before turning the call over to our Chief Investment Officer, Brian Norris. Joining us for Q&A are President, Kevin Collins; COO, Dave Lyle; and CFO, Mark Gregson.

Financial conditions improved during the quarter, supported by 2 Federal Reserve rate cuts, solid corporate earnings improved financial conditions and strong economic growth. Equity markets extended their gains credit spreads remain tight and agency mortgages outperformed treasuries aided by lower rate volatility and a supportive supply and demand environment. Inflation ratings trended modestly lower during the quarter with headline CPI at 2.7% and core CPI at 2.6%. Investors responded by reducing inflation expectations reflected in the lower breakeven rates on inflation-protected treasury bonds.

Even with continued economic growth, U.S. labor market continued to exhibit weakness as the economy lost 67,000 jobs during the quarter. Despite inflation running above target, the FOMC cut the federal funds target rate by 25 basis points at each of its last 3 meetings in 2025, citing labor market weakness. The Fed Reserve also ended its quantitative tightening program after reducing its treasury and agency mortgage holdings by more than $2.2 trillion since mid-2022, specifying that mortgage paydowns will be reinvested into treasury bills going forward.

Markets are pricing at an additional 50 basis points of cuts through 2026. Interest rates were generally stable during the quarter and the decline in interest rate volatility that began after the sharp increase in April continued into year-end. With market expectations shifting towards a more accommodative monetary policy stance. Agency mortgages delivered its strongest calendar year performance relative to U.S. treasury since 2010. Key drivers included a decline in interest rate volatility, broad inflows into fixed income and increased demand from [ Fannie Mae and Freddie Mac ] investment portfolios.

Agency CMBS spreads finished the year slightly tighter as markets gained confidence in the path towards monetary policy easing and improved clarity in U.S. trade policy. Higher issuance levels are readily absorbed given money manager inflows and continued bank demand for assets with stable cash flows. These factors led to a 3.7% increase in our book value per common share to $8.72 and combined with our recently increased dividend of $0.36, resulted in an 8% economic return for the quarter. We modestly increased leverage to 7x, consistent with the constructive investment environment.

At year-end, our $6.3 billion portfolio included $5.4 billion in Agency mortgages, $900 million in Agency CMBS and our liquidity position remained robust with $453 million in unrestricted cash and unencumbered assets. We remain positive on Agency mortgages following the sharp decline in volatility though we view near-term risks as balanced given the recent strong performance and the announcement of [ $200 million ] in Agency mortgage purchases by [ Fannie Mae and Freddie Mac ]. Agency CMBS continues to provide attractive risk-adjusted yields and diversification benefits. Longer term, we believe conditions for agency mortgages will remain favorable given lower interest rate volatility and expectations for broadening demand at a steeper yield further.

I'll now turn the call over to Brian for additional detail.

Thanks, John, and good morning to everyone listening to the call. I'll begin on Slide 4, which provides an overview of the interest rate markets over the past year. As depicted in the chart on the upper left, despite 2 25 basis point cuts to the Fed funds rate during the fourth quarter, the 10-year treasury yield was largely unchanged, increasing less than 2 basis points to end the year at [ $4.17 ], 40 basis points lower than where it started the year. Although 10-year yields were relatively stable over the quarter, the yield curve continue to steepen meaningfully with 2-year treasury yields falling 14 basis points while 30-year yields increased 11 basis points. The difference between 2-year and 30-year treasury yields ended the quarter at 137 basis points, 83 basis points steeper than a year ago.

The steeper yield curve benefits longer-term investments such as Agency RMBS and Agency CMBS and is supportive of our strategy. The chart on the upper right reflects changes in short-term funding rates over the past year with the fourth quarter highlighted in gray. While financing capacity for our assets remain ample and haircuts unchanged, 1-month repo spreads began to indicate broad-based funding pressures in late September and continued into October widening approximately 5 basis points.

Positively, the Fed's decision to end quantitative tightening in December alleviated the pressure and its announcement at the December meeting to initiate purchases of shorter-term treasury securities as needed to maintain an ample supply of reserves led to notable improvement in repo spreads as we head into 2026.

Lastly, the bottom right chart on Slide 4 highlights the significant decline in interest rate volatility since April, which provided a tailwind for risk assets, including Agency CMBS in the second half of the year. Although we do not anticipate further declines in 2026, the current level of volatility is in line with longer-term averages and remain supportive of the Agency RMBS sector.

Slide 5 provides more detail on the Agency mortgage market. In the upper left chart, we show 30-year current coupon performance versus U.S. treasuries over the past year, highlighting the fourth quarter in gray. Agency mortgages delivered strong performance, both for the quarter and the full year driven by reduced interest rate volatility that kept money manager and mortgage REIT demand robust, while net supply remains below expectations. Two additional cuts to the Fed funds rate the end of quantitative tightening and the beginning of monthly [ T-bill ] purchases by the Federal Reserve, all announced during the fourth quarter, provided significant support for risk assets in general and Agency mortgages in particular as funding markets improved notably.

Although bank and overseas purchases remain subdued, increased demand from the GSEs provide additional support, resulting in strong returns for the sector. Net [ GSE ] purchases began to increase late in the second quarter and accelerated in the second half of the year, providing notable support for agency mortgage valuations. Not only did the unexpected demand provided an immediate lift valuations but it also strengthened expectations that the GSE's retained portfolios could serve as a stabilizing backstop for the sector, helping to reduce spread volatility going forward and providing support to the Agency mortgage market has [ elected ] since Federal Reserve and bank participation lane in 2022.

This supply and demand environment also helps support the TBA dollar roll market, as you can see in the lower right chart. Implied financing improved notably during the quarter, whereas for most of 2025, financing via the dollar roll market was relatively unattractive compared to funding via short-term repo markets. As illustrated, that advantage in [ aerial late ] in the quarter and the shift is indicative of strong demand for Agency mortgage collateral amidst limited net supply. As this environment persists, the sector becomes more attractive, allowing investors to fund purchases at implied levels significantly below short-term funding rates.

Lastly, 30-year mortgage rates declined modestly to end the quarter near 6.25%. As tighter mortgage spreads offset slight increases in the 10-year treasury yield and primary secondary spread. This decline in mortgage rates continued to weigh on the performance of higher coupons relative to those lower in the coupon stack with discount coupons modestly outperforming premiums as investors were reluctant to increase prepayment risk in their portfolios.

In the upper right-hand chart, we show higher coupon specified pool pay-ups which are the premium investors pay for specified pools over generic collateral and are representative of the bonds that IVR owns. Positively, pays-ups improved during the quarter, offsetting some of the underperformance of higher coupons relative to lower coupons. Given increased investor demand for additional prepayment protection and premium dollar priced bonds. We continue to believe that owning prepayment protection via carefully selected specified pools, particularly in premium priced holdings remains an attractive investment for mortgage investors and helps mitigate convexity risk inherent in Agency mortgage portfolios.

Slide 6 details our Agency RMBS investments as of year-end. Our Agency RMBS portfolio increased 11% quarter-over-quarter as we invested proceeds from ATM issuance and paydowns and modestly increased leverage as the investment environment for Agency mortgages improved. Purchases were primarily focused in the 5% and 5.5% coupons with a decline in our 6% and 6.5% allocation of a result of paydowns and the overall growth in the portfolio. Although we continue to focus on our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environments. Price appreciation in our holdings has resulted in a higher percentage of our pools valued at premium dollar prices. Therefore, we continue to favor specified pools with lower loan balances, particularly in our higher coupon exposures given their superior predictability of future cash flows while we remain well diversified across collateral stories with limited changes during the quarter.

Overall, we remain constructive on Agency RMBS as supply and demand technicals are favorable and lower levels of interest rate volatility should continue to encourage demand for the sector. We believe near-term risks are balanced following recent outperformance with nominal spreads tightening approximately 15 basis points during the fourth quarter and another 10 basis points year-to-date. Despite the decline in risk premiums, levered returns on Agency RMBS hedged with swaps remain attractive. With the current coupon spreads of 5- and 10-year silver blend ending the year near 140 basis points, equating to levered gross returns in the mid- to upper teens.

Slide 7 details our Agency CMBS portfolio. Risk premiums were largely unchanged during the quarter as higher issuance levels were well [ story ] of money major inflows and continued bank demand for stable cash flow profiles. Given more attractive relative value in Agency RMBS, we did not add to our agency CMBS position during the quarter, and our allocation declined modestly due to the growth in the overall portfolio. Despite the lack of new purchases, we continue to believe Agency CMBS offers many benefits mainly through its inherent prepayment production and fixed maturities, which reduced our sensitivity to interest rate volatility.

Levered gross ROEs are in the low double digits and consistent with ROEs and lower coupon Agency RMBS. We have been disciplined in adding exposure only when the relative value between Agency CMBS and Agency RMBS accurately reflects their unique risk profiles. Financing capacity has been robust as we continue to fund our positions of multiple counterparties at attractive levels. We will continue to monitor this sector for opportunities to increase our allocation to the extent relative value becomes attractive, recognizing the overall benefits to the portfolio as the sector diversifies risks associated with Agency RMBS.

Slide 8 details our funding and hedge book at quarter end, Repurchase agreements collateralized by our Agency RMBS and Agency CMBS investments increased from $5.2 billion to $5.6 billion, consistent with the increase in our total assets. While the total notional of our hedges increased from $4.4 billion to $4.9 billion. Our hedge ratio was relatively stable during the quarter, increasing slightly from 85% to 87% as market expectations for monetary policy in 2026 were largely unchanged during the quarter. The table on the right provides further detail on our hedges at year-end. The composition of our hedges remained weighted towards interest rate swaps, with 78% of our hedges consisting of interest rate swaps on a notional basis and 57% on a dollar duration basis.

Swap spreads widened during the quarter, serving as a tailwind for our performance. Despite the recent widening, we remain comfortable focusing the majority of our hedges and interest rate swaps as we continue to believe swap [ rents ] are historically tight and offer an attractive hedge profile relative to treasury futures.

To conclude our prepared remarks, financial market volatility declined notably in the second half of 2025, resulting in strong performance for Agency mortgages. IVR's economic return of 8% during the fourth quarter as a result of that positive momentum, which has continued into 2026 with book value up approximately 4.5% since year-end through Wednesday of this week. While Agency mortgage valuations have improved significantly over the past year, we believe the current environment is reflective of a more normalized investment landscape that continues to provide investors with attractive levered returns. The January announcement of the [ MBS ] purchase program by the [ TSEs ] was well received by the market and the reduction in interest rate and spread volatility has broadened the investor base and enabled modestly higher leverage.

The conclusion of quantitative tightening in the fourth quarter, along with the announced [ T-bill ] purchases by the Fed helped solidify funding markets and tightened reco spreads, serving as another tailwind for our strategy. Lastly, we believe our liquidity position provides substantial cushion for any potential market stress while also allowing sufficient capital to deploy in our target assets as the investment environment evolves. While we view near-term risks as somewhat balanced, we believe the current environment of low volatility in interest rates and spreads, along with further steepening of the yield curve and support of supply and demand technicals will provide a positive backdrop for Agency mortgages over the long term.

Thank you for your continued support of Invesco Mortgage Capital, and now we will open the line for Q&A.

[Operator Instructions] Our first question comes from Trevor Cranston with Citizens JMP.

I think in the prepared comments, I heard you characterize your view on [ MBS ] posted [ GSE ] buying announcements as a little more balanced. Can you talk about how you're approaching the leverage level post the tightening that's occurred and kind of where you guys are finding value within the coupon stack with marginal deployments today?

Trevor, it's Brian. Yes, so we did take leverage up a little bit in the fourth quarter, just reflective of that positive environment that we've continued to kind of see in the second half of the year. And so I think we're still relatively comfortable there. I think with the announcement with spreads a little bit tighter, we do kind of leverage trips a little bit. So as book value increases, leverage could come down just a little bit. But I think we're still pretty comfortable because the environment overall, even though spreads are tighter, it's pretty supportive with limited spread volatility.

As far as the [ coupon ] stack goes, I think I mentioned that there's been some notable improvement in the [ TBA ] dollar roll market. And that's really been across the coupon stack but primarily in the belly, so call it 3.5 to [ 5.5 ]. And so I think we're finding pretty good value in those securities.

Got it. Okay. And I was curious within the specified pool portfolio, particularly in higher coupons, if you guys have seen any surprises within prepaid reports or if things have kind of behaved pretty much as you expected them to?

Yes, I wouldn't necessarily say that we've seen any surprises. We certainly saw an increase over the second half of the year in higher coupons in our 6 and 6.5 prepayment speeds did increase. But because we do own prepay protection, they certainly were less impacted than what you would see in generic collateral. Loan balance continues to, like I said in the prepared remarks, continues to be superior predictability of cash flows, and we continue to feel that way.

I think certain FICO and LTV and even geo stories a little bit less so, but still relatively in line with expectations heading into it.

Our next question comes from Jason Weaver with Jones Trading.

Maybe just to tee off of Trevor's first question there. Year-to-date, with new capital invested, have you continued rotating down in coupon. And maybe you can talk a little bit of trade-off you see between elevated prepay risk in the positioning in some of those 5.5 and 6 pools?

Sure. Yes. Jason, it's Brian. Yes. I think certainly, there is a push by the administration on housing affordability, and they are directly focused on the mortgage rate and bringing that down. So to the extent that, that impacts higher coupons, I think the goal is likely to not necessarily reduce the allocation by selling, but to future purchases come a little bit lower in the coupon stack.

So like I said earlier, more belly and lower coupons -- like I said, the TBA dollar roll market is pretty attractive in those coupons right now. So that's providing a nice boost as implied funding levels are significantly below SOFR.

Got it. And the only other thing is, did you give an updated estimated book value as of today?

I did say we were up about 4.5% through Wednesday.

I missed that one. But I appreciate the color. Thank you.

Our next question comes from Doug Harter with UBS.

We continued kind of modest top actions in the quarter, some small common issuance and some small preferred buyback. Can you talk about how you're thinking about capital structure and kind of the ability to raise capital going forward?

Yes. Doug, it's John. Yes. I think in terms of capital structure, we feel like we're in a better place than we've been and it's been improving, so that's -- we're happy about that. As far as the ATM goes, we do feel selectively access the ATM when the common stock provides clear benefits to shareholders. And we continue to view the ATM as the most efficient mechanism for raising capital. It was a pretty modest issuance during Q4 and conditions were slightly better in -- have been better in Q1. So you'll get an update later this month and are active in February when we report our monthly dividend, we will provide more color on that.

[Operator Instructions] Our next question comes from Jason Stewart with Compass Point.

Just following up on the capital raising and just putting it in context with the investment environment, is the decision on the ATM solely where the stock is? Or is part of this equation, what the pro forma ROEs look like? And on that front, would additional government action like an increase to the limit of the GSEs or removal of the PSPA cap or like a standing repo facility, change your view of a spread range for MBS and change your view of capital raising on the second half of that?

Yes, I'll start with the first part, and I'll let Brian tackle the harder part, second part. I think it is a combination of things when we make a decision on whether the issue -- I mean, it obviously price to book is important. I mean that's the first metric. And then after that, it's further accretive investment opportunities. And so we tend to look at it as a prism of how long is the payback period in terms of, okay, we're making accretive investments. And if you're trading slightly below book, we need accretive investments.

If you're trading above book you like to have your creative investments. But yes, I mean, that's how we kind of look at it. It's a combination of those 2 things. And then the second part of the question would be.

Yes. I would just add to that, just -- this is Brian. Yes. I would just add, those are certainly kind of more quantitative aspects of it. There is a qualitative aspect as well. Just I mean, I guess, even economies of scale, on reducing expenses, improving liquidity in the stock. Those are all things that kind of go into the factor on whether we are using -- utilizing the ATM or not.

As far as available ROEs, I did mention as of year-end, spreads versus SOFR were still pretty attractive around [ $140 ]. We've seen about 10 basis points of tightening since then. So not 1% or 2% of the available ROEs that we're seeing. But I think with the presence of the GSEs being more substantial now and being more prescriptive that does help reduce volatility brings greater comfort into potentially higher leverage. So I think there's a lot of positive things that despite slightly lower ROEs that there's a lot of reasons to kind of like the space right now.

Yes. Okay. That's helpful. But on the government intervention side or the presence of [ GSE ], is there anything that would sort of get you to the next level where it's less of a backstop view and more of the view that it's a tighter spread range and a lower spread range?

Yes, lower than where we are now. Yes. Certainly, if there was an announcement that they increased the caps from currently the $450 billion that would be a signal. And maybe as we move along here throughout the year, as we start to see that the pace of purchases has increased notably. I think in December, the GSEs added a combined $24 billion between loans and mortgages, Agency mortgages.

So I think if we were to see that pace continue to increase, that would be a pretty clear signal that at some point, the administration or the treasury and the [ FHFA ] plan to increase those caps. And so that could potentially take us into another spread regime and take us another 10 to 15 basis points tighter from here.

And our last question comes from Eric Hagen with BTIG.

All right. So spreads have already tightened a lot. How should we think about the book value sensitivity and just like the overall upside to further spread tightening. Like would you say that the sensitivity of the magnitude is kind of similar as when spreads were relatively wider? Or how should we think about the magnitude because of the fact that reset.

Sorry, didn't' mean to cut you out there. But thanks for calling in. I would say the magnitude of the change in book value spread changes is the same, just given that our leverage is relatively in line with where it has been here recently. But our expectation for further spread tightening is significantly reduced. And so we kind of -- we saw a lot of spread tightening in 2025. We certainly would not expect to occur unless they are, again, like I just mentioned, significant changes in the caps for the GSEs and their use of those retained portfolios.

So we're not really expecting significant spread tightening from here. The $200 billion of purchases is largely priced into the market as we sit here today. So a little less we start to see banks come in, in greater size and also increased caps. We don't necessarily expect spreads to tighten much. The expectation is that the longer we kind of stay at these spread levels, we'll see kind of money managers start to sell a little bit into it and kind of keep us here as opposed to taking us tighter.

And at this time, I'll turn the call back over to the speakers.

Okay. Well, thank you, everybody, for joining us, and we will talk to you next month. Thank you.

Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.

Welcome to the Invesco Mortgage Capital Third Quarter 2025 Earnings Call. [Operator Instructions]. As a reminder, this call is being recorded. Now I would like to turn the call over to Greg Seals in Investor Relations, Mr. Seals, you may begin the call.

Thanks, operator, and to all of you joining us on Invesco Mortgage Capital's quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today.

The press release and presentation are available on our website, invescomortgagecapital.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding the statements and measures as well as the appendix for the appropriate reconciliations to GAAP.

Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome, and thank you for joining us today.

I'll now turn the call over to Invesco Mortgage Capital's CEO, John Anzalone.

Good morning, and welcome to Invesco Mortgage Capital's Third Quarter Earnings Call. I'll provide some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning for Q&A is our President, Kevin Collins, our COO, Dave Lyle; and our CFO, Mark Gregson.

The strong momentum that began in mid-April continued throughout the third quarter as expectations for easing monetary policy, strong corporate earnings and improved economic growth fueled rallies across the financial markets. Financial conditions remained accommodative as volatility measures declined sharply and equity market has performed well with the S&P 500 Index in NASDAQ both posting strong gains.

Inflation measures continue to run hotter than the Federal Reserve's 2% target over the quarter. With a headline consumer price index rising to 3% in September, up from 2.7 in June. While the core CPI increased from 2.9% to 3%. Investor expectations for future inflation seen through [ TIPS ] breakeven rates increased modestly, reflecting concerns about the potential impact of fiscal and trade policies on consumer prices.

Meanwhile, prior to the pause in data caused by the government shutdown on October 1, labor market data pointed to continued sluggish growth. The economy added an average of 51,000 jobs in July and August, down slightly from 55,000 per month in the second quarter, while the headline unemployment rate increased to 4.3% in August.

Despite persistent inflation above the Fed's target, the FOMC lowered its benchmark Federal funds target rate by 25 basis points in mid-September, exciting signs of a weaker labor market. On Wednesday, the FOMC cut its target rate an additional 25 basis points to a range of 3.75% to 4% and announced the end of quantitative tightening.

Futures pricing now indicates that investors expect three more cuts before the end of next year. Interest rates declined across the treasury yield curve during the quarter with shorter maturities leading the way. This also reflected market expectations for a more accommodative policy stance from the Federal Reserve and continued weakness in the labor market.

Industry volatility declined notably throughout the quarter on growing consensus for easing monetary policy. As a result, agency mortgages performed well during the third quarter, benefiting from the persistent decline in interest rate volatility as well as the overall supportive environment for risk assets.

While demand from commercial banks and overseas investors remained relatively subdued, the steepening of the yield curve in the front end improved investor sentiment for agency mortgages. The outperformance was broadly distributed across the 30-year conventional mortgage coupon stack with discount coupons recording the largest gains.

Performance in higher coupons was dampened by elevated prepayment risk as 30-year mortgage rate declined approximately 50 basis points during the quarter. Positively, premiums on specified pool collateral improved in higher coupons as investors saw prepayment protection.

Agency CMBS risk premiums declined quarter-over-quarter as investor demand increased with broader financial markets. These factors led to a 4.5% increase in book value per common share to $8.41 at quarter end. And when combined with our $0.34 dividend, resulted in a positive economic return of 8.7% for the quarter. Leverage ticked up slightly as our debt-to-equity ratio increased to 6.7% at the end of the quarter, up from 6.5x as we continue to reduce the percentage of our capital structure comprised of preferred stock and position the company to further benefit from positive Agency RMBS performance.

During the quarter, we raised $36 million by issuing common stock through our ATM program, maintaining a disciplined approach to ensure that this activity benefits existing shareholders. At quarter end, our $5.7 billion investment portfolio consisted of $4.8 billion agency mortgages and $0.9 billion agency CMBS and we retained a sizable balance of unrestricted cash and unencumbered investments totaling $423 million.

As of last night's close, we estimate book value was up approximately 1.5% since quarter end. Given the notable decline in interest rate volatility, we remain constructive on agency mortgages, and we view near-term risks as balanced following its recent strong performance. Our longer-term outlook for this sector remains favorable as we expect investment demands to broaden given the lower interest rate volatility, a steeper yield curve, attractive valuations and the end of quantitative tightening.

In addition, Agency CMBS continues to offer attractive risk-adjusted yields and diversification benefits relative to our Agency mortgage holdings supported by its stable cash flow profile and lower sensitivity to interest rate fluctuations. Lastly, we believe anticipated changes to bank regulatory capital rules would increase investor demand for agency mortgages and agency CMBS, providing further tailwinds for both sectors.

Now I'll turn the call over to Brian to provide for more details.

Thanks, John, and good morning to everyone listening to the call. I'll begin on Slide 4, which provides an overview of the interest rate markets over the past year. As depicted in the chart on the upper left, despite further easing of monetary policy in September, treasury yields declined only modestly during the quarter as the deterioration in employment data was offset by robust economic growth, fueled in part by the boom in AI investment.

Positively, the yield curve continue to steepen with 2-year treasury yields falling 11 basis points, while 30-year yields were down just 4 basis points. The difference between 2-year and 30-year treasury yields ended the quarter at 112 basis points, roughly 65 basis points steeper than a year ago, and remain supportive of longer-term investments, such as our Agency RMBS and Agency CMBS.

The chart in the upper right reflects changes in short-term funding rates over the past year, with the third quarter highlighted in gray. While financing capacity for our assets remained ample and haircuts unchanged, 1-month repo spread began to indicate funding pressures in late September and continued into October, widening approximately 5 basis points.

Steady issuance of [ T-bills ] caused dealers to become very long collateral, squeezing balance sheet and putting upward pressure on repo rates. We believe that FOMC announcement on Wednesday to end quantitative tightening at the end of November was largely in response to this pressure, but further adjustments may be necessary before repo spreads can unwind the recent widening.

Lastly, the bottom right chart highlights the significant decline in implied interest rate volatility since the middle of April. This improvement has provided a tailwind for risk assets in recent months, particularly Agency RMBS and is largely driven by diminishing tail risks across fiscal, monetary and trade policies as well as potential deregulation measures that should encourage greater investment in fixed income securities.

Slide 5 provides more detail on the Agency mortgage market. In the upper left chart, we show 30-year current coupon performance versus U.S. treasuries over the past year, highlighting the third quarter in gray. Agency mortgage performance was impressive during the quarter as the decline in interest rate volatility supported persistent demand for money managers and mortgage REITs, while net supply continued to undershoot expectations.

Although bank and overseas demand remains subdued, steady inflows into money managers and robust capital raising by mortgage REITs helped to offset the weakness resulting in strong returns for the sector. Third-year mortgage rates declined during the quarter as tighter mortgage spreads, lower interest rates and compression in the primary secondary spread led to a decline of nearly 50 basis points.

This decline in mortgage rates dampened the performance of higher coupons relative to those lower in the stack as investors were reluctant to increase prepayment risk in their portfolios. While generic, collateral and discount coupons outperformed treasury hedges by 90 to 130 basis points, similarly generic collateral in 6% and 6.5% coupons outperformed by a more modest 30 to 70 basis points.

In the upper right-hand chart, we show higher coupon specified pool pay-ups which are the premium investors pay for specified pools over generic collateral and are representative of the bonds that IVR owns. Positively, payoffs improved during the quarter, offsetting a portion of their underperformance relative to lower coupons given increased investor demand for additional prepayment protection and premium coupons.

Although IVR's prepayment fees were relatively unchanged during the quarter at just over 10 CPR, higher coupons did indicate a faster refi response to the decline in mortgage rates in September, and we expect a similar response in speeds this month.

This recent increase in refinancing activity is expected to be somewhat short-lived, however, as increased refi efficiencies result in swifter responses and reduced flag comps with November speeds expected to decline. We continue to believe that owning prepayment protection via specified pools, particularly in premium price holdings remains a beneficial way to hold attractively priced mortgage exposure.

Slide 6 details our Agency RMBS investments and summarizes the investment portfolio changes during the quarter. Our Agency RMBS portfolio increased 13% quarter-over-quarter as we invested proceeds from ATM issuance and maintain leverage at book value improved. The majority of our net purchases occurred in 4.5% versus 5.5% coupons with a decline in our 6% and 6.5% allocations, a result of paydowns and the growth in the overall portfolio.

Although we continue to focus our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environments. Price appreciation in our holdings has resulted in a higher percentage of our pools valued at premium dollar prices.

Therefore, while we remain most comfortable with lower loan balance specified pool stories, we increased our exposure to borrowers with higher loan-to-value ratios, given our expectations for slowing on price appreciation resulting in a reduced refi response for these borrowers. Overall, we remain constructive on Agency RMBS as supply and demand technicals are favorable and lower levels of interest rate volatility should continue to encourage strong demand for the sector.

We believe near-term risks have become more balanced following recent outperformance with nominal spreads tightening approximately 20 basis points during the quarter. However, valuations remain attractive with the current coupon spreads on a 5- and 10-year SOFR blend ending the quarter near 170 basis points, equating to leverage gross returns in the upper teens.

Slide 7 provides detail on our Agency CMBS portfolio, risk premiums tightened during the quarter consistent with broader financial markets. Given the more attractive relative value in Agency RMBS, we did not add to our agency CMBS position during the quarter and maintained current holdings with our allocation declining modestly due to the growth in the portfolio.

Despite the lack of new purchases, we continue to believe that Agency CMBS offers many benefits mainly through its prepayment protection and fixed maturities which reduced our sensitivity to interest rate volatility. Levered gross ROEs are in the low double digits and consistent with ROEs and lower coupon Agency RMBS, and we have been disciplined on adding exposure only when the relative value between Agency CMBS and Agency RMBS accurately reflects their unique risk profiles.

Financing capacity has been robust as we continue to fund our positions with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation as the relative value becomes attractive, recognizing the overall benefits to the portfolio as the sector diversifies risk associated with an agency RMBS portfolio.

Slide 8 details our funding and hedging book at quarter end. Repurchase agreements collateralized by our Agency RMBS and Agency CMBS investments increased from $4.6 billion to $5.2 billion, consistent with the increase in our total assets while the total notional of our hedges increased from $4.3 billion to $4.4 billion as our hedge ratio declined from 94% to 85%.

The table on the right provides further detail on our hedges at year-end. The composition of our hedges shifted modestly towards treasury futures quarter-over-quarter with 77% of our hedges consisting of interest rate swaps on a notional basis. While on a dollar duration basis, the allocation declined to 63% given the higher allocation of interest rate swaps closer to the front end of the curve.

Swap spreads widened during the quarter, unwinding a portion of the tightening experienced in the second quarter, serving as a tailwind for our performance. Despite the recent widening, we continue to believe swap spreads are still historically tight and should continue to normalize, benefiting the company, and we maintain our preference for interest rate swaps over treasury futures.

Slide 9 provides detail on our capital structure and highlights the improvement made in recent quarters to reduce our cost of capital. Further improvement in the capital structure remains a focus of our management team as we seek to prudently maximize shareholder returns. To conclude our prepared remarks, financial market volatility has declined notably since the beginning of the second quarter, resulting in strong performance from most risk assets in the last 5 months.

IVR's economic return of 8.7% during the third quarter is a result of that positive momentum, but also reflects our disciplined approach to capital activity and our focus on shareholder returns. In recent years, we have taken significant yet prudent steps towards improving our capital structure and reducing the cost of capital to our common stock shareholders.

We remain committed to that approach as we seek to further reduce expenses while enhancing returns and improving scale. We believe our liquidity position provides substantial cushion for further potential market stress while also providing sufficient capital to deploy into our target assets as the investment environment evolves.

While we view near-term risks as somewhat balanced we believe further easing of monetary policy will lead to a steeper yield curve and lower interest rate volatility, both of which will provide a supportive backdrop for Agency mortgages over the long term.

Thank you for your continued support for Invesco Mortgage Capital, and now we will open the line for Q&A.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Trevor Cranston with Citizens JMP.

You're just talking about the changes in the hedge portfolio moving a little bit towards treasuries this quarter. Can you talk in general about kind of where your net duration exposure is at? And kind of if you have any general position on with respect to the shape of the yield curve? And then a second question on the hedge portfolios, how you guys are thinking about potentially using options given the decline in the cost of volatility.

Sure, Trevor. Thanks for the question. Yes, I'll tackle yield curve first. We kind of had a bit of a steepener on a while now. And we started to reduce that a little bit, preferring to move more of our hedges into the front end of the curve. Obviously, the Fed did cut rates on Wednesday. Chair Powell did express that future cuts are a little less certain than the market was expecting.

And so I think that would result in a bit of a flatter curve than what we've been seeing. So as potentially those cuts start to get priced out of the market. So we like being -- we're still positioned for a bit of a steepener, but we did reduce that just a little bit. As far as the overall net duration of the portfolio, we like -- we have historically preferred to have empirical duration as close to 0 as we can get it.

But given the fact that most of our tools are, a larger percentage of our tools are now in premium prices. We do think that we have a little bit more risk towards a rally in interest rates. And so at least from a model duration perspective, we are running model duration is slightly long versus kind of being more historically flat.

So we still do prefer interest rate swaps. We do think that, like we said, we do expect swap spreads to continue to normalize. And as that occurs, we'll kind of continue to move more into treasury futures, just given some of the benefits that we see there from a liquidity and margining perspective. But right now, we still think that there's, we still have a bit of widening to do in there. So we'd like to lean more heavily into swaps.

Got it. Okay. That's helpful. And then with the tightening that we saw in agency spreads in the last quarter, can you talk about where you're seeing returns on kind of marginal capital deployment relative to the existing dividend level? .

Yes. So at the end of the quarter, levered gross returns were in the upper teens. So net returns were kind of mid-teen area. So that's pretty consistent with where our dividend to book yield is. So we feel like is supportive of that level. And we've seen a little bit of compression so far in October, just given further outperformance in mortgages that.

Recently, we have seen those levels kind of back up a little bit since the Fed meeting. So I think mostly in line with what the earnings power of the portfolio currently is.

[Operator Instructions] Our next question comes from Doug Harter with UBS.

Can you talk about your appetite for continuing to kind of change the capital structure with the buyback of the preferred issuance common. And I guess, as you look at those transactions, the combined effect of that transaction, does that have any impact on book value in the quarter?

Yes. Doug, it's John. Yes, on the preferred buybacks, I mean, those are relatively small. Obviously, I think there is -- so the impact was pretty minimal on that. I think around $2 million we bought back. So I mean those -- it's just harder sliding on those because the volume of trading is relatively low. So we'll continue to, to buy those back as long as that makes sense and they're trading below 25%, which -- so that didn't have a big impact on, on the capital structure, although in the right direction.

Yes. And then just comment. Obviously, in terms of common stock, I mean, we're trading at -- we've been trading at a discount. So we have not issued any recently, which would go in the right direction for improving the capital structure. In terms of going the other way, in terms of buybacks, we have been active in the past buying back shares.

Typically, we look for times when the price-to-book ratio is persistently low over an extended period of time. I mean it kind of bounces around quite a bit. And so if we look for persistent discount and also when investment opportunities are not accretive. So right now, we're still seeing relatively accretive investment opportunities. So we're not buying back shares now. Certainly, if those conditions occur, we will certainly look at doing that.

Great. And then moving back to the investment opportunities, just how you're seeing the relative value between Agency CMBS and Agency RMBS today?

Yes, Doug, it's Brian. Yes, I mean, Agency RMBS continues to provide a more attractive ROE. I think Agency CMBS, like I said in my comments, the return potential there is a bit more in line with what we would call lower coupon Agency RMBS and continues to have a lot of benefits.

So I think -- to the extent that Agency RMBS is still mid to upper teens, we would probably look to see a bit more compression between the 2 before we would look to significantly moved more towards Agency CMBS, but we do like continuing to hold those securities as they do provide a lot of convexity benefits for the portfolio.

At this time, I'm showing no further questions. I'll turn the call back over to the speakers.

Thank you, everybody, again for joining and look forward to speaking to you next quarter. .

Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.