Good day, and welcome to the Q2 2025 Annaly Capital Management Earnings Conference Call. [Operator Instructions] 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. Sean Ken

Good morning, and welcome to the Second Quarter 2025 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 second quarter 2025 investor presentation and second quarter 2025 financial supplement, both found under the Presentations 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. And with that, I'll turn the call over to David.

Thank you, Sean. Good morning, everyone, and thank you all for joining us for our second quarter earnings call. Today, as usual, I'll briefly review the macro and market environment as well as our performance for the quarter, then I'll provide an update on each of our three businesses, ending with our outlook. Serena will then discuss our financials before opening up the call to Q&A. . Now starting with the macro landscape, the U.S. economy is persevere through considerable trade-related uncertainty and resulting market volatility in recent months. Growth is likely to run around 1% annualized for the first half of the year, well below the pace of recent years but is arguably outperforming post Liberation Day expectations. Employers hired nearly 450,000 workers in the second quarter, which has lowered the unemployment rate marginally to 4.1%. And overall hiring has slowed compared to recent years, but the labor market is relatively balanced and layoffs have been somewhat muted. Inflation, meanwhile, likely ran at the slowest level in the past three quarters, as the continued decline in service sector inflation offset firming and goods prices, some of which likely tariff related. The economy and the labor market's resilience has affirmed the Fed's current wait-and-see stance with the majority of policymakers indicating a preference for more data to assess the impact of tariffs on inflation. We do expect the Fed to ultimately deliver on the two interest rate cuts projected for 2025 at the last FOMC meeting given the consensus view among policymakers, the current interest rate levels remain somewhat restrictive. As it relates to markets, a positive reversal in sentiment as the second quarter progressed, help risk assets recover from their sharp underperformance in early April, and financial conditions have reached some of the most accommodative levels since the onset of the hiking cycle in 2022. And despite improvement in markets, longer-term treasury yields remain elevated as the market will need to continue to fund large deficits, particularly with the passage of the recent tax and spending bill. Swap spreads have also been unable to reverse the majority of their April tightening, which left Agency MBS spreads 5 to 10 basis points wider on the quarter. Now against this backdrop, we delivered an economic return of 0.7% for the second quarter, while generating earnings available for distribution of $0.73, once again out earning our dividend. And Q2 marked the seventh consecutive quarter of generating a positive economic return for our shareholders, demonstrating the diversification benefit of our three fully scaled housing finance strategies. Year-to-date, we've delivered a 3.7% economic return with a total shareholder return of over 10% through quarter end. And further to note, we raised just over $750 million of accretive capital in the second quarter through our ATM program, which was predominantly deployed in the agency sector. and leverage increased modestly to 5.8x in light of the increased allocation to agency. Now turning to our investment strategies and beginning with agency. Our portfolio ended the quarter at nearly $80 billion in market value, up 6% quarter-over-quarter. After the early April volatility, market conditions for Agency MBS improved. Rates were range- bound, the yield curve remained relatively steep, implied volatility declined and comparable fixed income assets tightened given the favorable risk sentiment in markets. Agency MBS did lag in the recovery as demand from overseas and the bank community has remained muted, but we do think that these participants could become more active, should the Fed resume cutting or as expected regulatory reform materializes. With respect to our activity early in the quarter, we managed our duration through the tariff-driven volatility with little adjustment to our agency portfolio, -- and as markets normalized, we steadily added Agency MBS at attractive spreads in line with our capital raising, growing our agency portfolio by roughly $4.5 billion in notional terms. Purchases were fairly evenly split across 4.5s, 5.5s and 6s, and we marginally preferred pools over TBAs as repo financing was slightly more attractive than dollar roll carry. We continue to operate within a narrow interest rate risk band given the volatility we've experienced thus far this year. And in Q2, all asset purchases were hedged, and duration extension was prudently managed due to the rise in long-end rates. Within our hedge portfolio, we remain in favor of holding swaps against shorter-term risk due to the positive carry profile while maintaining a more balanced mix of treasury and swap exposure in the intermediate and long end. Swap spreads tightened significantly during the quarter and forward markets are signaling further tightening in the months ahead. That changes, however, You can nimbly adjust our hedges between swaps and treasury risk but for now, maintaining a roughly 60-40 hedge allocation between swaps and treasuries is more favorable in our view. Overall, we remain optimistic on the agency sector as fundamentals are sound, and there are several potential catalysts out the horizon to improve Agency MBS technicals. Additionally, we're encouraged by the administration's recent statements regarding GSE reform noting that any privatization efforts will preserve the implicit guarantee and aim to tighten MBS spreads, removing a significant market concern. Shifting to residential credit. Our portfolio was relatively unchanged at $6.6 billion in market value and $2.4 billion of capital. The resi credit sector broadly tracked corporate credit over the quarter, widening in sympathy with other risk assets in early April, only to finish the quarter with spreads roughly unchanged. Now despite the turbulence in the first half of the quarter, the non-agency market demonstrated its durability with over $43 billion of gross issuance in the quarter. Our Onslow Bay platform had its highest quarterly securitization activity to date, closing $3.6 billion across seven transactions, and we priced an additional two securitizations in July bringing cumulative 2025 activity to $7.6 billion across 15 transactions, generating [ 913 million ] of high-yielding proprietary assets for Annaly and our joint venture. Onslow Bay's expanded credit correspondent channel also remain the industry leader, generating $5.3 billion of locks and funding $3.7 billion of loans over the quarter. And this is despite tightening our credit standards once again, given some of the headwinds we are seeing in housing. Our current lock pipeline has a 764 weighted average FICO, and 68% LTV and is over 95% first lien. Regarding the housing market, available-for-sale inventory continues to increase as affordability remains challenged given elevated mortgage rates, high home prices and increased property taxes and insurance premiums. While housing affordability has been an issue for the past three years, we've entered a buyer's market as sellers now materially outweigh prospective homeowners. Higher supply has led to four consecutive months of negative HPA according to Zillow, and we expect the majority of the housing market to turn modestly negative year-over-year in the near term. Now balancing the deceleration of the housing market. This is a stable labor market, low consumer delinquencies, expansionary fiscal policy and elevated asset pricing, including equity markets. We remain well positioned in this environment as we control all aspects of our loan manufacturing strategy and the resulting assets have minimal leverage. Notably, over 70% of our residential credit exposure is represented by retained OBX securities and residential whole loans collateralized with high-quality borrowers. Moving to our MSR business. The portfolio ended the second quarter unchanged at $3.3 billion in market value, comprising $2.6 billion of the firm's capital. While bulk trading activity was healthy in the second quarter, we were measured with respect to new purchases as MSR valuations remain firm, acquiring approximately $30 million in market value. Our MSR valuation improved very modestly quarter-over-quarter, driven by the steepening of the yield curve, lower implied volatility and strong observed bulk execution. Solid fundamental performance of the portfolio persisted this past quarter with a 3-month CPR of 4.6%. Serious delinquencies unchanged at 50 basis points. And escrow balances up 6% year-over-year, which helped to drive increased float income. And the portfolio continued to generate well-defined durable cash flows given the 3.24% note rate with the average borrower at 350 basis points out of the money. As we move forward, we remain focused on furthering the build-out of our flow servicing relationships and capabilities and expanding our subservicing and recapture partnerships, which should allow us to capitalize on MSR opportunities across both the bulk and flow channels as relative value dictates. Now to conclude with our outlook, we maintain conviction that our portfolio will continue to generate strong risk-adjusted returns in the current environment. We've been encouraged by declining macro volatility as of late and we see further benefits to our portfolio in the mortgage sector should expected Fed cuts materialize. In the near term, we expect to be overweight agency given historically attractive spread levels, but over the long term, we'll strategically grow our residential credit and MSR portfolios as we look to expand on Onslow Bay's presence across the housing finance sector. And as always, we remain flexible in the current investing climate with our historically low leverage and ample liquidity, we're well positioned as we enter the second half of the year. And with that, I'll turn it over to Serena to discuss the financials.

Thank you, David. Today, I will provide a brief overview of the financial highlights for the quarter ended June 30, 2025. Consistent with prior quarters, our earnings release will disclose both GAAP and non-GAAP earnings metrics. However, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. As of June 30, 2025, our book value per share decreased 3% from the prior quarter to $18.45. After accounting for our dividend of $0.70, we achieved a positive economic return of 0.7% for the second quarter. This brings our economic return to 3.7% for the first half of the year. Earnings available for distribution per share increased by $0.01 to $0.73 and once again exceeded our dividend for the quarter. Results were primarily driven by higher yields on our investment portfolio of 5.41% compared to 5.23% in the prior quarter. Additionally, we saw lower average repo rates of 4.53% during the quarter, a modest decline of 3 basis points in comparison to the prior quarter. These increases were partially offset by lower swap income due to very modest swap runoff in the first half of the year. Our rotation up in coupon and agency over the last several quarters is evident in our interest metrics due to our increase in yields. The resi credit business generated additional income due to the growth of accretive OBX securitizations on balance as Onslow Bay experienced another quarter of record issuance. Net interest spread ex PAA has increased again. Reaching 1.47% in the second quarter compared to 1.24% a year ago. And net interest margin ex PAA is 1.71% in Q2 compared to 1.58% in Q2 2024. Turning to our financing strategy. Over the past several years, we have made deliberate and disciplined efforts to expand and diversify our funding sources. Today, our financing platform encompasses a diverse range of traditional and nontraditional financing arrangements which enhanced both our liquidity profile and operational flexibility. We have added substantial capacity through non- mark-to-market arrangements, second lien and HELOC lines, structured repurchase agreements and committed lines. For example, across our residential loan facilities, our non-mark-to-market capacity has grown from $150 million or 6% of total available capacity at the end of 2023 to $1.9 billion in the second quarter, now representing 45% of total capacity. These additions complement our more traditional financing sources, including bilateral repo, our internal broker-dealer, sponsored repo, securitizations, participation interests and warehouse financing facilities. This breadth of funding structures allows us to navigate a range of market environments more effectively enhancing stability during periods of volatility and positioning us to capitalize on opportunities as they arise. During the quarter, we added approximately $5 billion of repo principal, including term at attractive spreads. This increase was primarily due to the growth of the agency portfolio. As a result, our Q2 reported weighted average repo days maintained a healthy position of 49 days. During the quarter, we upsized several resi credit warehouse facilities and added a new MSR line, increasing our capacity by $500 million. As of June 30, 2025, our total facility capacity for the residential credit business was $4.2 billion across 10 counterparties with a utilization rate of 40%. Our MSR business has total available committed warehouse capacity of $2.1 billion across 4 counterparties as of June 30, 2025, with a utilization rate of 50%. Inclusive of our committed MSR warehouse facilities, our weighted average days to maturity is 56 days. Annaly's financial strength is further evident in our unencumbered assets, which ended the second quarter at approximately $6 billion including cash and unencumbered Agency MBS of $4.7 billion. In addition, we have roughly $1.5 billion in fair value of MSR that has been pledged to committed warehouse facilities but remains undrawn and can be quickly converted to cash, subject to market advance rates. Together, we have approximately $7.4 billion in assets available for financing, a decrease of roughly $70 million compared to the first quarter. Now that concludes our prepared remarks, and we will open the line for questions. Thank you, operator.

[Operator Instructions] Our first question is from Bose George, KBW.

Actually, first, can I just get an update on book value quarter-to-date?

Sure, Bose. As of last night, pre-dividend accrual book was up about 0.5%, so call it, 1.5% economic return.

Okay. Great. And then can you just discuss your comfort level with the dividend, how that ties in with your -- the economic return that you guys are seeing from the portfolio?

Sure. So obviously, we raised the dividend earlier this year, and we make those decisions very deliberately. And we did have confidence that it was certainly earnable. And that's been the case, we've outearned the dividend and we expect to certainly cover and potentially out earn the dividend for the remainder of the year, all else equal. . As it relates to economic return, the way we look at it is the portfolio should generate an economic return approximating or in upwards of the dividend. There are hedging costs, which could erode that economic return somewhat. But nevertheless, the goal is to get as close to the dividend as is achievable managing for hedging costs and other costs, and we feel pretty good about where our economic return is year-to-date, certainly. And as I mentioned, we have had positive economic return for the past seven quarters. We think the environment is certainly conducive to achieving close to that dividend yield given volatility has come down and asset spreads are relatively cheap.

The next question from Doug Harter, UBS.

David, hoping you could just talk through kind of how you thought about managing the portfolio through the second quarter your comfort in letting kind of leverage rise during kind of the extreme bout of volatility versus kind of feeling compelled to kind of risk manage the portfolio? And just help us with that thought process.

Sure. Good question, Doug. So look, we came into the quarter with a very good liquidity position, consistent with where we're at this quarter. So we're comfortable in light of the volatility. And Liberation Day was announced well in advance, and so we wanted to be prepared for it. Our leverage was low, and we had ample capacity. So as April did get underway, our biggest focus was managing rate exposure. Given our low leverage, we could allow leverage to drift higher, which we certainly did. But rate exposure was something we were more focused on. And I think when it comes to the rates market in the current environment, navigating uncertainty is now the base case, and we need to be prepared for a range of outcomes. And so we're keeping our rate risk very close to home, as I mentioned Doug, in my prepared remarks. And we let duration drift, but we're very disciplined when it comes to bands. And now we feel we're in a much better place certainly than we were in April and throughout the second quarter. We have a little bit more clarity on where tariffs are heading. The tax bill is complete. We came into this quarter with virtually no duration. We drifted a little bit and so far as rates have gone up, which is fine, but we feel good about the rates view, but that's the key focus in terms of managing that type of volatility given the fact that we have flexibility in light of relatively low leverage. Does that help?

Very helpful. And then, I guess, in that context of your -- I guess, how do you think about balancing kind of continuing to invest into a market you see as attractive, whether that's through increasing leverage or continuing to access fresh capital? Kind of how are you weighing those decisions as kind of there's slightly more certainty than there was, say, three months ago?

Yes. So look, as it related to the second quarter and raising capital, we were very deliberate with how we invested it. Our view when it comes to raising capital as we've said before, it's got to be accretive to book value and accretive to earnings. And as we raise capital, we deploy it accordingly. We look at new capital the same as we look at existing capital, and we study our leverage position on a daily basis. And if we feel like we're under-levered, we'll put money to work. And to your point about in an environment that it was as uncertain as it was early in the second quarter, it can be difficult at times to deploy capital. But at the end of the day, we had confidence that capital raise would be accretive and so we're comfortable putting it to work. Now related to increasing leverage versus raising capital, it was more advantageous for us we felt to raise capital and put that money to work as opposed to increasing leverage given the uncertainty. And now we're in a place where all has come down. We could raise leverage, but we don't need to. If you look at the returns we're generating and the yield we're generating, which spreads where they're at, you can earn quite a handsome return with relatively low leverage, and it gives us a lot of flexibility to manage other parts of the portfolio, and it gives smoother returns. The point I want to stress about consistently positive returns is that we have run at meaningfully lower leverage over the past couple of years than we had in the past. And it's worked out quite well. There's always an episode of volatility here and there. But we're able to sit on our hands with low leverage and not [ before ] sellers in a lot of circumstances, and that's led to smoother returns because we hadn't been in positions to sell cheap assets. And as we raise capital, we've been able to deploy it profitably. So we feel really good with the leverage where it's at. And we haven't raised capital thus far this quarter, but if the opportunity materializes, we may do so.

The next question from Rick Shane, JPMorgan.

Look, you -- one of the things you mentioned -- or actually two of the things you mentioned an expectation that rates will be headed lower later in the year and commentary about negative HPA. As we think about the credit portfolio, can you help us start to think about some of the dynamics there? How are you insulated on the credit side? What are the puts and takes potentially of higher speeds on a portfolio that has different discount characteristics than the historic agency portfolio. This is going to be sort of the first cycle with the credit portfolio of this size, and I think it's helpful for investors to sort of understand the dynamics that you -- sort of the pros and cons as we enter a new part of the housing cycle.

Yes. So I'll start and then Mike can take it from there. I'll just say, Doug (sic) [Rick] Mike has been very forward-thinking about but making sure that the quality of the credit portfolio was as high as it could be. We were very early in tightened credit standards in 2022. I talked about we've tightened them more recently. And I think when you look at the underlying credit it's as high quality as it gets in that sector. Our mark-to-market LTV on the portfolio, I think, is around 62%. We look at stress scenarios with HPA shocks and -- if you look at our portfolio, we experienced, say, a 20% decline in home prices, roughly 4% of that portfolio would be under water, which is a very high quality credit portfolio in our view. And I think Mike has done a nice job and feel free to take it from here and talk about how you manage it.

Yes. Thanks, Rick. I think that I would just add that in terms of the proactive changes that we've made since 2022, they are very significant. And I would say that we are an outlier in the market in terms of making those changes. So if you go back to the middle of 2022, the weighted average FICO in our lock pipeline was 735, about 20% of our originations were greater than 80 LTV, about 20% or less than 700 FICO. So if you fast forward to our lock pipeline right now, it's a 764 weighted average FICO, only about 1% of loans are greater than 80 LTV, and I'll say only about 4% to 5% are less than 700 FICO. So it has not impacted our volume in a meaningful way. But we've been very proactive in seeing the housing market decelerate and trying to be on our front foot, so to speak. And Dave did mention the quality of the portfolio it's a $30 billion plus GAAP whole loan portfolio. The 759 original FICO. It's a 62 mark-to-market LTV. There's $300,000 of borrower equity in those underlying properties. And the D60+ as of the end of the recent quarter was under 2%, it was 185 basis points, and that's actually down, call it, 7, 8 basis points quarter-over-quarter. In terms of the second part of your question in terms of speeds, so the portfolio is a $655 gross WAC. That's the GAAP consolidated portfolio. The 1-month CPR is 13%. But I think when you look at the part of the portfolio that right now, non-QM rates will say are 7.5%. If you look at our non-QM portfolio rates that are 8.5% to 9%. So you're saying 100 to 150 basis points in the money, They're only paying 25% to 35% CPR. So the S curves within this market are flatter than the agency market. They're certainly much flatter than the jumbo market. You do have forms of prepayment protection like penalties. So I think that we are well insulated if there is a significant rally given the current gross back of the portfolio and the prepayment protection that we have.

Got it. Okay. That's helpful. And look, this is all triggering thinking about this on a deeper basis I don't see anywhere in the disclosures, but I may just be missing something. Is there a breakout by vintage, so we can think about the cohort exposure and HPA underlying HPA by year.

Yes, Rick, that's not something that we have disclosed, but that's something that we can follow up with you off-line in a discussion about potentially disclosing that in the future.

The next question from Jason Stewart, Janney Montgomery Scott.

Congrats on 7 consecutive quarters of positive economic returns, quite an achievement there. So I wanted to continue on Rick's question on the private credit markets. What's your expectation at this point for GSE reform and how does that impact opportunities and developments in terms of products and where you can grow that business?

Sure. And we've talked a lot about this in the past, Jason. Our expectation is now that the tax bill is done and we're working our way through tariff negotiations. We do expect it to be on the front burner over the near term, the GSEs do still need to raise capital, and there's a lot of work to do before privatization can occur. But as we've said in the past, a lot of the loans that the GSEs originate or what are considered noncore, I think roughly 20% thereabouts. And ultimately, we'll be able to compete for that origination is our view. So we're optimistic, both in terms of lower supply in the agency sector, which can help the technicals and also the ability to broaden the approach on the resi side. Does that help?

Yes. I guess I'm hearing no change to your view there, which is fine.

Sorry, Jason, one thing I could add for David, in terms of the correspondent channel, about, I'll say, call it, 10% to 11% of the actual correspondent lock volume is agency collateral. So that is agency investor agency second homes. You are not seeing us come to the market to do stand-alone deals However, that collateral is oftentimes included in our non-QM transaction. So we are capitalizing on some of the pricing that the GSEs have and some of the efficiencies within the PLS market relative to GSE execution. So we are doing that right now.

Okay. Okay. That's helpful. And then on the MSR portfolio, I mean I understand that the 3.24% gross WAC is so far the money that any sort of -- it would take such a meaningful movement rates to have a prepayment effect there. But how do you think about external factors impacting the multiple, whether it's M&A activity in the space, lower rates impacting transaction multiples elsewhere? How do you think about that in terms of valuation on the MSR portfolio?

One of the driving factors of MSR valuations as of late has been the cost of servicing has come down because of technological enhancements, which are only, I would say, right now escalating and accelerating and consolidation in the servicing sector will only fuel that. There's about 4 to 5 players that are investing combined hundreds of millions of dollars in technology and which you're going to see in terms of the pace of advancements in servicing is going to be very meaningful over the next few years in terms of lowering the cost, and that all passes through to us because it leads to cheaper subservicing expenses. So we're happy with what we've seen. We think there's going to be a lot of differentiation in servicing. And we're partnered with the ones who are making these investments, and they provide great service. And what we provide them is -- we help them with their scale, obviously. But also we're a capital and liquidity provider when there's a need to move MSR off balance sheet. So we like where we sit. We like the evolution of the sector. We think it's only going to become more efficient and it flows through into the valuations, and when you look at our multiple, we're relatively conservatively priced, we feel, and the performance of our MSR has been very good, well exceeded our expectations.

Yes. I mean another exogenous factor that's really helped as Dave mentioned in the prepared remarks, is just the growth in the float accounts, the T&I accounts up 6% year-over-year. That's not the first year. It's been up that much, and it's certainly below what the industry -- and we've modeled -- another exogenous factor is servicers have never been able to keep customers for so long. So developing that customer relationship and cross-sell opportunities and other revenue streams off the MSR derived from the MSR asset. I mean those initiatives are in the infancy, but sure, I have a lot of promise given all the technology investments.

The next question from Eric Hagen, BTIG.

I have one on the MSR as well. As these low coupon MSRs continue to season and pay down slowly, I mean, how should shareholders think about the value in pairing that opportunity with these higher coupons, right? Like even versus a couple of years ago when the complexion of the mortgage market was a little different, the level of prepayment risk looked a little different, volatility. I mean how should we think about like the pairing of that opportunity now?

Yes. I mean we've built out the capability to really participate actively in any coupon. And the way we've done that, and again, as Dave alluded to building out these partnerships with the largest, the best and most technology-enabled servicers and we capture partners. And given the portfolio of partners we have and given we already have exposure to all the coupons, well, not a lot in the higher coupons, we have enough to be statistically significant, we're really able to see how they're performing and what's really going on and we do isolate the hedge strategies between the different note rates. So we're ready, we're there. We're showing bids on all coupons and prepared. On the low coupon side, I mean, there is still a lot out there that does change hands because there's still -- there is a need for much of the mortgage industry to recycle out of the lower- yielding loan low-rate MSR and kind of reallocate that capital to originating new loans which would be the higher coupon MSR. So we're still facilitating that trade as well as building out the infrastructure.

Okay. That's helpful color. I mean how much hedging or like dollar duration is covered by the MSR position at this point? If you didn't have the MSR, how much bigger was your hedge portfolio or your swap portfolio, in other words, like how much is the return of the total portfolio being supported by this pairing of MSR and Agency MBS?

Maybe I would call it less than 2% of the overall hedge portfolio. There's very little structural leverage in the MSR position, so we don't get meaningful duration change, but it's just a very powerful care generator with a little bit of negative duration there.

The next question from Crispin Love, Piper Sandler.

Can you dig into the demand picture for Agency MBS in the current environment where is the bulk of demand coming from? You seem pretty positive on the space. Just curious on your expectations in demand. Have you seen more involvement from banks? Is it too early there? Just curious on the picture overall and then just how that could impact your spread expectations?

Sure. On fundamentals. On demand, fixed income funds saw about $50 billion in redemptions in April. But since then, they have seen about $50 billion per month in inflows. So demand from fixed income funds has been pretty strong. CMO issuance continues to be very strong. We're seeing about $25 billion to $30 billion in CMO issuance, but that's taking away about 30% of the gross supply to the market. What we've not seen is demand from banks and overseas accounts. And even without that demand, I think fundamentals are quite supportive for Agency MBS, impled volatilities currently at 3-year lows. Asset carry is attractive for unhedged accounts. So we do think MBS spreads can tighten 3 to 5 basis points to treasuries, even without additional demand from banks and foreign accounts. But the real [ bull ] case for MBS is that a combination of regulatory reform and further easing and monetary policy will materially increase demand from banks in Asian accounts, and we think the odds of that happening in the second half of the year are quite good.

Yes, Crispin, if you think about the bank model, they benefited quite a bit from high short rates and the generation of NIM, specifically as a consequence of that. As the Fed does reduce rates, that need for NIM to replace that NIM will materialize, and we do expect it to come into Agency MBS.

The next question from Matthew Erdner, JonesTrading.

I'd like to turn back to resi credit. In the second half, what you guys have seen kind of quarter-to-date. I know that there's close to about $1 billion in securitizations out there already. But do you think 3Q is tracking to kind of be in line with 2Q? And then just what are your margin expectations going forward as well given that the Fed is pricing -- are those two rate cuts priced in?

Sure. Thanks, Matt. This is Mike. In terms of issuance, I'll say year-to-date, gross issuance has been $92 billion that's outperformed analyst expectations. I think we're tracking probably to be the highest issuance year since 2021, where we were north of $200 billion. So the capital markets remain robust. They're healthy. In terms of securitization and levels, we actually have the tightest print in terms of AAAs where we've printed post Liberation Day. Our latest transaction was Non-QM 13. It was a $662 million transaction, $500 million of AAA bonds, and we sold the AAA at $138 all other issuers and sponsors are kind of in, call it, the $140 to $150 range. So I think what Q2 showed us in early Q2 and the volatility that we saw in April, I think that, that showed us that there's a resiliency and maturation of the non-agency market that, again, if that occurred three, four, five years ago, we don't think that you'd see the same outcomes. So I think it's very healthy, and we continue to build up the investor base. In terms of the second part of your question in terms of margins, we've talked about this in past calls. We don't actually publish what our margins are on our correspondent channel. But what you can assume is that we're retaining, call it, 11% to 12% of our transactions using maybe what 1 turn, 1.5 turns of recourse leverage. So call it 5% to 7% of capital deployment per each $100. And you're talking mid-teens returns on that capital deployed.

Got it. That's very helpful. And then just as a follow-up to that, you guys talked about the credit box there, but you don't expect that to have any effect on the volumes that you guys see do, remainder of the year.

Yes. It's hard to say. So we did $5.3 billion of locks, $3.7 billion of fundings on the quarter, which was virtually identical to Q1. It was down a little bit from Q4. When you look at some of the origination volumes that we've seen from the banks and some of the nonbank so far, origination volumes are up, call it, 20%. So it's hard for us to say that if we did not make some of these changes, to our guidelines and to our pricing that we would not have done more volume. But I do think that we feel very good with the type of volume that we're doing. So we've done $7.5 billion closed funded loans through the correspondent for the first half of the year, that's a $15 billion run rate. We think the non-QM DSCR market is about 5% of total originations. So call it $2 trillion of total originations, $100 billion of non-QM DSCR. We think we're about a 15% market share, and we think that that's a comfortable level for us at this point in time. So I think we feel good with the volumes and the targeted credit box that we have.

Next question from Trevor Cranston, Citizens JMP.

Citizens JMP Securities, LLC, Research Division I guess a question on the macro outlook. It seems like there's a pretty strong consensus around steepening of the yield curve going forward. But as the impact of tariffs start to come in, I guess, how much risk do you guys see of the impact of that on inflation being kind of greater than anticipated and if some of the pricing in the Fed cuts were to come out of the market at some point, how do you think agencies in particular, would perform in that type of scenario?

Sure. So just looking at the macro outlook as it relates to tariffs, there will be inflation that will pass through. We're just starting to see it with the last CPI print, and it will come through the summer. And our view is, overall, you are going to have a continuation of services inflation and shelter coming down and goods inflation will be increasing. And as the Fed forecast, you got a 3.1% core PCE at the end of the year. And that equates to roughly 25 basis points per month core PCE. And we feel like that's a reasonable assessment with services inflation coming down and goods inflation coming up. So we do anticipate that they'll deliver on the two cuts, they have an unemployment rate of around 4.5%, so 0.4% higher. The labor market is slowing. That will likely materialize. And as it relates to growth, I think they have 1.4% GDP. To achieve that, we need to grow close to 2% for the second half of the year. And so overall, the forecast and the dots seem to paint what we believe would be a pretty accurate picture of how it plays out and we'll get those two cuts. Now should that not occur, let's assume that inflation runs higher, and the Fed is not in a position to cut. You'll see a flattening of the yield curve, which were hedged for and Agency MBS so long as volatility is contained, should perform just fine. If, on the other hand, you get a bigger deterioration in the economy and the Fed is more aggressive, then that's obviously going to be good for agency because you will get more cuts, you'll get more involvement and that would be encouraging for us. But overall, if they don't deliver on the cuts, we're reasonably well hedged for that. And that's not our base case. We actually think they'll get delivered upon.

This concludes our Q&A session. I would like to turn the conference back over to Mr. Finkelstein for any closing remarks. Thank you.

Thank you, Vicki. Everybody, have a good rest of the summer, and we'll talk to you soon.

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