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Good day, and welcome to the Q1 2026 Annaly Capital Management Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zeronene. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Sean Kensil, Director, Investor Relations. Please go ahead.

Good morning, and welcome to the Q1 2026 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release.

Content referenced in today's call can be found in our Q1 2026 investor presentation and Q1 2026 financial supplement, both found under the Presentation section of our website. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer, Serena Wolfe, Chief Financial Officer, Mike Fania, Co-Chief Investment Officer and Head of Residential Credit, V.S. Srinivasan, Head of Agency, and Ken Adler, Head of Mortgage Servicing Rights. With that, I'll turn the call over to David.

Thank you, Sean. Good morning, everyone, and thank you for joining us on our Q1 earnings call. I'll open with a brief review of the macro landscape before discussing our performance. I'll provide further detail on each of our three investment strategies and conclude with our outlook. Serena will then discuss our financials before opening up the call to Q&A. Starting with the macro backdrop, January and February saw a continuation of many of the trends seen in the second half of 2025, highlighted by a resilient economy as well as modest stabilization in the labor market. Consequently, fixed income markets initially experienced continued strong investor demand and generally muted volatility. Ultimately, however, the war in the Middle East ruptured the calm as it introduced an energy price shock that may challenge the performance of the U.S. economy as the rest of the year unfolds.

Although the U.S. is better insulated from higher commodity prices than most of Europe and Asia, rising oil and food prices risk further squeezing a consumer that is already facing slowing income growth and persistent affordability constraints. The bond market reacted sharply to the Middle East conflict and higher commodity prices as Treasury yields sold off meaningfully in March. Short-term rates led the sell-off as investors priced higher near-term inflation, while long-term yields rose on increased term premium. Expectations for monetary policy shifted significantly with markets pricing limited probability of any rate cuts this year, compared to roughly 2.5 cuts priced in at the end of February. For the time being, it appears Fed officials will be best served by waiting to evaluate incoming data for clear signs that inflation pressures are receding or the labor market is more markedly weakening before further lowering rates.

This past quarter also saw the release of the Federal Reserve's re-proposed bank capital requirements, which were generally in line with market expectations. The newly proposed capital standards are more market-friendly than both the original 2023 Basel III Endgame proposal and current standards, providing the potential for deployment of excess capital from banks into fixed income and housing finance. The re-proposal also specifically targets the mortgage market as residential mortgage loan RWAs are estimated to decline by 30%. This could accelerate prime bank loan growth and lower Agency MBS securitization rates, a positive technical for prime loans and Agency MBS. Also, the elimination of a provision that deducted mortgage servicing rights above a specific threshold from regulatory capital may, at the margin, lead to slightly higher demand to hold MSRs on the part of banks.

Now, with respect to our portfolio performance in the Q, we delivered an economic return of 1.5%, reflecting the strength of our diversified housing finance platform across a volatile market backdrop. Leverage remained conservative at 5.7 turns, and we generated $0.76 of earnings available for distribution per share. Capital markets remained supportive in the Q1, and we were able to raise approximately $510 million of common equity through our ATM in Q1. The majority of the capital raise was deployed in our residential credit and MSR strategies, given the tightening experienced in the agency in January, and as such, our aggregate capital allocation to resi and MSR increased from 38%-44% at the end of the quarter. Now turning to our investment strategies and beginning with agency.

Spreads tightened sharply in early January following the GSE purchase announcement, before ultimately drifting wider, initially simply on tight valuations and later on increased rate volatility following the outbreak of the Iran war. Now, despite the wide interquarter range, MBS widened only modestly quarter-over-quarter, with lower coupons outperforming. For our agency strategy, the story for the Q1 was about our ability to allocate capital dynamically as relative value shifts. Following the January tightening, we redeployed capital away from agency and into our credit businesses, which exhibited a more attractive return profile. However, the ultimate retracement of MBS spreads back to more reasonable levels later in the quarter left us entering Q2 with a more balanced view of the relative value landscape across our three businesses.

The further support for Agency currently is the strong technical backdrop the sector is exhibiting, as aside from GSE purchase mandate, weekly flows into fixed income funds are strong, and CMO issuance continues to absorb over 30% of gross supply as banks have ramped up buying CMO floaters. Moreover, recent changes to bank capital rules encourage banks to retain more loans, which could lower securitization rates and decrease organic growth in Agency MBS. In our Agency portfolio specifically, we ended the quarter at $92 billion in market value, a marginal decrease from year-end, with Agency representing 56% of the firm's capital. We opportunistically repositioned the portfolio during the late-quarter sell-off in rates, rotating down in coupon from 6s into 4.5 TBAs, and notably, 4.5s provide more durable cash flows and improve the portfolio convexity should rates retest recent lows.

Also to note, we added modestly to our agency CMBS portfolio in the quarter. We maintained conservative interest rate exposure throughout Q1 with continued focus on protecting book value and managing risk through disciplined, measured hedging. Heightened rate and macro volatility led to more active tactical hedge adjustments interquarter as markets moved quickly in response to geopolitical developments. Despite this activity, the net impact by quarter end was modest, with overall hedge levels changing only slightly. We remain comfortable maintaining exposure in swap spreads given the increased clarity around bank capital regulation and the growing presence of mortgage investors who actively hedge using swaps. That said, Treasuries have proven to be a more effective hedge in sharp volatility episodes such as March, which is why they continue to be an important part of our overall hedge composition. Now moving to residential credit.

Our portfolio ended the Q1 at $10.3 billion in market value, increasing to 23% of the firm's capital, driven largely by continued growth in our whole loan correspondent channel. Residential credit spreads tightened at the outset of the year as the strong move in the agency basis drove a rally across securitized products. However, similar to agency, credit spreads gave back their tightening in late February and March with triple A non-QM spreads ending the quarter 10-15 basis points wider. We acquired $6.7 billion in whole loans on the quarter, approximately 80% sourced via our correspondent channel. Our lock volume was very strong at $7.4 billion, a 16% increase quarter-over-quarter and 41% increase year-over-year. Securitization markets remained healthy with Q1 residential credit gross issuance of $79 billion, a 63% increase year-over-year.

Our OBX platform settled eight securitizations for $4.7 billion on the quarter, generating $570 million of high-quality proprietary assets for Annaly's balance sheet and our joint venture. Subsequent to quarter end, we priced an additional four securitizations and now have brought 12 transactions to market, totaling $6.6 billion year to date. Onslow Bay remains the largest non-bank securitizer of residential credit and is well positioned to continue to benefit from the growth of the private label market. We've maintained our tight credit standards as our quarter-end locked pipeline is represented by a 764 weighted average FICO, a 67% combined LTV with less than 2% of the portfolio greater than 80% LTV. Now shifting to MSR. Our portfolio ended the Q1 at $4.2 billion in market value, and our capital allocation MSR increased to 21% of the firm's capital.

During the quarter, we committed to purchase $24 billion in principal balance, or roughly $388 million in market value of MSR, with a weighted average note rate of 3.4%. These purchases came across four bulk packages as well as our flow channels. We were the second largest buyer of conventional MSR in the Q1 as measured by transfers, and we are now ranked as the fifth largest non-bank conventional servicer. Bulk supply in the Q1, roughly $80 billion UPB, was above Q1 2025, and we expect supply levels to remain ample throughout the balance of the year. We continue to scale our flow MSR capabilities in order to acquire current coupon MSR when attractive. Our active flow partners more than tripled quarter-over-quarter as we purchased $1.9 billion UPB via flow, though still a small share of our overall purchases.

Underlying fundamentals within our MSR portfolio remain strong, with prepay speeds muted at 4.2 CPR in Q1, while our credit profile continues to be high quality, with serious delinquencies just under 50 basis points. The portfolio's weighted average note rate at 3.3% continues to provide significant prepayment protection and is the lowest note rate among the top 20 largest agency MSR holders. Our MSR valuation multiple increased modestly to a 5.94 multiple, primarily driven by the increase in interest rates. Lastly, to touch on our outlook, we believe each of our investment strategies is well-positioned to deliver attractive risk-adjusted returns through the remainder of the year, supported by a constructive market and housing finance backdrop. Agency spreads are at a more reasonable level today than earlier in the year, offering prospective new money returns in the mid-teens.

As I noted earlier, market technicals are the most favorable they've been since the end of QE. We believe that our portfolio composition continues to be a meaningful differentiator for Annaly, minimizing prepayment risk while also generating strong carry. Our residential credit business continues to see very strong growth, all while maintaining a diligent focus on asset selection and credit quality. While the non-QM and broader residential credit market is attracting new forms of institutional capital, our early investment in infrastructure and technology, the expansion of our correspondent partners, and the depth of our OBX platform creates competitive advantages that are not easily replicated, and we intend to continue growing our allocated capital residential credit. Our MSR portfolio is distinguished from other scaled portfolios in the industry by our significantly out of the money note rate and the high credit quality of our underlying borrowers.

This has allowed us to consistently outperform our modeled projections, providing ample and predictable cash flows. We expect to further add MSR this year, with increasing usage of our flow acquisition channels and benefiting from our longstanding synergistic relationships with large originators and servicers. Now overall, Annaly's scaled, diversified housing model has demonstrated our ability to perform across different market environments. Over the last three years, Annaly has delivered a double-digit annualized economic return with a lower levered and more efficient platform than peers. The ability to dynamically allocate capital toward the most attractive relative value opportunities is critical in times such as this past quarter. As we enter the Q2 with a reduced overweight in agency, we see a more balanced opportunity set with each strategy providing compelling new money returns. Now with that, I'll hand the call over to Serena.

Thank you, David. Today, I will briefly review the financial highlights for the quarter ended March 31st, 2026. As in prior quarters, our earnings release discloses GAAP and non-GAAP earnings metrics. My comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. This quarter, our portfolio delivered sound performance even as market volatility and geopolitical challenges increased. Our diversified housing finance platform proved resilient, and our proactive hedging strategy protected us against interest rate volatility throughout the quarter. With that context in mind, as of March 31st, 2026, our book value per share decreased by 1.9% from the prior quarter to $19.82. After accounting for our $0.70 dividend, we achieved an economic return of 1.5% in Q1. Earnings available for distribution per share increased by $0.02 to $0.76 per share and exceeded our quarterly dividend.

We achieved this level of EAD primarily through a 30 basis points improvement in our average repo rate to 3.9% and higher TBA dollar roll income driven by increased specialness. Partially offsetting these benefits were lower levels of swap income due to lower average receive rates on declining SOFR. Net interest margin benefited from the reduction in cost of funds, improving two basis points to 1.71%, while our net interest spread remained strong, declining modestly to 1.42%. The residential credit securitization business achieved another record quarter, issuing $4.7 billion across eight securitizations, surpassing $50 billion in total issuance since inception. Our economic leverage ratio remains disciplined at 5.7 times, and our Q1 reported ending repo rate was 3.87%, down 15 basis points. The weighted average repo days to maturity ended the quarter at 36, up one day.

Total warehouse capacity across our Residential Credit and MSR businesses was $7.6 billion, including $2.8 billion of committed capacity. We have ample available capacity in both businesses, with utilization rates at 65% for Residential Credit and 60% for MSR. We ended the Q1 with $7.4 billion in unencumbered assets. This includes $5 billion in cash and unencumbered Agency MBS. We also have roughly $1.6 billion in fair value of MSR pledged to committed warehouse facilities. This amount remains undrawn and can be quickly converted to cash subject to market advance rates. In total, we have about $9 billion of total assets available for financing, down $300 million from the prior quarter. This represents about 55% of our total capital base and provides significant liquidity and flexibility.

Finally, on our OpEx, our efficiency ratio fell two basis points to 1.29% this quarter, continuing our trend of being one of the lowest in the mortgage REIT sector, despite operating three fully scaled businesses on the balance sheet. That concludes our remarks. We will now take questions. Thank you, operator.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we pause momentarily to assemble our roster. The first question comes from Crispin Love with Piper Sandler. Please go ahead.

Thank you. Good morning, everyone. Appreciate it. Dave, you mentioned bank capital rules. Do you think these changes will drive significant changes in bank balance sheets with banks holding more mortgages? Mortgages have definitely been moving towards non-banks for an extended period of time. I think the bank crisis in 2023 only increased that, just given the asset liability mismatches. I'm curious if you think that these changes could be meaningful, could change just on the margin, and what that could mean for the broader mortgage industry.

Sure, Crispin, and good morning. Look, we'll have to see. I think when you look at the estimates in terms of balance sheet capacity for mortgages as a consequence of the rule, I think it's a little over $600 billion in balance sheet capacity. In terms of how we see it evolving, the tiering of LTVs obviously is quite favorable, and we think it'll reduce agency issuance as banks will retain more loans. We don't know at this point the extent of it. Generally it's good for the technicals associated with mortgages. As far as origination, and I'm going to hand it over to Mike momentarily, but as far as the origination market, we don't see banks getting back into origination.

That has largely moved outside of the banking system into non-banks, and the non-banks have made considerable investments, and it'll be hard to ultimately compete with them. Banks obviously still engage in origination, but that's typically on behalf of their customers as opposed to a real profit center. Mike, feel free to add.

Yeah, I would just add, Crispin, that in terms of what banks have been focused on, they have been focused on catering to their retail customer. They are not focused on pursuing origination through the correspondent channel. You could see that through Wells Fargo, but there's been a number of other companies that have de-emphasized correspondent lending as a way to acquire the customer, and we do not think that these rules will change that. A lot of it is what David is saying is that the secular trend of non-banks, that's going to stay in place. They've invested in terms of technology resources. But also the profitability of the mortgage origination market as well is currently challenging. If you look at 2025, the net profit margin for independent mortgage bankers was 21 basis points. That is historically a low number.

It's not really a conducive environment for banks to come back into the mortgage origination market with a large presence.

Okay. No, that makes a ton of sense. Just second question for me on capital allocation across the businesses. You did lean into resi credit and MSRs. Can you just remind us what your long-term goals are for allocation? I believe it was 50% agency, 30% resi credit, 20% MSRs. First, does that still stand? Is that a place that you'd like to get to and just be able to dial up or dial down specific areas?

Yeah, that is correct. You did identify those metrics accurately. It is a long-term objective of ours. As I've always said, we've always said we're very patient about getting there. This past quarter is an example of our ability to pivot. In January, Agency MBS were very difficult to buy given the valuations and the ability of the other businesses to pick up the slack and add assets, I think, is a testament to the flexibility of the model. Long-term, 50, 30, 20 is still the target.

Perfect. Thank you, David. Appreciate it.

Thank you, Crispin.

The next question comes from Bose George with KBW. Please go ahead.

Hey, everyone. Good morning. Actually, can we get an update on your book value quarter to date?

Sure, Bose. As of Friday, we were up 4% in economic return terms.

That's 4% net of the accrued dividend?

Inclusive of the dividend accrual.

Okay. Great. Thanks. Going back to the Basel III question, the MSR risk weighting has remained at 250%. Do you expect that to go down after the comment period? If so, do you think that gets the banks a little more active on the MSR side?

Well, the banks are already active on the MSR side, so we see them as we're bidding for MSR. Look, it's under comment, the 250 risk weight. I would expect that the banks are going to be very active at lobbying around that 250 risk weight. Whether they'll be successful or not, we don't know, but they'll certainly be proactive about commenting on it.

Okay, great. Thanks.

Thank you, Bose.

The next question comes from Marissa Lobo with UBS. Please go ahead.

Thanks and good morning. On the increased capital allocation to non-agencies in Q1, the presentation states returns of about 12%-15%. Can you expand on how that looks among the various non-agency sub-sectors you're active in?

Sure. Mike, do you want to take that?

Sure, Marissa. The net increase in the portfolio was $2.3 billion. I would say it's broken down within three components. One is third-party securities. The portfolio was $2.1 billion at the end of the quarter. That was up $435 million. Within third-party securities, we bought $395 million of CRE CLOs. These are AAA assets. 43 points of enhancement. They're like a two-year spread duration. They're uncapped floaters. seven turns of leverage, that gets you kind of to 12%. We also bought BB non-QM bonds. These are the B1s. We bought those in the kind of the range of 335-340 over. I would say that those are in kind of the 12%-13% levered ROEs. We also bought $55 million of MPL/RPL A2s. These are unrated securities.

We're buying the subordinate bond 15-20 points of enhancement, and they're in the kind of like the 350 range. There's kind of the 12%-13% as well. The lower end of that 12%-15%, that is the identification of these third-party securities. The other two components of the portfolio is OBX. That was $3.5 billion. That is where you're getting those mid-teens returns. Whole loans were up $1.65 billion on the quarter. I will say when they're sitting on warehouse lines, you're earning kind of in that 11%-12% range. But then when they're ultimately manufactured into OBX securities, you're earning that 15% on one turn of leverage. That is kind of the breakdown over the quarter.

I appreciate that detailed answer, Mike, referencing recent reports from the rating agencies on non-QM delinquencies, particularly newer vintage collateral, with the rising pressure you referenced on the consumer from inflation. How is that impacting investor appetite down in credit? Has it impacted your credit enhancement and pricing and your deals in any meaningful way?

Yeah. I would say that what we are experiencing and what we are seeing is that the 2024 and the 2025 vintages up the seasoning curve, up the credit curve, are showing lower delinquencies than what was experienced in 2023, and 2025 is outperforming 2024. When you look at our portfolio, our serious delinquencies, our D90 plus, it's 140 basis points. That has been pretty much in the range over the last year, call it in the 130-145 basis points. Our performance has been very consistent. In terms of the deals themselves, what we're seeing broadly is when non-QM gets up the seasoning ramp, 2023 vintage, if you include other third-party non-QM shelves, you're maybe in that kind of 5%-6% range as a percentage of current. What you are not seeing, however, is realized losses.

Realized losses, cumulative losses within non-QM are still a handful of basis points across various vintages. I would say we have not really seen any impact from the investor side. I think they're very comfortable with the structures of the deals, the credit enhancement, the performance, and ultimately the fact that these borrowers have equity and they're not realizing losses on those delinquencies. In terms of the rating agencies, I would say that they have been constructive. They initially were, we thought, very conservative evaluating these transactions. CEs, I would say, have actually probably declined a little bit given the actual performance that we've seen over the last number of years.

Got it. Thank you very much.

Thank you, Marissa.

The next question comes from Rick Shane with JP Morgan. Please go ahead.

Hey, everybody. Thanks for taking my questions, and good morning. Look, you guys were aggressive in the Q1, raising capital through the ATM. Stock continues to trade at a premium to book. I am curious in this environment with spreads tightening again, how aggressive you might be at these levels and also given deployment into what I would describe as less liquid, more bespoke instruments, whether it's MSR or CRT. Is the strategy to raise capital and then deploy it into the core agency book, and then as you see opportunities rotated into the other asset classes. How should we think about deployment and your ability, I guess how aggressive you will be in raising capital and how you will mitigate the drag as you redeploy capital?

Sure. Good question, Rick. Just to be clear, in the Q1, the capital raise was specifically related to resi credit and MSR in real time. In January, agency obviously got quite tight as I mentioned. However, we were seeing a lot of supply coming in, both MSR and the loan pipeline was picking up. We felt it was highly productive to raise capital, and we did so. We added nearly $400 million in market value in MSR and obviously over $2 billion in resi credit. That was the purpose. We weren't just raising capital, putting it in agency and then redeploying it. It was specifically earmarked. On a go-forward basis, agency looks better than it did obviously in January after the GSE announcement.

When we look at that sector, the technicals are as supportive as they've been, as I mentioned in the prepared remarks, since QE. While spreads are not as cheap as they were in 2025, it's a very investable sector because we feel like it's safer given the breadth of demand across virtually all market participants. We wouldn't hesitate to methodically raise capital and invest in agency. We don't feel like our footprint is going to be that heavy. We don't need to be that aggressive. It's got to work for us, and obviously it was accretive last quarter. It still looks to be that way. We're going to be delicate, and we want to be very thoughtful about how we allocate it. Again, Q1 was not about just storing it in agency and then redeploying it.

We have done that from time to time, as I've mentioned, when agency was cheaper. Really it's a very thoughtful process, and we weren't in the market that frequently. When March, when the volatility hit, we certainly weren't actively in the market. It had to be right. The stock had to be liquid and with a strong bid associated with it. We didn't have a heavy footprint at all, and we'll maintain that approach.

Hey, David. Thank you. Our team's a little short-handed at the moment, and I'm bouncing around between calls, so the clarification on how opportunistic that issuance in Q1 was really helpful. Thank you.

Thank you, Rick.

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

There were a few securitizations this quarter that included agency-eligible loans. Could you maybe talk a little bit about the dynamic that's incentivizing originators to sell their loans in the non-agency channel over the agencies, and then how you expect that to trend over the coming quarters?

Sure. Thanks, Harsh. This is Mike. I would say that the agency-eligible investor loans and agency-eligible second homes has been a continuing sector within the residential credit market over the last number of years, when the FHFA and the GSEs made changes to their LLPAs at the higher LTV levels. It is very onerous to deliver those products to the GSEs. Dependent upon where market execution is, a lot of these underlying originators would rather retain those loans, put them on gestation facilities for a period of time, and deliver it to non-agency aggregators like ourselves relative to delivering to correspondents or the cash window. There's enough pay-up for them to hold that loan, perform due diligence, pay incremental warehouse costs, relative to just delivering it to another correspondent or cash window within a handful of days.

That's something that has existed within this market for a number of years, given those LLPAs. A new development, what the market is seeing, is that agency owner-occupied collateral, which does not have these so-called onerous LLPAs. You have seen more and more originators securitize that. At this point, I think that there's been three originators that have come to the market. I think they all have differing objectives in terms of coming to the market. One of them, which is fairly large, I think that they've been very clear that the actual execution of owner-occupied in the PLS market versus the agency market is break even. But they're utilizing it to create credit investments. We did a deal this quarter with a company. It was a partnership transaction. We didn't actually take principal risk. We are charging for the use of our shelf.

We take down subordinate bonds. I think their incentive was they wanted additional capital markets distributions away from the GSEs. We've seen a handful of originators go down the route of owner-occupied. At this point, though, we don't think that it's actually that profitable relative to the agency execution. It's more just broadening these originators' capital markets distribution, so to speak.

Got it. That's helpful. That's all for me. Thank you.

Thanks, Harsh.

The next question comes from Merrill Ross with Compass Point Research & Trading. Please go ahead.

Thank you. Good morning. You mentioned that there were only slight changes in your hedging portfolio despite the shift in your equity allocation. I'm wondering if the lower periodic income reduces your appetite for hedging with swaps over Treasury futures, and just how you expect to roll forward your hedge positions in the Q2. Thank you.

Sure, Merrill, good morning. I'll just take a big-picture approach to your question and talk about swaps versus Treasuries. Now, we've had a couple of changes to the market in the past number of months, beginning last fall, and the first one being that the Fed ended QT and started reserve management for purchases. That to us signaled that the Fed is going to stand behind balance sheet in the market. The difference between swaps and Treasuries in terms of the risk is Treasuries have balance sheet risks, swaps don't. When you add potential for balance sheet on the part of the Fed, it makes swaps a safer hedge. In addition to that, the second item is we got clarity on bank capital rules, which should free up a little bit of balance sheet.

From that standpoint, our disposition towards hedging with swaps is a little bit more optimistic. Now, having said that, the correlation between mortgages and swaps is not as good as the correlation between mortgages and Treasuries, or hasn't historically been as good. It's a tighter fit to hedge with Treasuries, so it makes sense to maintain Treasuries as a hedge, even though the carry isn't as good. However, if you look at some of the evolution over the very recent past, REITs growing and they're hedging with swaps, the GSEs hedge with swaps, a lot of bank purchases of CMO floaters, which are SOFR-based. The market is evolving more towards benchmarking mortgages to swaps, and as a consequence, you should get better correlations on a go-forward basis.

Between both of those developments, I think we're a little bit more comfortable hedging with swaps, and you might see a slight increase in our usage of swaps. However, when you get shock environments like we saw in March in the sell-off, Treasuries tend to underperform swaps, and they end up being a better hedge. You want to have some element of your hedge portfolio in Treasuries to kind of cushion those eventualities. But generally, we're pretty comfortable with around a two-thirds hedge ratio between swaps and Treasuries. You could see it go up because of the better or the increasingly better fit between mortgages and swaps.

Thank you. I appreciate that view.

Tank you, Merrill.

The next question comes from Jason Weaver with Jones Trading. Please go ahead.

Hey, guys. Good morning. I was hoping perhaps maybe you could disaggregate the 190 basis points, the book value decline by what was driven by Agency spread widening versus marks on resi credit MSR book. If that's materially reversed in April.

Yeah. I'd say resi performed the best, followed by MSR and agency obviously lagged. Agency spreads as well as costs associated with dynamically hedging. We had a 50 basis point variation in ten-year swaps and that can tend to cost a little bit. Some of the book value deterioration was as a consequence to just managing the portfolio and hedging. Generally, agency lagged the other two on a little bit of spread widening and maybe had a very slightly negative return. Resi did the best, call it low to mid-single digits, and MSR low single digits in terms of economic return.

Got it. That's helpful. Given the geopolitical volatility that's been going on since March, has that shifted your outlook for the runway for the Onslow Bay business, or have you changed your retention targets with that strategy?

You said Onslow Bay specifically?

Correct.

Hey, Jason. This is Mike. I would say, if anything, Q1 has actually given us more comfort in terms of ramping up residential whole loans, ramping up the correspondent business. Similar to what we experienced during Liberation Day and the subsequent fallout there's been significant resiliency within the non-agency market. If we look at Q1, David mentioned it in his script, over 60% growth year-over-year in Q1, and that is despite spreads at the top part of the capital stack experiencing a 50 basis point range. The market was fully functioning. We obviously priced eight deals, settled eight deals, $4.7 billion. We've priced 12 deals to date. Right as we sit here today, the cost of funds on a triple A security is probably in the 120 range, all in SOFR cost or SOFR plus 150. You're in the low 5% cost of funds.

The market has shown increasing growth, sponsorship, and liquidity. I would say we're comforted by despite this volatility, the market continued to operate at a high level.

Well, thanks, guys. Congrats on the quarter. I appreciate the color.

Thanks, Jason.

The next question comes from Trevor Cranston with Citizens JMP. Please go ahead.

Hey, thanks. Good morning. With mortgage rates increasing a decent amount over the last several weeks, can you give us an update on your thinking as to the probability of further efforts from the government to potentially lower mortgage rates? What form you think that could potentially come in?

Sure. Look, the affordability issue's kind of moved a little bit to the sidelines in light of the conflict in Iran. Just to summarize what's been done thus far, obviously the GSE announcement was meaningful for the mortgage basis. There's been a couple of executive orders which have been primarily focused on regulation, both building as well as mortgage lending. Those are just around the edges. The ROAD Act is stuck in the House, and that has, again, some positive impact for affordability. There's pilot programs, convert vacant buildings into attainable housing, and spur construction through regulatory relief as well, and grants for manufactured housing, et cetera. Also the other efforts within the government to just generally make housing more affordable.

These are not having an impact insofar as at the end of the day, mortgage rates are higher, folks are locked in, and home prices are high. Ultimately we need lower rates to be able to help that. We'll see what else the government can do. One thing I can tell you that might be a little novel idea if you want to get mortgage rates lower is to take a bipartisan approach and focus on reducing spending and raising revenues and get overall level of interest rates down if you can deal with deficits. Until you really deal with the bigger structural problems in the economy, it's going to be hard to get mortgage rates lower. That's the short of it.

Yeah. Okay, that's helpful. Thank you.

Thank you, Trevor.

This concludes our question and answer session. I would like to turn the conference back over to David Finkelstein for any closing remarks.

Thank you, operator, and thanks everybody for joining today, and we'll talk to you next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.