AGNC Investment - Earnings Call - Q2 2020

Transcript

Operator (participant)

Good morning and welcome to the AGNC Investment Corp's second quarter 2020 shareholder call. All participants will be in listen-only mode. Should you need assistance, please signal our conference specialist or press the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Katie Wisecarver in investor relations. Please go ahead.

Katie Wisecarver (VP of Investor Relations)

Thank you all for joining AGNC Investment Corp's second quarter 2020 earnings call. Before we begin, I'd like to review the Safe Harbor Statement. This conference call and corresponding slide presentation contain statements that, to the extent they are not recitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the risk factor section of AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligations to update our forward-looking statements unless required by law. Participants on the call include Gary Kain, Chief Executive Officer, Bernie Bell, Senior Vice President and Chief Financial Officer, Chris Kuehl, Executive Vice President, Aaron Pas, Senior Vice President, and Peter Federico, President and Chief Operating Officer. With that, I'll turn the call over to Gary Kain.

Gary Kain (CEO and CIO)

Thanks, Katie, and thanks to all of you for your interest in AGNC. We were very pleased with the performance of our portfolio in the second quarter, with economic return totaling just over 12% as we recovered a significant portion of our Q1 loss. More importantly, we remain optimistic about the earnings power of the portfolio across a wide range of possible economic scenarios. This favorable earnings backdrop is evident in our net spread and dollar roll income, which increased $0.01 per share to $0.58 in Q2, despite a smaller portfolio and lower average leverage. During the second quarter, market conditions improved materially as the unprecedented monetary and fiscal support drove a dramatic recovery in equity markets around the world.

The S&P 500 recouped almost all of the Q1 losses, while the Nasdaq finished Q2 over 10% higher than where it began the year, a quarterly increase of over 30%. Fixed income credit also performed very well, with most credit spreads recovering close to 70% of the Q1 widening. Interest rates were very stable, with the yield on the 10-year Treasury ending the quarter within a basis point of where it closed on March 31. The short end of the Treasury and swap curves performed better in response to growing confidence that the Fed will keep the funds rate near zero for multiple years. Despite very limited interest rate volatility, massive Fed support, and the dramatic recovery in credit-centric products, generic Agency MBS performance was mixed, with lower coupons tightening modestly while higher coupons widened. Specified pools, which underperformed dramatically in March, saw a significant recovery.

The outperformance of specs drove our strong book value and economic return performance for the quarter. Contrary to expectations, the mortgage origination market was less impacted by lockdowns and social distancing. Refinancing volumes remained very robust, and we saw a rapid recovery in the home purchase market. The heavier-than-expected origination volume, which totaled $730 billion in the second quarter, served as a major offset to Fed MBS purchases. As a result, lower coupon Agency MBS valuations, while modestly tighter quarter over quarter, remained attractive both in absolute and relative terms. This attractiveness is further enhanced by improved dollar roll specialness in lower coupons, a trend we expected to see during the quarter. As Chris will discuss shortly, incremental levered ROE potential on low coupon 30-year TBAs is still in the low to mid-teens, depending on the amount and durability of roll specialness.

In contrast, the projected returns on most higher coupon specs have declined to the lower double digits on the back of price increases and faster prepayment expectations. From a big picture perspective, the current investment environment is very different and more favorable for us than the QE3 era. Back in late 2012 and early 2013, the Fed's purchases drove agency MBS spreads to valuations around 50 basis points tighter than today's levels by most measures. While the QE3 tightening was temporarily good for book value, it materially lowered our expected returns on new purchases and set the stage for the significant widening in spreads that occurred when the Fed telegraphed the tapering of its purchases. Today, despite Fed purchases of over $850 billion since mid-March, MBS valuations remain attractive, benefit from favorable dollar roll levels, and are easier to hedge given the zero interest rate bound.

In summary, we feel good about AGNC's performance in Q2 and remain confident about the earnings potential of the company. Given the lack of credit risk in our Agency MBS portfolio and the favorable funding backdrop, we believe AGNC should be able to produce strong returns regardless of the progression of COVID-19 or broader moves in the global economy. This potential for our portfolio to perform well in either a risk-on or risk-off scenario is somewhat unique to AGNC. At this point, I will turn the call over to Bernie to review our financial results for the quarter.

Bernie Bell (SVP and CFO)

Thank you, Gary. Turning to slide four, we had total comprehensive income of $1.60 per share for the second quarter. Net spread and dollar roll income, excluding catch-up, was $0.58 per share for the quarter, which, as Gary mentioned, was up slightly from Q1 despite a materially smaller average portfolio balance, lower average leverage, and meaningfully faster prepayment projection. These earnings headwinds were offset by lower aggregate funding cost, which drove the slight improvement quarter over quarter. Tangible net book value increased 9.5% for the quarter, led by a significant rebound in spec pool valuation. Including dividends, our economic return on tangible common equity was 12.2% for the quarter, recovering nearly half of our first quarter economic loss. So far this quarter, we estimate that our tangible net book value is down a couple of percent given a modest pullback in spec pool pay-up values.

Turning to slide five, our average portfolio at quarter end totaled $97.7 billion, up $4.7 billion from the end of the first quarter. Our ending leverage was 9.2 times tangible equity, down slightly from 9.4 times as of the end of the first quarter. As I mentioned, given the significant decrease in our average portfolio balance for the quarter, our average leverage was down meaningfully for the second quarter at 8.8 times tangible equity compared to 9.9 times in the first quarter. Our liquidity position remained very strong in the second quarter and is above pre-crisis levels, with cash and unencumbered Agency assets totaling $4.5 billion at quarter end. Importantly, that figure excludes both unencumbered CRT and Non-Agency securities, as well as assets held at our broker-dealer subsidiary, Bethesda Securities. With mortgage rates dropping to historically low levels during the quarter, prepayment speeds increased across the coupon stack.

Actual prepayment speeds on our portfolio increased to 19.9% for the quarter, while our forecasted life CPRs increased to 16.6% from 14.5% last quarter. Lastly, during the second quarter, we repurchased $147 million of our common stock at substantial discounts to our tangible net book value for an average repurchase price of $11.99 per share. With that, I'll turn the call over to Chris to discuss the Agency market.

Chris Kuehl (EVP)

Thanks, Bernie. Let's turn to slide six. Interest rate volatility was muted in the second quarter, with 10-year Treasury rates ending the quarter one basis point lower at 64 basis points. The yield curve did steepen, with two-year and five-year Treasury yields 10 basis points lower, ending the quarter at 15 and 29 basis points respectively. Agency MBS spreads were generally tighter, but performance was mixed, with lower coupon TBAs modestly tighter while higher coupon TBAs were modestly wider. Specified pools, however, were the best performers, regaining most of the Q1 widening. The unprecedented support from the Fed, with purchases heavily concentrated in production coupon MBS, drove the outperformance in lower coupons, even with gross supply significantly larger than expected.

As you can see in the lower left table on page six, higher coupon TBA 3.5s and 4s declined in price during the quarter, as prepayment speeds generally surprised to the upside, as the widely expected COVID-related headwinds to housing and refinance activity did not materialize. Faster prepayment speeds on more generic cohorts and the weakness in higher coupon TBA led to a strong outperformance of higher coupon specified pools in the second quarter. Let's turn to slide seven. You can see in the top left chart the investment portfolio increased by a little over $4.5 billion as of June 30. Given the outperformance of specified pools, most of which occurred in April, we continued to trim positions in both higher quality and generic higher coupon MBS versus adding production coupons.

During the quarter, we reduced holdings in 3% coupons and above by approximately $12 billion versus adding $16 billion in 2.5s and 2s. As I mentioned on the call last quarter, we expected dollar roll financing to improve as the combination of very strong origination volumes and large Fed purchases, which continue to clear out the worst bonds in the float, create an ideal backdrop for dollar rolls. Roll financing on lower coupon TBA is currently trading around 20 to 80 basis points through repo, depending on the coupon. With this degree of specialness, the potential contribution to returns is material. As a hypothetical example, with gross returns on lower coupon 30-year MBS funded with repo around 12%, 25 basis points of dollar roll specialness has the potential to add more than 2% in incremental return.

Realistically, roll specialness could be even higher as it is today, but there's no guarantee that it will persist. We remain optimistic about the investment environment given relatively wide spreads, attractive carry, and low interest rate volatility. And while the prepayment backdrop is certainly not the tailwind we had hoped for, our diversified portfolio of higher coupon specified pools and production coupon TBA has offsetting risk characteristics that position us well in the current environment. I'll now turn the call over to Aaron to discuss the non-agency market.

Aaron Pas (SVP)

Thanks, Chris. I'll quickly recap our current positioning and then update you with our outlook on credit. Please turn to slide eight. After facing unprecedented price action in the first quarter, both equities and credit markets staged a fierce recovery in Q2. As it stands now, we've seen a V-shaped recovery in credit spreads, yet an uncertain backdrop remains on when the economy will be fully reopened and the resulting toll on the consumer and business sector. To put the magnitude of the rally in perspective, from the start of the year to the wides in late March, IG and high-yield CDX spreads were approximately 100 and 600 basis points respectively. Subsequently, they have tightened about 70 and 370 basis points. Our holdings across the portfolio were largely unchanged, with a slight shift in the vintages of our CRT portfolio to more recently issued securities.

These are generally more exposed to and benefit from higher-than-anticipated prepayments, which is a natural fit for our portfolio. On the residential side, as we mentioned last quarter, the quick implementation of forbearance programs would likely result in reduced downside pressure on housing prices in the near term. The GSE subsequently announced the ability to defer up to 12 months of payments, thus giving borrowers a much easier path to return to current status. This was particularly beneficial for credit risk transfer, as it served to reduce potential modification-related losses. This change, along with faster-than-anticipated prepayments, stabilization in forbearance requests, and the improved macro backdrop led to a strong rally in CRT. Additionally, many of these same themes were supportive of credit spreads in other parts of the residential credit markets.

On the commercial front, while increases in delinquencies have stabilized for the time being, we believe this sector remains particularly exposed to the stops and starts in the economy. While we are comfortable with our positions from a risk perspective, we generally remain defensive until we get better clarity around the timing of a potential return to normalcy in the economy. Looking forward, with the Fed actions setting the stage, we are likely to be in a regime of relatively tight credit spreads coupled with an elevated fundamental risk environment for some time. This does present many challenges, and particularly so for levered investors, since the risk-return equation is a bit skewed.

At the same time, with rates expected to sit close to the zero bound for years, it also means picking the right bonds today could generate reasonable returns, as bonds that ultimately have sufficient credit support are likely to see spread tightening over the coming couple of years. With that, I'll turn the call over to Peter to discuss funding and risk management.

Peter Federico (President and COO)

Thanks, Aaron. I'll start with our financing summary on slide nine. The repo market for agency MBS traded very well in the second quarter and continues to benefit from the Fed's open market operations, as well as the very significant influx of cash into government money market mutual funds. The substantial demand for high-quality collateral, like agency MBS, has led to a meaningful repricing across all repo tenors. As a result, our average repo cost fell to 76 basis points in the second quarter, less than half of the 180 basis points we reported in the first quarter. A key development during the quarter was the Fed's communication regarding their intention to keep short-term rates near zero for the foreseeable future. Chairman Powell's statement that the Fed is not even thinking about thinking about raising rates makes that very clear. As a result, the repo funding curve flattened significantly.

Today, for example, there is only about a five-basis-point cost differential between overnight repo, which trades at around 15 basis points, and one-year repo, which trades at around 20 basis points through our captive broker-dealer. I expect these favorable funding conditions to continue, and as such, I expect our average repo cost to drop to around 40 basis points in the third quarter, as more of our outstanding repo resets at current market rates. Our aggregate cost of funds, which includes the cost of our swap hedges, fell to 88 basis points in the second quarter, down meaningfully from the 167 basis points the prior quarter. This improvement more than offset the decrease in our asset yield and drove the notable improvement in our net interest margin, which increased to 168 basis points. Looking ahead, I expect our net interest margin to improve further in the third quarter.

Turning to slide 10, we provide a summary of our hedge portfolio, which totaled $59 billion at quarter end, unchanged from the prior quarter, and covered 66% of our funding liabilities. As we discussed last quarter, with swap rates at such low levels, we continue to view this as an opportunity to lock in very attractive funding for an extended period of time. As such, we continued to adjust the composition of our swap portfolio in the second quarter, unwinding more of our shorter-term swaps and replacing them with slightly longer-term swaps. As a result, the average maturity of our swap portfolio increased to 5.1 years at quarter end from 4.5 years the prior quarter. On slide 11, we show our duration gap and duration gap sensitivity. Given the stability of interest rates during the quarter, our duration gap remained roughly unchanged at negative 0.1 years.

With that, I'll turn the call back over to Gary.

Gary Kain (CEO and CIO)

Thanks, Peter. And at this point, I will open up the call to questions.

Operator (participant)

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. And the first question comes from Doug Harter with Credit Suisse.

Doug Harter (Director)

Thanks. Gary, can you tell us how you and the board are thinking about dividends given kind of the much higher level of earnings this quarter and your commentary about those conditions persisting?

Gary Kain (CEO and CIO)

Yeah, I'd be happy to. And thank you for the question. When you look at our net spread and dollar roll income performance this quarter, and realistically the fact that it is still probably biased upward from here, you certainly could conclude that our dividend cut was unnecessary. And we made that move back in April, just a few weeks after kind of the depth of the crisis. That being said, I do think it's important to also view it, I mean, in our minds, while it may have been unnecessary, we're not sure it's not optimal in terms of the return kind of profile for shareholders. I mean, if you look at our dividend yield relative to our stock price, it's obviously just north of 10%, which is still a very attractive dividend yield.

And by having a dividend so far below net spread and dollar roll income, and even versus that trajectory of net spread and dollar roll income, it really gives us a nice tailwind to book value over time. And that's not a bad situation for us to be in and for shareholders. So very attractive dividend, tailwind for book value. And then obviously, we also have a share repurchase program in place, which we're certainly very, very willing to use as another way of returning capital to shareholders, if that makes sense. So big picture, it is something that we will continue to look at, and we will evaluate over time. We're cognizant of the large gap between, again, both our current net spread income and the likely trajectory, again, which is still positive, and where the dividend is.

But we also want to be cognizant that there are some benefits to this situation as well. So it is something that we will evaluate over time, and it's something that the board is going to be very focused on.

Doug Harter (Director)

And then just to follow up, those points all make sense. But I guess, where or how much flexibility do you have from a taxable income standpoint, and kind of how different are kind of taxable and kind of the corpus drop right now, just in kind of that dividend discussion?

Gary Kain (CEO and CIO)

There's a wide gap between taxable income and our core. And so realistically, our taxable income is very low at this point and projected to be very low. So that doesn't come into play with respect to the dividend. We have lots of flexibility with respect to the dividend. The reason taxable income is so low, I mean, there's multiple reasons. But one is it treats dollar roll income differently. Plus, in light of all the activity over the, in particular, in the first and second quarter, in terms of repositioning the swap portfolio, changing the duration around, probably by far the biggest differential between GAAP and or net spread and dollar roll income and taxable income relates to terminated swaps that get terminated, which then get amortized for taxable income, whereas they're taken as an upfront cost on the regular income front.

I don't know, Bernie or Peter, if you want to add anything to that?

Peter Federico (President and COO)

No, Gary, that last point is a key one. And obviously, we still have some rebalancing to do there. So our projection for that taxable income is that that's not going to be a constraint for some period of time.

Doug Harter (Director)

Great. Thank you, guys.

Operator (participant)

Thank you, and the next question comes from Bose George with KBW.

Bose George (Managing Director)

Hey, good morning. Actually, can you go over the drivers of specialness in the lower coupon MBS? And also, when we think about your return, should we sort of think about a base case return on the spread income kind of in the low double digits, and then the specialness being sort of what flexes it up and down from there?

Gary Kain (CEO and CIO)

Yeah, I think that's a good way. First off, I'll take the second half of your question first. I think it's a good way to think about it, and we start by thinking about, okay, if we buy a new production 30 or 2 or 2 and a half, and let's say we think the spread is 110-120 in that zip code, depending on prepayment assumptions. That's right, that's a good starting point. However, the first part of your question is really important, and if you think about the drivers of specialness and what creates a situation when dollar rolls are special, you need the first piece actually is everyone always says the Fed, and that's a huge piece of it, and I'll come to that, but the first piece is actually significant origination volume.

And we are seeing that like we've never seen it before, where the last couple of months have been around $250 billion a month in gross issuance. And remember, the way the origination market works is people sell those forward one and two, three months even. And so that drives down the price of out-month TBAs. And that's the first step realistically in creating specialness. Now, second of all, you've got massive Fed purchases, which continue to take out kind of existing production. And the Fed purchases are in the neighborhood of 40% of that origination, total origination. And importantly, what the Fed purchases do is they take out kind of the fastest prepaying kind of least desirable pools within the float, which means that then that gets priced into dollar rolls because the bonds that float around for other investors are dramatically better.

So when you put those two pieces together, you have the, and I think these are the words Chris used, the ideal backdrop for roll specialness. And so we do think we're in that kind of situation. We talked about that on our April call. The roll specialness hadn't really materialized because we were still working through balance sheet issues and other things in April, but it really started to materialize in May, June, and it's continuing now. So we feel very good about the sustainability of roll specialness. Now, it's going to bounce around in terms of the magnitude, but in the lowest coupons in both 30-year and 15-year, we feel pretty good about the fact that it's sustainable, certainly over the near to intermediate term at a level where it's going to add to ROEs.

It is important to, while you start in the calculation where we talked about where you would on a repo-funded position, we do believe that TBAs are going to outperform that because of the roll specialness.

Bose George (Managing Director)

Okay, great. Thanks, Gary. That was very helpful. And then actually, just on your prepayment expectation, can you just talk about what you're thinking in terms of the primary mortgage rate, like what that does versus a benchmark over time?

Gary Kain (CEO and CIO)

Sure. So I mean, the primary mortgage rate has been trending lower and likely will trend a little lower from here. And that's certainly something that both we and I think the market certainly understands. Another factor that comes into play at some point, obviously, is expectations around interest rates. And when we look at things, we factor in the forward curve, which does have, after some period of time, puts an upward bias on the mortgage rate as well as long rates. So in the short run, the bias is toward somewhat lower rates, mortgage rates, again, because the primary rate drives prepayments in general. There are other things to keep in mind. I mean, we don't know. The other things that factor into refinancing activity and prepayment estimates are qualifying, obviously, for mortgages.

We are seeing an environment where unemployment is likely to be elevated for some time. We are seeing a tighter underwriting environment than what we had even three to six months ago. I think there are some offsets. The other thing to keep in mind about prepayments is that in these refi waves, you see these peaks or big bulges. Sometimes they're more narrow, and other times they're a little more spread out. With the mortgage rate dropping and in light of these circumstances, it may be a little more spread out. There is this element of burnout where people have had really good opportunities to refinance. Even if the opportunity is a little better, if they didn't take advantage of a 100 basis point opportunity, taking advantage of a 110 basis point opportunity five months later doesn't necessarily do the trick.

So I mean, that's a long-winded answer, but I tried to touch on a couple of different elements of that.

Bose George (Managing Director)

Okay, great. Thanks. That was helpful.

Operator (participant)

Thank you, and the next question comes from George Saravelos with Deutsche Bank.

George Saravelos (Managing Director and Global Head of FX Research)

Hi, good morning, Gary. You alluded to a favorable backdrop for AGNC given a very accommodative Fed. Fed funds rate is anchored near zero. Hedging dynamics are attractive, and Fed purchases are likely to continue for some time. As you think about downside risk to book value and dividend sustainability in kind of near to medium term, what would you say are the biggest kind of things that are on your radar today?

Gary Kain (CEO and CIO)

Sure. Look, I mean, I think. I'll start again maybe in reverse order. We're not going back to the earlier answer on the dividend. We're not overly concerned. We're not very concerned right now at all about dividend sustainability. The biggest headwind or potential headwind to book value in the near term is probably continued faster prepayments and some incremental pressure. We've already seen it a little in the last couple of weeks on spec pools and higher coupons. So I wouldn't honestly be surprised to see a little more of that. But we're talking about that in terms of a couple % here or there. There's also some risk to book value, certainly, of lower coupons in bouts of when there's significant origination volumes that can exceed certainly the Fed's bid.

And if there isn't significant bank buying at the time, I think you could see periods where lower coupons widen a little bit. But big picture, without significant interest rate volatility and with the Fed backstop the way it is, it's really not an environment where we expect to see a lot of book value volatility. And I would say that's true in either direction. I know people would like to see what's a scenario where book value explodes from here. It's possible that the Fed activity could drive book value higher, and that could be a kind of a relatively quick move. We think that's unlikely. We think we're more in an environment where book value is going to be relatively stable on both sides, and we're going to be in a favorable earnings environment.

What's important to keep in mind about our portfolio is we sort of have a mix now of lower coupons, which really benefit directly from the Fed, which benefit from the dollar roll specialness, and where there's very limited prepayment fears in the near term. We have our higher coupon specified portfolio, which we continue to sort of optimize and prune and try to tailor for the current environment. Those sort of have different risks. I think that also helps to reduce the book value volatility embedded in our portfolio as a whole. Hopefully that helps.

George Saravelos (Managing Director and Global Head of FX Research)

Great. That's helpful.

Operator (participant)

Thank you.

Gary Kain (CEO and CIO)

Thank you.

Operator (participant)

Thank you. And yeah, next question comes from Trevor Cranston with JMP Securities.

Trevor Cranston (Director and Senior Equity Research Analyst)

Hey, thanks. Good morning. Follow-up to the question about the prepay outlook and your thoughts around the primary mortgage rate. Can you maybe just to ask it a different way, can you maybe talk about sort of what you would expect to see in terms of prepay speeds? For example, if the primary mortgage rate hit 2.5%, recognizing that it may be sort of a flatter peak when speeds increase. I guess, how sensitive generally do you think speeds would be to a 50 basis point decline in mortgage rates? Thanks.

Gary Kain (CEO and CIO)

I'll start, and I'll let maybe Chris chime in a little as well. But the short answer is it depends very much on what type of security, what coupon you're looking at, what seasoning, how long has it been outstanding, loan balance, and lots of other characteristics. So as an example, going back to the earlier point, I would expect fours and four and a half specified pools, which we own a fair amount, not to be all that impacted. I'm not saying speeds won't pick up on them, but they have dramatic incentive to refinance today. And we've seen a healthy pickup in those speeds. But while they'll have a stronger refinance incentive, and there may be some increase, we don't expect that increase to be dramatic, and it should tend to burn out quicker.

I think when you start looking at specified pools in the 3%-3.5% coupon, that's where I think there'll be the most reactivity to that kind of decline. Now, with respect to TBAs, in most TBAs that are more seasoned in threes through fours, they'll pick up as well, but they're already fast, and the challenge will be, I think, where you will see some parts of the lower coupons, let's say like 3.0 or two and a halfs, will become a lot more like threes, and you'll have to be very careful at a certain point in time. It will still take time because the Fed will still be absorbing the worst pools out there and the most seasoned, so you can still hide for probably a good at least six months, maybe nine months in the brand newest originations in that coupon.

But you're going to have to be careful about lower coupon TBAs such as 2.5 because they will flip very quickly or in that scenario into a prepay window. But again, that'll be manageable given the Fed's kind of purchase program and the fact that they've cleaned up the float. And the other way you deal with that is obviously migrating your coupons. Chris, I don't know if you want to add anything to that.

Chris Kuehl (EVP)

Yeah, no, Gary, that covered it pretty well. I mean, the one thing to keep in mind, I'd say, is that we're already operating at or near capacity for lenders with around 90% of the mortgage universe exposed to, call it at least a 50 basis point rate incentive. So everything else equal, even if rates stay here, it'll take time for the primary secondary spread to come down. It's not going to just gap down since we're already close to capacity. But more directly to your question, clearly, two and a halfs, two and a half would be the most exposed to sort of a no-cost 2.5% mortgage rate. But we're still a good ways away from that right now.

Trevor Cranston (Director and Senior Equity Research Analyst)

Okay. That's helpful. Appreciate the comments. Thank you.

Operator (participant)

Thank you. And our last question comes from Charlie Arestia with J.P. Morgan.

Charlie Arestia (VP)

Hey, good morning, everybody. Thanks for taking the questions today. You noted in the prepared remarks about $730 billion in origination volumes during the quarter, which helped offset those Fed purchases. I'm wondering what your outlook is like for supply through year-end, and I'm wondering if there was sort of a catch-up effect as the lockdowns lifted and things returned to normal, or if that pace is sustainable given where rates are.

Gary Kain (CEO and CIO)

So what I would say is, one, we really didn't see, and we mentioned this a couple of times in the prepared remarks, I think most market participants had expected more of an impact from the lockdowns and social distancing in the second quarter around origination volumes, refinancing, and even the housing market. And interestingly, I think what you saw in the mortgage market was really what you saw kind of more globally across retail, delivery. The business didn't shut down. I mean, it just moved online or technology took over. And I think we saw that in the mortgage market as well. And so just first off, what I would say is that I don't think we saw much disruption, which certainly was a possibility.

So taking that forward, we believe production remains high and around the current levels for, let's say, at least the next two or three months before likely starting to tail off as people get more used to this general level of rates. And where there is what we will say is a little bit of a catch-up is actually on the demand side. I think the production will be better absorbed in the second half of the year, and we're sort of already seeing that a little in July than it was certainly early on, let's say, March and April, even with large Fed purchases because of the fact that the prepayments probably won't be accelerating going forward. They're already at high levels. And if anything, there is sort of catch-up around reinvestment of paydowns.

Even at the Fed, there's catch-up that's sort of built in and certainly among many other investors as well as they've already had some very high months of prepayments and not necessarily all of that has been reinvested. So look, I think that's the high levels of production coupled with a continued Fed bid, coupled with this sort of pent-up reinvestment, I think is why we don't see a ton of volatility in lower coupon prices, more MBS spreads or prices as we look ahead, and again, it's also why we see dollar rolls remaining very special.

Charlie Arestia (VP)

Got it. Thanks very much for the color. I appreciate it.

Gary Kain (CEO and CIO)

No problem.

Operator (participant)

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

Gary Kain (CEO and CIO)

I'd like to thank everyone for their interest in AGNC, their participation in this call. Please stay safe, and we look forward to talking to you next quarter.

Operator (participant)

Thank you. That concludes today's teleconference. Thanks for calling in for today's presentation. You may now disconnect your lines.