Orchid Island Capital, Inc.
For the period ended Sep 30, 2026. Filed Oct 23, 2026.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Sep 30, 2026 · Filed Oct 23, 2026
ORC$4.94-1.0%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2026-06-30; filed 2026-07-24.
0001437749-26-024400
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2026-09-30; filed 2026-10-23.
0001437749-26-033373
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 135 previous paragraphs and 138 current paragraphs.
90 unchanged; 36 reworded; 12 added; 9 removed; 0 previous and 0 current paragraphs rearranged.
Tables are not compared: 51 previous and 60 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (12)
Current report
Net (Loss) Income Summary
Current report
The 2026 acquisitions above included $413.3 million of RMBS received as a resecuritization of previously owned RMBS.
Current report
During the third quarter and early fourth quarter of 2026, interest rates increased to levels not observed since the early 2000s. The move occurred in most western markets, including Japan and most of Europe, and there was a confluence of factors impacting interest rates across these markets. In the U.S. the drivers have been the following:
Current report
With the recent dramatic increases in interest rates there has been widespread deleveraging and forced selling on the part of the various levered investors across fixed income markets. This in turn has put additional downward pressure on various fixed income assets – particularly Agency RMBS like the Company invests in – and interest rates themselves as additional hedging needs lead to shorting of various forms of interest rate products. Interest rates across the yield curve reached levels during the third quarter of 2026, last seen in the early 2000s. Implied interest rate volatility in the swaptions market has spiked higher during the third quarter of 2026 as well. One frequently referenced measure of implied interest rate volatility in the swaptions market – the ICE BofA MOVE index (the “MOVE index”), reached 115.02 just after the Iran war broke out in late February 2026.
Current report
Since quarter end the fiscal sustainability crisis associated with sovereign debt has deteriorated materially in France, resulting in yields on French government debt increasing precipitously, especially in relation to the level on German sovereign debt. This is commonly referred to as “fragmentation” in the EU sovereign debt markets, and akin to what occurred in the early 2010s during that debt crisis. The sovereign debt crisis in France has a significant political element and could affect the country’s leadership in the next French presidential elections in early 2027.
Current report
The most significant development during the third quarter of 2026 was the significant increase in global interest rates, particularly in the U.S. The U.S. Treasury curve steepened as rates increased. The yield on the 2-year U.S. Treasury note increased from 4.18% at June 30, 2026, to 4.89% at September 30, 2026. The yield on the 10-year U.S. Treasury note increased from 4.47% at June 30, 2026, to 5.29% at September 30, 2026. As a result, the spread between the 2 and 10-year U.S. Treasury notes increased from 29 bps to 40 bps. Implied interest rate volatility in the swaptions market increased in tandem, reaching levels close to those observed just after the war in Iran started. The MOVE index increased from 71.96 at June 30, 2026, to 110.45 at September 30, 2026.
Current report
As interest rates in the U.S. Treasury market increased, mortgage rates available to residential home buyers also increased. The Mortgage Bankers Association U.S. fixed-rate 30-year contract rate weekly index increased from 6.57% on June 26, 2026, to 7.49% on October 2, 2026. With such an increase, housing affordability, already at multi-decade low levels, is even lower. Housing turnover and refinancing activity is likewise further subdued, and pre-payments on the Company’s portfolio have diminished as well.
Current report
With inflation persistently high and economic activity resilient, even in the face of higher interest rates, the Fed raised the overnight Fed Funds rate range in September by 25 bps to 3.75% to 4.00%. Current market pricing, as reflected in the Fed Funds futures market, among others, was for approximately 3.8 additional 25 bps hikes over the next year as of September 30, 2026. Inflation has been above the Fed’s 2% inflation target for over five years and the labor market, the second of the Fed’s dual mandate focus, remains stable. Fed Chairman Warsh’s public comments have repeatedly stressed his desire to get inflation back to the Fed’s target level, so these conditions are likely to keep additional rate hike pricing in the market over the near term at least.
Current report
While interest rates have increased markedly since the end of the second quarter and the Fed raised the Fed Funds target range 25 bps at their September meeting, the overnight funding markets have been otherwise stable. The Company’s funding of the levered RMBS portfolio is accomplished exclusively in the repurchase agreement – or “repo” – market. Repo funding is done at a spread to SOFR. Such spreads have been stable for the past several quarters. Earlier this year the Fed introduced their reserve management program (“RMP”), whereby they buy U.S. Treasury bills in the open market to support the funding markets. The levels of RMP purchases vary as the Fed perceives the stability in the funding markets. Also, money market assets are at very high levels by historical standards, with close to $8 trillion at the end of the third quarter of 2026. The allocation of money market assets to the repo market varies over time, but was approximately 30% at the end of the third quarter, thus providing a substantial source of liquidity to the market. As government deficits in the U.S. remain at historically high levels – approximately $2 trillion for the fiscal year ended September 30, 2026 – the government continues to issue increasing levels of U.S. Treasury bills into the market, absorbing funding that might otherwise be available for the repo market. To date this has not materially impacted funding levels, but may do so in the future.
Current report
Interest rates rose substantially during the third quarter of 2026 to multi-decade high levels. As is typically the case, implied interest rate volatility in the swaptions market also rose precipitously during the quarter as well. Interest rates and implied volatility are the primary variables that impact the Agency RMBS market. The cash flows associated with Agency RMBS are driven in part by the extent of prepayment activity, which is inversely correlated with mortgage rates and the underlying U.S. Treasury rates. Implied volatility is a key variable in the pricing of the borrower’s prepayment option embedded in a residential mortgage loan. As interest rates rise, prepayment levels are anticipated to slow – materially in the case of this quarter – and the cash flows associated with Agency RMBS extend. At the end of the third quarter of 2026 nearly all Agency RMBS are trading at a discount to par. The price declines on these securities that occurred during the quarter triggered pervasive forced selling on the part of levered RMBS investors, exacerbating the downward price pressure. This resulted in poor absolute and relative returns for most Agency RMBS. For the third quarter of 2026, the Agency RMBS sector generated a total return of -4.1% and -0.8% versus comparable duration swaps. By comparison, the high-yield and investment-grade corporate bond sectors produced returns of -1.8% and -3.8%, respectively, and excess returns of -0.4% and 0.3%, respectively, versus comparable duration swaps over the same period.
Current report
The factors above are likely to result in additional increases in the Fed Funds rate. Accordingly, the Company’s funding levels may move higher in the near term. However, to date the funding markets have been stable otherwise. Higher rates have slowed refinancing activity substantially, which is supportive of the revenue derived from the RMBS portfolio. The net effect of these factors on the net interest income derived from the RMBS portfolio cannot be determined at this time.
Current report
To the extent interest rates remain high and funding levels are increased by the Fed, their impact should put downward pressure on economic growth over time. To the extent this occurs, this process could reverse as the market and the Fed respond to slowing growth prospects. Such a development should simultaneously bring inflation back in line with the Fed’s 2% target. Further, the significant capital expenditure buildout associated with the hyperscalers adding data centers to support AI models should eventually slow as adequate capacity is available to support the initial surge in demand and subsequent work should be more maintenance related. This should quell the surge in the demand for capital to fund the initial buildout. What remains is the fiscal sustainability of the U.S. government and the deficits that have to be financed. To the extent this continues, there could be continued pressure on interest rates – particularly longer-term rates as the government continues to fund the deficits in the U.S. Treasury market. All else equal, this should lead to a steeper U.S. Treasury yield curve as longer maturity rates remain high in relation to overnight rates. While such conditions are generally favorable for the Company’s business model, there is no reason to assume such an outcome is more or less likely.
Removed paragraphs (9)
Previous report
Net Income (Loss) Summary
Previous report
The second quarter of 2026 was pivotal in many ways. The Federal Reserve (“Fed”) transitioned from an easing bias to a hiking bias and a new Fed Chairman with a strong anti-inflation disposition was seated. Meanwhile, the war between the United States, Israel and Iran (the “Iran War”) appeared to be on course to wind down by June before conditions deteriorated materially. A near-term resolution now appears unlikely, allowing energy related inflationary pressures to persist.
Previous report
On May 22, 2026, Kevin Warsh became the new Chairman of the Fed, replacing Jerome Powell as Chairman. The new Chairman brings an elevated level of vigor in addressing the persistently high inflation that has exceeded the Fed’s 2% target for approximately 5 years. Even before Chairman Warsh assumed his new role, the FOMC appeared to be shifting its bias away from additional easing toward hiking. At the Fed’s meeting on April 29, 2026, there were three votes in favor of signaling a more two-side characterization of the Fed’s future interest rate decisions. At Chairman Warsh’s first press conference on June 17, 2026, all doubt regarding the bias of the FOMC was put to rest. The new Chairman was very stern in declaring his highest priority was bringing inflation back to the Fed’s target.
Previous report
The Iran War appeared to be nearing conclusion when a ceasefire was announced on April 8, 2026, and a formal Memorandum of Understanding (“MOU”) was signed by the parties on June 17, 2026. Shipping traffic through the Strait of Hormuz (“SOH”) was slowly returning to pre-war levels, and market volatility materially subsided. However, shortly after the MOU was signed, hostilities between the parties began to escalate and shipping traffic through the SOH has slowed significantly again. Commodity prices have rebounded in turn and are slowly heading back toward the peak levels reached in the early days of the war. At this point, there is no obvious path to an end to the war, as the two crucial points of disagreement – control over the SOH and the status of Iran’s nuclear capability – seem unlikely to be resolved diplomatically. Unless and until the war pivots again toward a peaceful resolution, upward pressure on commodity prices seems likely to persist, adding to already elevated levels of inflation in the United States and globally.
Previous report
Developments in the Iran War have only exacerbated problems for the new Fed Chair and the FOMC. The economy in the United States has proven to be very resilient in the face of inflation, particularly elevated commodity prices and disruptions to critical supply channels. At the beginning of 2026, the labor market appeared to be stable, yet at low levels of job growth. During the second quarter of 2026, the labor market appeared to pivot as job growth rebounded. Consumer spending has also remained robust. If the war remains unresolved for an extended period, the Fed will likely need to act and increase the Fed Funds rate. Data for June 2026 released in July – namely the jobs report and the consumer price index and producer price index – were all weak. As a result, market pricing of Fed hikes over the balance of 2026 and into 2027 has subsided. Unless this data remains weak, the market is likely to see higher funding levels.
Previous report
Consistent with the pivot in the outlook for Fed policy during the quarter, the nominal rates curve moved higher and flatter during the second quarter of 2026. Specifically, the yield on the 2-year U.S. Treasury note increased from 3.796% at March 31, 2026 to 4.175% at June 30, 2026, while the yield on the 10-year U.S. Treasury note increased from 4.319% at March 31, 2026 to 4.466% at June 30, 2026. As a result, the curve between these two points flattened by approximately 9 basis points. Most proxies for the shape of the rates curve show comparable – or greater – levels of flattening during the second quarter of 2026. The primary impetus for the movements in the nominal U.S. Treasury curve and the swap curve was the pivot in market expectations for Fed Funds rate going forward. At March 31, 2026, market expectations for the Fed Funds rate (based on Fed Funds futures contracts) were for slightly more than one rate cut by year end and two cuts by mid-2027. By the end of the second quarter of 2026, Fed Funds futures implied nearly two hikes by year-end and in excess of three hikes by the end of first quarter of 2027. Current pricing, reflecting the soft June 2026 data released in early July, is unchanged in terms of year-end levels but now reflects very modest cuts in early 2027.
Previous report
The Fed ended its quantitative tightening program, which reduced its balance sheet via the maturation of its holdings, and began reinvesting them into additional U.S. Treasury holdings on December 1, 2025. Run-off from the Agency RMBS holdings is now directed toward purchasing U.S. Treasuries. The Fed also announced its intention, via Reserve Management Purchases (“RMPs”), to grow its balance sheet over time to maintain a stable relationship between the size of its balance sheet and the economy. These steps resulted in increased purchases of U.S. Treasuries by the Fed. When the RMP program was first introduced, U.S. Treasury purchases were $40 billion per month, although they have declined since and are currently $10 billion per month. However, even at the lower level of purchases the program has been successful at taking pressure off of the overnight funding markets, as market participants such as money-market funds had fewer options to deploy their liquidity and therefore increased the pool of available funds for the overnight repurchase agreement (“repo”) funding markets. As a result, funding levels available to the Company in the repo markets – typically expressed as a spread over SOFR – have remained stable during the second quarter, continuing the trend we saw during the first quarter of 2026.
Previous report
Interest rate volatility spiked meaningfully after the outbreak of the Iran War, consistent with the increase in interest rates across the curve. Volatility peaked just before the first quarter of 2026 ended, with the Merrill Lynch Option Volatility Estimate Index reaching 115.02. Following the announcement of a ceasefire on April 8, 2026, rate volatility dropped nearly to pre-war levels by mid-April and remained relatively stable throughout the balance of the second quarter. Implied interest rate volatility has remained range bound at low levels since the end of the second quarter. As is typically the case, subdued levels of implied interest rate volatility and range-bound interest rates are conducive to Agency RMBS market performance, and the sector had a positive quarter in both absolute and excess returns. For the second quarter of 2026, the Agency RMBS sector generated a total return of 0.6% and 0.5% versus comparable duration swaps. By comparison, the high-yield and investment-grade corporate bond sectors produced returns of 2.5% and 1.4%, respectively, and excess returns of 2.4% and 1.5%, respectively, versus comparable duration swaps over the same period.
Previous report
At the outset of 2026, there was uncertainty about how the risks facing the economy would ultimately drive Fed policy and the level of interest rates, with resulting impacts on risk assets and Agency RMBS. Inflation was elevated, but risks to the growth outlook were clearly present, creating a quandary for policy makers. This does not appear to be the case now. Growth has proven to be remarkably resilient, as has the labor market, and the growth of the economy is not a pressing concern for policy makers or markets. Inflation, however, remains well above the Fed’s target and the Iran War seems likely to persist, representing a continued source of commodity inflation. Data released for June in early July reflected a welcome decrease in the various inflation measures, but considerable doubt remains regarding the sustainability of these readings. Looking forward, the Iran War continues to be a dominant force driving the performance of all markets. At this point, it is unclear what the ultimate outcome of the war will be or when it will end. As for the economy and monetary policy, the outlook is no longer uncertain, as the path of inflation alone is likely to drive monetary policy and interest rate levels in the United States. The Company has maintained modest levels of leverage for the past several quarters and is likely to continue to do so given the prevailing market uncertainty.
Reworded paragraphs (36)
Previous wording
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 1 of this Form 10-Q. Certain written statements in this Quarterly Report on Form 10-Q that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Statements in this report addressing expectations, assumptions, beliefs, projections, future plans and strategies, future events, developments that we expect or anticipate will occur in the future, and future operating results, capital management, and dividend policy are forward-looking statements. Forward-looking statements are based upon management’s beliefs, assumptions, and expectations as of the date of this report regarding future events and operating performance, considering all information currently available to us, and are applicable only as of the date of this report. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. Forward-looking statements in this Quarterly Report on Form 10-Q may include, but are not limited to, statements about interest rates, inflation, liquidity, pledging of our structured RMBS, funding levels and spreads, prepayment speeds, portfolio composition, positioning and repositioning, hedging levels, leverage ratio, dividends, investment and return opportunities, the supply and demand for Agency RMBS and the performance of the Agency RMBS sector generally, the effect of actual or expected actions of the U.S. government, including the Fed, market expectations, capital raising, future opportunities and prospects of the Company, the stock repurchase program, geopolitical uncertainty and general economic conditions (including the effects of artificial intelligence, wars, tariffs, trade wars, inflation, the U.S. deficit, and the strength of the U.S. dollar). As a result of many factors, such as those set forth under “Risk Factors” in our most recent Annual Report on Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.
Current wording
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 1 of this Form 10-Q. Certain written statements in this Quarterly Report on Form 10-Q that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Statements in this report addressing expectations, assumptions, beliefs, projections, future plans and strategies, future events, developments that we expect or anticipate will occur in the future, and future operating results, capital management, and dividend policy are forward-looking statements. Forward-looking statements are based upon management’s beliefs, assumptions, and expectations as of the date of this report regarding future events and operating performance, considering all information currently available to us, and are applicable only as of the date of this report. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. Forward-looking statements in this Quarterly Report on Form 10-Q may include, but are not limited to, statements about interest rates, inflation, liquidity, pledging of our structured RMBS, funding levels and spreads, prepayment speeds, portfolio composition, positioning and repositioning, hedging levels, leverage ratio, dividends, book value, investment and return opportunities, the supply and demand for Agency RMBS and the performance of the Agency RMBS sector generally, the effect of actual or expected actions of the U.S. government, including the Fed, market expectations, capital raising, future opportunities and prospects of the Company, the stock repurchase program, geopolitical uncertainty and general economic conditions (including the effects of artificial intelligence, wars, tariffs, trade wars, inflation, the U.S. deficit, and the strength of the U.S. dollar). As a result of many factors, such as those set forth under “Risk Factors” in our most recent Annual Report on Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.
Previous wording
On October 27, 2025, we entered into an equity distribution agreement (the “October 2025 Equity Distribution Agreement”) with four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $500,000,000 of gross proceeds from the sales of shares of our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. From inception through June 30, 2026, we issued a total of 48,824,644 shares under the October 2025 Equity Distribution Agreement for aggregate gross proceeds of approximately $360.9 million, and net proceeds of approximately $355.2 million, after commissions and fees. For the six months ended June 30, 2026, we issued a total of 18,558,681 shares under the October 2025 Equity Distribution Agreement for aggregate gross proceeds of approximately $137.7 million, and net proceeds of approximately $135.5 million, after commissions and fees.
Current wording
On October 27, 2025, we entered into an equity distribution agreement (the “October 2025 Equity Distribution Agreement”) with four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $500,000,000 of gross proceeds from the sales of shares of our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. From inception through September 30, 2026, we issued a total of 48,824,644 shares under the October 2025 Equity Distribution Agreement for aggregate gross proceeds of approximately $360.9 million, and net proceeds of approximately $355.2 million, after commissions and fees. For the nine months ended September 30, 2026, we issued a total of 18,558,681 shares under the October 2025 Equity Distribution Agreement for aggregate gross proceeds of approximately $137.7 million, and net proceeds of approximately $135.5 million, after commissions and fees.
Previous wording
On June 22, 2026, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 25,000,000 shares, bringing the remaining authorization under the stock repurchase program to 26,612,580 shares, representing approximately 13.3% of the Company’s currently outstanding shares of common stock.
Current wording
On June 22, 2026, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 25,000,000 shares, bringing the remaining authorization under the stock repurchase program to 26,612,580 shares, representing approximately 13.3% of the Company’s then outstanding shares of common stock.
Previous wording
From the inception of the stock repurchase program through June 30, 2026, the Company repurchased a total of 7,364,383 shares at an aggregate cost of approximately $92.1 million, including commissions and fees, for a weighted average price of $12.51 per share. During thesix and three months ended June 30, 2026, the Company repurchased a total of 1,106,557 shares at an aggregate cost of approximately $7.3 million, including commissions and fees, for a weighted average price of $6.64 per share. During the year ended December 31, 2025, the Company repurchased a total of 1,113,224 shares at an aggregate cost of approximately $7.3 million, including commissions and fees, for a weighted average price of $6.52 per share. The remaining authorization under the stock repurchase program as of July 23, 2026 was 26,612,580 shares.
Current wording
From the inception of the stock repurchase program through September 30, 2026, the Company repurchased a total of 12,310,506 shares at an aggregate cost of approximately $123.3 million, including commissions and fees, for a weighted average price of $10.02 per share. During thethree months ended September 30, 2026, the Company repurchased a total of 4,946,123 shares at an aggregate cost of approximately $31.2 million, including commissions and fees, for a weighted average price of $6.30 per share. During thenine months ended September 30, 2026, the Company repurchased a total of 6,052,680 shares at an aggregate cost of approximately $38.5 million, including commissions and fees, for a weighted average price of $6.36 per share. During the year ended December 31, 2025, the Company repurchased a total of 1,113,224 shares at an aggregate cost of approximately $7.3 million, including commissions and fees, for a weighted average price of $6.52 per share. Subsequent to September 30, 2026, the Company repurchased a total of 1,669,704 shares at an aggregate cost of approximately $8.4 million, including commissions and fees, for a weighted average price of $5.05 per share. The remaining authorization under the stock repurchase program as of October 22, 2026 was 19,996,753 shares.
Previous wording
Described below are the Company’s results of operations for the six and three months ended June 30, 2026, as compared to the Company’s results of operations for the six and three months ended June 30, 2025.
Current wording
Described below are the Company’s results of operations for the nine and three months ended September 30, 2026, as compared to the Company’s results of operations for the nine and three months ended September 30, 2025.
Previous wording
Net income for thesix months ended June 30, 2026 was $69.2 million, or $0.35 per share. Net loss for thesix months ended June 30, 2025 was $16.5 million, or $0.16 per share. Net income for thethree months ended June 30, 2026 was $89.2 million, or $0.44 per share. Net loss for thethree months ended June 30, 2025 was $33.6 million, or $0.29 per share. The components of net income (loss) for thesix and three months ended June 30, 2026 and 2025, along with the changes in those components are presented in the table below:
Current wording
Net loss for thenine months ended September 30, 2026 was $109.7 million, or $0.56 per share. Net income for thenine months ended September 30, 2025 was $55.6 million, or $0.48 per share. Net loss for thethree months ended September 30, 2026 was $178.9 million, or $0.90 per share. Net income for thethree months ended September 30, 2025 was $72.1 million, or $0.53 per share. The components of net (loss) income for thenine and three months ended September 30, 2026 and 2025, along with the changes in those components are presented in the table below:
Previous wording
Described below are the Company’s results of operations for the six months ended June 30, 2026 and 2025, and for each quarter in 2026 to date and 2025.
Current wording
Described below are the Company’s results of operations for the nine months ended September 30, 2026 and 2025, and for each quarter in 2026 to date and 2025.
Previous wording
During the six months ended June 30, 2026, we earned net interest income of $117.0 million consisting of $322.0 millionof interest income from RMBS assets offset by $205.0 millionof interest expense on borrowings. For the comparable period ended June 30, 2025, we earned $42.9 million of net interest income, consisting of $173.4 millionof interest income from RMBS assets offset by $130.5 millionof interest expense on borrowings. The $148.6 million increase in interest income was due to a 35 basis point ("bp") increasein the yield on average RMBS, combined with a $4,780.8 million increase in average RMBS. The $74.5 million increasein interest expense was due to a $4,603.3 million increase in average outstanding borrowings, offset by a 44 bps decreasein the average cost of funds.
Current wording
During the nine months ended September 30, 2026, we earned net interest income of $176.2 million consisting of $486.1 millionof interest income from RMBS assets offset by $310.0 millionof interest expense on borrowings. For the comparable period ended September 30, 2025, we earned $69.8 million of net interest income, consisting of $281.8 millionof interest income from RMBS assets offset by $212.0 millionof interest expense on borrowings. The $204.3 million increase in interest income was due to a 31 basis point ("bps") increasein the yield on average RMBS, combined with a $4,330.1 million increase in average RMBS. The $98.0 million increasein interest expense was due to a $4,199.8 million increase in average outstanding borrowings, offset by a 48 bps decreasein the average cost of funds.
Previous wording
During the three months ended June 30, 2026, we earned net interest income of$60.0 million consisting of$164.2 million of interest income from RMBS assets offset by$104.2 million of interest expense on borrowings. For the comparable period ended June 30, 2025, we earned$23.2 million of net interest income, consisting of$92.3 million of interest income from RMBS assets offset by$69.1 million of interest expense on borrowings. The$71.9 million increase in interest income was due to a 36 basis point ("bp")increase in the yield on average RMBS, combined with a $4,573.6 million increase in average RMBS. The$35.1 million increase in interest expense was due to a$4,438.5 million increase in average outstanding borrowings, offset by a 43 bpsdecrease in the average cost of funds.
Current wording
During the three months ended September 30, 2026, we earned net interest income of$59.1 million consisting of$164.1 million of interest income from RMBS assets offset by$105.0 million of interest expense on borrowings. For the comparable period ended September 30, 2025, we earned$26.9 million of net interest income, consisting of$108.4 million of interest income from RMBS assets offset by$81.5 million of interest expense on borrowings. The$55.7 million increase in interest income was due to a 26 bpsincrease in the yield on average RMBS, combined with a $3,428.9 million increase in average RMBS. The$23.5 million increase in interest expense was due to a$3,392.9 million increase in average outstanding borrowings, offset by a 53 bpsdecrease in the average cost of funds.
Previous wording
On an economic basis, our interest expense on borrowings for the six months ended June 30, 2026 and 2025 was $177.4 millionand $88.7 million, respectively, resulting in $144.6 millionand $84.7 millionof economic net interest income, respectively.
Current wording
On an economic basis, our interest expense on borrowings for the nine months ended September 30, 2026 and 2025 was $269.4 millionand $148.3 million, respectively, resulting in $216.8 millionand $133.5 millionof economic net interest income, respectively.
Previous wording
On an economic basis, our interest expense on borrowings for the three months ended June 30, 2026 and 2025 was $91.3 millionand$48.2 million, respectively, resulting in$72.9 million and$44.1 million of economic net interest income, respectively.
Current wording
On an economic basis, our interest expense on borrowings for the three months ended September 30, 2026 and 2025 was $92.0 millionand$59.6 million, respectively, resulting in$72.1 million and$48.8 million of economic net interest income, respectively.
Previous wording
The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread for the six months ended June 30, 2026 and 2025, and for each quarter in 2026 to date and 2025 on both a GAAP and economic basis.
Current wording
The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread for the nine months ended September 30, 2026 and 2025, and for each quarter in 2026 to date and 2025 on both a GAAP and economic basis.
Previous wording
We had average outstanding borrowings of $10,733.0 million and $6,129.7 million and total interest expense of$205.0 millionand$130.5 millionfor thesix months ended June 30, 2026 and 2025, respectively. Our average cost of funds was 3.82% for thesix months ended June 30, 2026, compared to 4.26% for the comparable period in 2025.
Current wording
We had average outstanding borrowings of $10,730.1 million and $6,530.3 million and total interest expense of$310.0 millionand$212.0 millionfor thenine months ended September 30, 2026 and 2025, respectively. Our average cost of funds was 3.85% for thenine months ended September 30, 2026, compared to 4.33% for the comparable period in 2025.
Previous wording
We had average outstanding borrowings of $10,975.8 million and $6,537.3 million and total interest expense of $104.2 million and $69.1 million for the three months ended June 30, 2026 and 2025, respectively. Our average cost of funds was 3.80% for the three months ended June 30, 2026, compared to 4.23% for the comparable period in 2025.
Current wording
We had average outstanding borrowings of $10,724.3 million and $7,331.4 million and total interest expense of $105.0 million and $81.5 million for the three months ended September 30, 2026 and 2025, respectively. Our average cost of funds was 3.92% for the three months ended September 30, 2026, compared to 4.45% for the comparable period in 2025.
Previous wording
Our economic interest expense was$177.4 millionand $88.7 million for thesix months ended June 30, 2026 and 2025, respectively. There was a 42 bps increase in the average economic cost of funds to 3.31% for thesix months ended June 30, 2026, from 2.89% for thesix months ended June 30, 2025.
Current wording
Our economic interest expense was$269.4 millionand $148.3 million for thenine months ended September 30, 2026 and 2025, respectively. There was a 32 bps increase in the average economic cost of funds to 3.35% for thenine months ended September 30, 2026, from 3.03% for thenine months ended September 30, 2025.
Previous wording
Our economic interest expense was $91.3 million and $48.2 million for the three months ended June 30, 2026 and 2025, respectively. There was a 38 bps increase in the average economic cost of funds to 3.33% for the three months ended June 30, 2026, from 2.95% for the three months ended June 30, 2025.
Current wording
Our economic interest expense was $92.0 million and $59.6 million for the three months ended September 30, 2026 and 2025, respectively. There was a 18 bps increase in the average economic cost of funds to 3.43% for the three months ended September 30, 2026, from 3.25% for the three months ended September 30, 2025.
Previous wording
Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 17 bps above the one-month average SOFR and 13 bps above the six-month average SOFR for the quarter ended June 30, 2026. Our average economic cost of funds was 30 bps below the average one-month SOFR and 34 bps below the average six-month SOFR for the quarter ended June 30, 2026. The average term to maturity of the outstanding repurchase agreements was 33 days at June 30, 2026 and 39 days at December 31, 2025.
Current wording
Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 17 bps above the one-month average SOFR and 24 bps above the six-month average SOFR for the quarter ended September 30, 2026. Our average economic cost of funds was 32 bps below the average one-month SOFR and 25 bps below the average six-month SOFR for the quarter ended September 30, 2026. The average term to maturity of the outstanding repurchase agreements was 26 days at September 30, 2026 and 39 days at December 31, 2025.
Previous wording
The table below presents the one-month average and six-month average SOFR rates for the six months ended June 30, 2026 and 2025, and for each quarter in 2026 to date and 2025.
Current wording
The table below presents the one-month average and six-month average SOFR rates for the nine months ended September 30, 2026 and 2025, and for each quarter in 2026 to date and 2025.
Previous wording
The table below presents our gains or losses for the six and three months ended June 30, 2026 and 2025.
Current wording
The table below presents our gains or losses for the nine and three months ended September 30, 2026 and 2025.
Previous wording
We invest in RMBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs, and not for the purpose of making short term gains from sales. However, we have sold, and may continue to sell, existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management strategy. During the six months ended June 30, 2026, we received proceeds of $356.5 million from sales of RMBS, resulting in gains of approximately $0.9 million. During the six months ended June 30, 2025, we received proceeds of $733.9 million from sales of RMBS, resulting in losses of approximately $9.3 million.
Current wording
We invest in RMBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs, and not for the purpose of making short term gains from sales. However, we have sold, and may continue to sell, existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management strategy. During the nine months ended September 30, 2026, we received proceeds of $769.8 million from sales of RMBS, resulting in gains of approximately $0.9 million. These proceeds included $413.3 million of RMBS, measured at fair value, that the Company transferred into a larger RMBS transaction collateralized by the transferred securities. This resecuritization did not result in the recognition of any gain or loss. During the nine months ended September 30, 2025, we received proceeds of $733.9 million from sales of RMBS, resulting in losses of approximately $9.3 million.
Previous wording
For the six and three months ended June 30, 2026, the Company’s total operating expenses were approximately $14.2 million and $6.8 million, respectively, compared to approximately $9.2 million and $5.0 million for the six and three months ended June 30, 2025, respectively. The table below presents a breakdown of operating expenses for the six and three months ended June 30, 2026 and 2025.
Current wording
For the nine and three months ended September 30, 2026, the Company’s total operating expenses were approximately $20.5 million and $6.3 million, respectively, compared to approximately $14.7 million and $5.4 million for the nine and three months ended September 30, 2025, respectively. The table below presents a breakdown of operating expenses for the nine and three months ended September 30, 2026 and 2025.
Previous wording
As of December 31, 2025 and 2024, the Company had accrued a liability of $0.6 million for bonuses to be paid to the Manager's employees. During the six months ended June 30, 2026 and 2025, the Company awarded shares of Company common stock with a fair value of $1.7 million and $0.3 million, respectively. Accrued incentive compensation for the six months ended June 30, 2026 includes a reversal of a $1.1 million under accrual of the December 31, 2025 liability. Incentive compensation for the six months ended June 30, 2025 includes a reversal of a $0.4 million over accrual of the December 31, 2024 liability.
Current wording
As of December 31, 2025 and 2024, the Company had accrued a liability of $0.6 million for bonuses to be paid to the Manager's employees. During the nine months ended September 30, 2026 and 2025, the Company awarded shares of Company common stock with a fair value of $1.7 million and $0.3 million, respectively. Accrued incentive compensation for the nine months ended September 30, 2026 includes a reversal of a $1.1 million under accrual of the December 31, 2025 liability. Incentive compensation for the nine months ended September 30, 2025 includes a reversal of a $0.4 million over accrual of the December 31, 2024 liability.
Previous wording
The following table summarizes the management fee and overhead allocation expenses for six months ended June 30, 2026 and 2025, and for each quarter in 2026 to date and 2025.
Current wording
The following table summarizes the management fee and overhead allocation expenses for the nine months ended September 30, 2026 and 2025, and for each quarter in 2026 to date and 2025.
Previous wording
As of June 30, 2026, our RMBS portfolio consisted of $11.5 billion of Agency RMBS at fair value and had a weighted average coupon on assets of 5.52%. During the six months ended June 30, 2026, we received principal repayments of $863.5 million, compared to $332.2 million for the six months ended June 30, 2025. The average three month prepayment speeds for the quarters ended June 30, 2026 and 2025 were 10.9% and 10.1%, respectively.
Current wording
As of September 30, 2026, our RMBS portfolio consisted of $10.7 billion of Agency RMBS at fair value and had a weighted average coupon on assets of 5.51%. During the nine months ended September 30, 2026, we received principal repayments of $1,169.5 million, compared to $544.9 million for the nine months ended September 30, 2025. The average three month prepayment speeds for the quarters ended September 30, 2026 and 2025 were 8.4% and 10.1%, respectively.
Previous wording
As of June 30, 2026, the Company's portfolio had an effective duration of 3.180, indicating that an interest rate increase of 1.0% would be expected to cause a 3.180% decrease in the value of the RMBS in the Company’s investment portfolio. As of December 31, 2025, the Company's portfolio had an effective duration of 2.513, indicating that an interest rate increase of 1.0% would be expected to cause a 2.513% decrease in the value of the RMBS in the Company’s investment portfolio. These figures do not include the effect of the Company’s funding cost hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc.
Current wording
As of September 30, 2026, the Company's portfolio had an effective duration of 4.327, indicating that an interest rate increase of 1.0% would be expected to cause a 4.327% decrease in the value of the RMBS in the Company’s investment portfolio. This compares to an effective duration of 2.513 as of December 31, 2025, which indicated that an interest rate increase of 1.0% would be expected to cause a 2.513% decrease in the value of the RMBS in the Company’s investment portfolio. These figures do not include the effect of the Company’s funding cost hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc.
Previous wording
The following table presents a summary of portfolio assets acquired during the six months ended June 30, 2026 and 2025, including securities purchased during the period that settled after the end of the period, if any.
Current wording
The following table presents a summary of portfolio assets acquired during the nine months ended September 30, 2026 and 2025, including securities purchased during the period that settled after the end of the period, if any.
Previous wording
As of June 30, 2026, we had obligations outstanding under the repurchase agreements of approximately $11.1 billion with a net weighted average borrowing cost of 3.77%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 2 to 136 days, with a weighted average remaining maturity of 33 days. Securing the repurchase agreement obligations as of June 30, 2026 are RMBS with an estimated fair value, including accrued interest, of approximately $11.5 billion, and cash pledged to counterparties of approximately $111.5 million. Through July 24, 2026, we have been able to maintain our repurchase facilities with comparable terms to those that existed at June 30, 2026, with maturities through November 13, 2026.
Current wording
As of September 30, 2026, we had obligations outstanding under the repurchase agreements of approximately $10.4 billion with a net weighted average borrowing cost of 3.99%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 1 to 338 days, with a weighted average remaining maturity of 26 days. The repurchase agreement obligations outstanding as of September 30, 2026 were secured by RMBS with an estimated fair value, including accrued interest, of approximately $10.7 billion, and cash pledged to counterparties of approximately $130.0 million. Through October 23, 2026, we have been able to maintain our repurchase facilities with comparable terms to those that existed at September 30, 2026, with maturities through September 3, 2027.
Previous wording
We use two primary measures of leverage. Economic leverage is calculated by dividing total liabilities, adjusted for our net notional TBA position and securities borrowed, by stockholders' equity. We include our net TBA position in our calculation of economic leverage because a forward contract to purchase or sell an Agency RMBS in the TBA market carries similar risks to an Agency RMBS purchased or sold in the cash market and funded with repurchase agreement liabilities. Adjusted leverage is calculated by dividing our repurchase agreements by stockholders' equity. Our economic leverage as of June 30, 2026 and December 31, 2025 was 7.3 to 1. Our adjusted leverage as of June 30, 2026 was 7.7 to 1, compared to 7.4 to 1 as of December 31, 2025. The following table presents information related to our historical leverage.
Current wording
We use two primary measures of leverage. Economic leverage is calculated by dividing total liabilities, adjusted for our net notional TBA position and securities borrowed, by stockholders' equity. We include our net TBA position in our calculation of economic leverage because a forward contract to purchase or sell an Agency RMBS in the TBA market carries similar risks to an Agency RMBS purchased or sold in the cash market and funded with repurchase agreement liabilities. Adjusted leverage is calculated by dividing our repurchase agreements by stockholders' equity. Our economic leverage was 8.6 to 1 as of September 30, 2026 compared to 7.3 to 1 as of December 31, 2025. Our adjusted leverage as of September 30, 2026 was 8.8 to 1, compared to 7.4 to 1 as of December 31, 2025. The following table presents information related to our historical leverage.
Previous wording
Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead, fulfill margin calls and pay dividends. We have both internal and external sources of liquidity. However, our material unused sources of liquidity include cash balances, unencumbered assets and our ability to sell encumbered assets to raise cash. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio. Management believes that we currently have sufficient short-term and long-term liquidity and capital resources available for (a) the acquisition of additional investments consistent with the size and nature of our existing RMBS portfolio, (b) the repayments on borrowings and (c) the payment of dividends to the extent required for our continued qualification as a REIT. We may also generate liquidity from time to time by selling our equity or debt securities in public offerings or private placements.
Current wording
Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead, fulfill margin calls and pay dividends. We have both internal and external sources of liquidity. However, our material unused sources of liquidity include cash balances, unencumbered assets and our ability to sell encumbered assets to raise cash. Our balance sheet also generates liquidity on an ongoing basis through payments of principal and interest we receive on our RMBS portfolio. Management believes that we currently have sufficient short-term and long-term liquidity and capital resources available for (a) the acquisition of additional investments consistent with the size and nature of our existing RMBS portfolio, (b) the repayments on borrowings and (c) the payment of dividends to the extent required for our continued qualification as a REIT. We may also generate liquidity from time to time by selling our equity or debt securities in public offerings or private placements.
Previous wording
Our internal sources of liquidity include our cash balances, unencumbered assets and our ability to liquidate our encumbered security holdings. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio. Because our PT RMBS portfolio consists entirely of government and agency securities, we do not anticipate having difficulty converting our assets to cash should our liquidity needs ever exceed our immediately available sources of cash. Our structured RMBS portfolio also consists entirely of governmental agency securities, although they typically do not trade with comparable bid / ask spreads as PT RMBS. However, we anticipate that we would be able to liquidate such securities readily, even in distressed markets, although we would likely do so at prices below where such securities could be sold in a more stable market.
Current wording
Our internal sources of liquidity include our cash balances, unencumbered assets and our ability to liquidate our encumbered security holdings. Our balance sheet also generates liquidity on an ongoing basis through payments of principal and interest we receive on our RMBS portfolio. Because our PT RMBS portfolio consists entirely of government and agency securities, we do not anticipate having difficulty converting our assets to cash should our liquidity needs ever exceed our immediately available sources of cash. Our structured RMBS portfolio also consists entirely of governmental agency securities, although they typically do not trade with comparable bid / ask spreads as PT RMBS. However, we anticipate that we would be able to liquidate such securities readily, even in distressed markets, although we would likely do so at prices below where such securities could be sold in a more stable market.
Previous wording
Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing. The margin posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient, and we will be required to post additional collateral. Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we would be entitled to have excess margin returned to us by the counterparty. Our lenders typically value our pledged securities daily to ensure the adequacy of our margin and make margin calls as needed, as do we. Typically, but not always, the parties agree to a minimum threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis. Our master repurchase agreements do not specify the haircut; rather haircuts are determined on an individual repo transaction basis. Throughout the six months ended June 30, 2026, haircuts on our pledged collateral remained stable and as of June 30, 2026, our weighted average haircut was approximately 4.1% of the value of our collateral.
Current wording
Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing. The margin posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient, and we will be required to post additional collateral. Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we would be entitled to have excess margin returned to us by the counterparty. Our lenders typically value our pledged securities daily to ensure the adequacy of our margin and make margin calls as needed, as do we. Typically, but not always, the parties agree to a minimum threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis. Our master repurchase agreements do not specify the haircut; rather haircuts are determined on an individual repo transaction basis. Throughout the nine months ended September 30, 2026, haircuts on our pledged collateral remained stable and as of September 30, 2026, our weighted average haircut was approximately 4.1% of the value of our collateral.
Previous wording
In future periods, we expect to continue to finance our activities in a manner that is consistent with our current operations through repurchase agreements. As of June 30, 2026, we had cash and cash equivalents of $682.6 million. We generated cash flows of $1,163.4 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $10.7 billion during the six months ended June 30, 2026.
Current wording
In future periods, we expect to continue to finance our activities in a manner that is consistent with our current operations through repurchase agreements. As of September 30, 2026, we had cash and cash equivalents of $462.4 million. We generated cash flows of $1,624.7 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $10.7 billion during the nine months ended September 30, 2026.
Previous wording
On October 27, 2025, we entered into an equity distribution agreement (the “October 2025 Equity Distribution Agreement”) with four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $500,000,000 of gross proceeds from the sales of shares of our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. From inception through June 30, 2026, we issued a total of 48,824,644 shares under the October 2025 Equity Distribution Agreement for aggregate gross proceeds of approximately $360.9 million, and net proceeds of approximately $355.2 million, after commissions and fees. For the six months ended June 30, 2026, we issued a total of 18,558,681 shares under the October 2025 Equity Distribution Agreement for aggregate gross proceeds of approximately $137.7 million, and net proceeds of approximately $135.5 million, after commissions and fees.
Current wording
On October 27, 2025, we entered into an equity distribution agreement (the “October 2025 Equity Distribution Agreement”) with four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $500,000,000 of gross proceeds from the sales of shares of our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. From inception through September 30, 2026, we issued a total of 48,824,644 shares under the October 2025 Equity Distribution Agreement for aggregate gross proceeds of approximately $360.9 million, and net proceeds of approximately $355.2 million, after commissions and fees. For the nine months ended September 30, 2026, we issued a total of 18,558,681 shares under the October 2025 Equity Distribution Agreement for aggregate gross proceeds of approximately $137.7 million, and net proceeds of approximately $135.5 million, after commissions and fees.
Previous wording
Within Agency RMBS for the second quarter of 2026, conventional 30-year mortgages generated a total return of 0.6%, 15-year mortgages generated a total return of 0.1% and Ginnie Mae 30-year mortgages generated a total return of 0.7%. Versus comparable duration swaps, the returns were 0.6%, 0.0% and 0.6% for 30-year conventional, 15-year conventional and Ginnie Mae 30-year mortgages, respectively. The Company invests predominantly in 30-year conventional mortgages. Returns with the 30-year stack were lowest for lower coupons and increased for progressively higher coupons, with returns for coupons 4% and lower between 0.2% and 0.5%, and above 1.0% for coupons of 5% and higher. This is consistent with higher interest rates, lower prepayment expectations and the durations of the various coupons inversely related to coupon – the lower the coupon the higher the duration, and visa-versa. Conversely, excess returns were best for middle coupons – between the 4.5% and 6.0% coupons, with lower and higher coupons lagging. Excess returns for middle coupons were between 0.7% and 1.2%, while the lower and higher coupons ranged between 0.3% and 0.8%.
Current wording
Within Agency RMBS for the third quarter of 2026, conventional 30-year mortgages generated a total return of -4.4%, 15-year mortgages generated a total return of -2.2% and Ginnie Mae 30-year mortgages generated a total return of -4.1%. Versus comparable duration swaps, the returns were -0.8%, 0.4% and -1.0% for 30-year conventional, 15-year conventional and Ginnie Mae 30-year mortgages, respectively. The Company invests predominantly in 30-year conventional mortgages. Absolute returns within the 30-year stack were lowest for lower coupons and increased for progressively higher coupons, with returns for coupons 5% and lower between -4.3% and -5.3%, and for coupons of 5.5% through 7.0% progressively improving from -3.5% to –1.7% . This is consistent with higher interest rates, lower prepayment expectations and the durations of the various coupons inversely related to coupon – the lower the coupon the higher the duration, and visa-versa. Conversely, excess returns were worst for middle coupons – between the 4.0% and 6.0% coupons, with lower and higher coupons slightly better. Excess returns for middle coupons were between -1.1% and -1.3%, while the lower coupons ranged between -0.2% and -0.6%. The poor performance of coupons in the middle of the stack resulted from their more extreme extension as they moved from at or just below par to discount prices – implying the underlying cash flows had the most extreme movement. Previously existing discount securities had already extended, and higher coupons were still slight premiums that had yet to fully extend.
Previous wording
In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month. In November of 2021, it began tapering its net asset purchases each month, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency RMBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing its balance sheet by a maximum of $60 billion of U.S. Treasuries and $35 billion of Agency RMBS per month. On May 1, 2024, the FOMC announced the Fed’s decision to reduce its balance sheet by a maximum of $25 billion of U.S. Treasury securities and remove the cap on Agency RMBS reduction, with any amounts in excess of $35 billion per month being reinvested in U.S. Treasury securities. On March 19, 2025, the FOMC announced the Fed’s decision to reduce its balance sheet by a maximum of $5 billion of U.S. Treasury securities beginning April 1, 2025. Relatively high interest rates and slow prepayment speeds kept the balance sheet reduction for Agency RMBS below $20 billion per month throughout 2024 and 2025. On December 1, 2025, the Fed ended quantitative tightening and began reinvesting all proceeds from maturing Agency RMBS up to a $35 billion per month cap in U.S. Treasuries and announced that it would begin buying an additional $40 billion per month of U.S. Treasuries via RMPs in order to maintain an ample level of reserves on an ongoing basis. RMPs were reduced to $25 billion per month in April 2026, and further reduced to $10 billion per month in May 2026, As of June 30, 2026, the Fed had reduced its balance sheet for Agency RMBS by approximately $792 billion from the peak of approximately $2.7 trillion to approximately $1.9 trillion, shedding approximately 58% of the Agency RMBS added during pandemic quantitative easing and representing the lowest level since August 2020.
Current wording
In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month. In November of 2021, it began tapering its net asset purchases each month, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency RMBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing its balance sheet by a maximum of $60 billion of U.S. Treasuries and $35 billion of Agency RMBS per month. On May 1, 2024, the FOMC announced the Fed’s decision to reduce its balance sheet by a maximum of $25 billion of U.S. Treasury securities and remove the cap on Agency RMBS reduction, with any amounts in excess of $35 billion per month being reinvested in U.S. Treasury securities. On March 19, 2025, the FOMC announced the Fed’s decision to reduce its balance sheet by a maximum of $5 billion of U.S. Treasury securities beginning April 1, 2025. Relatively high interest rates and slow prepayment speeds kept the balance sheet reduction for Agency RMBS below $20 billion per month throughout 2024 and 2025. On December 1, 2025, the Fed ended quantitative tightening and began reinvesting all proceeds from maturing Agency RMBS up to a $35 billion per month cap in U.S. Treasuries and announced that it would begin buying an additional $40 billion per month of U.S. Treasuries via RMPs in order to maintain an ample level of reserves on an ongoing basis. RMPs were reduced to $25 billion per month in April 2026, and further reduced to $10 billion per month in May 2026. The Fed paused RMPs from mid-August 2026 through mid-October 2026, although the market anticipates that RMPs will resume and potentially increase in late 2026. As of September 30, 2026, the Fed had reduced its balance sheet for Agency RMBS by approximately $842 billion from the peak of approximately $2.7 trillion to approximately $1.9 trillion, shedding approximately 61% of the Agency RMBS added during pandemic quantitative easing and representing the lowest level since June 2020.
Previous wording
The Company invests exclusively in Agency RMBS securities and applies leverage utilizing repurchase agreement funding. The primary drivers of the performance of our assets – both absolute performance and performance relative to our hedges, are interest rates, their impact on both our asset prices and the level of prepayments, interest rate volatility, particularly the level of implied volatility in interest rate swaptions and various interest rate derivatives, and finally our funding levels. Accordingly, we have significant exposure to interest rates, and our performance is driven by our ability to select assets, manage our leverage, and our hedging strategy. As we entered 2026, interest rates had been range bound for more than 12 months, but the range was broken during the first quarter of 2026 as a result of the Iran War. After a brief respite in the conflict, rates moved higher once again as prospects for a resolution dimmed and a new Fed Chairman, Kevin Warsh, took control of the Fed, immediately expressing his strong conviction in ending the five-year period of inflation running above the Fed’s 2% target. Interest rate volatility, both realized and implied in interest rate options, has remained subdued outside of the temporary spike at the onset of the Iran War.
Current wording
The Company invests exclusively in Agency RMBS and applies leverage utilizing repurchase agreement funding. The primary drivers of the performance of our assets, both absolute performance and performance relative to our hedges, are interest rates and their impact on both our asset prices and the level of prepayments, interest rate volatility – particularly the level of implied volatility in interest rate swaptions and various interest rate derivatives – and finally our funding levels. Accordingly, we have significant exposure to interest rates, and our performance is driven by our ability to select assets, manage our leverage, and our hedging strategy. During the third quarter of 2026, interest rates and implied interest rate volatility surged and interest rates across the U.S. Treasury yield curve increased to the highest levels since the early 2000s. There were numerous factors that contributed to the move in rates, and it is likely these factors will continue to support higher rates for the time being. War-induced supply shortages impacting the economy that was already experiencing sticky inflation comfortably above the Fed’s 2% target level, resilient growth in the economy, supported by the substantial capital expenditure buildout associated with AI hyperscalers and the need for data centers throughout the country, fiscal sustainability concerns associated with persistently high budget deficits and the resulting excess demand for capital between the U.S. government and the hyperscalers are powerful forces driving borrowing costs higher. While rates may ultimately stabilize and stop rising, it is not clear what the catalyst would be to drive rates meaningfully lower in the near term.