Invesco Mortgage Capital Q4 2025 Earnings Call - GSE Buying and Lower Volatility Lift Agency MBS, Leaving Further Spread Compression Limited

Conference Operator: Welcome to the Invesco Mortgage Capital fourth quarter 2025 earnings call. All participants will be on the listen-only mode until the question and answer session. At that time, to ask a question, press the star followed by one on your telephone. As a reminder, this call is being recorded. Now I’ll turn the call over to Greg Seals in Investor Relations. Mr. Seals, you may begin the call.

Greg Seals, Investor Relations, Invesco Mortgage Capital: Thanks, operator, and to all of you joining us on Invesco Mortgage Capital’s quarterly earnings call. In addition to today’s press release, we have provided a presentation that covers the topics we plan to address today. Press release and presentation are available on our website, investcomortgagecapital.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two of the presentation regarding these statements and measures, as well as the appendix for appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome, and thank you for joining us today.

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

John Anzalone, CEO, Invesco Mortgage Capital: Good morning, and welcome to Invesco Mortgage Capital’s fourth quarter earnings call. I will offer brief remarks before turning the call over to our Chief Investment Officer, Brian Norris. Joining us for Q&A are President Kevin Collins, COO Dave Lyle, and CFO Mark Gregson. Financial conditions improved during the quarter, supported by two Federal Reserve rate cuts, solid corporate earnings, improved financial conditions, and strong economic growth. Equity markets extended their gains, credit spreads remained tight, and agency mortgages outperformed Treasuries, aided by lower rate volatility and a supportive supply and demand environment. Inflation readings trended modestly lower during the quarter, with headline CPI at 2.7% and core CPI at 2.6%. Investors responded by reducing inflation expectations, reflected in lower break-even rates on inflation-protected Treasury bonds.

Even with continued economic growth, the U.S. labor market continued to exhibit weakness as the economy lost 67,000 jobs during the quarter. Despite inflation running above target, the FOMC cut the federal funds target rate by 25 basis points at each of its last three meetings in 2025, citing labor market weakness. The Federal Reserve also ended its quantitative tightening program after reducing its Treasury and agency mortgage holdings by more than $2.2 trillion since mid-2022, specifying that mortgage paydowns will be reinvested into Treasury bills going forward. Markets are pricing in an additional 50 basis points of cuts through 2026. Interest rates were generally stable during the quarter, and the decline in interest rate volatility that began after the sharp increase in April continued into year-end.

With market expectations shifting towards a more accommodative monetary policy stance, agency mortgages delivered its strongest calendar year performance relative to U.S. Treasuries since 2010. Key drivers included a decline in interest rate volatility, broad inflows into fixed income, and increased demand from Fannie Mae and Freddie Mac’s investment portfolios. Agency CMBS spreads finished the year slightly tighter as markets gained confidence in the path towards monetary policy easing and improved clarity in U.S. trade policy. Higher issuance levels were readily absorbed, given money manager inflows and continued bank demand for assets with stable cash flows. These factors led to a 3.7% increase in our book value per common share to $8.72, and combined with our recently increased dividend of $0.36, resulted in an 8% economic return for the quarter.

We modestly increased leverage to 7 times, consistent with the constructive investment environment. At year-end, our $6.3 billion portfolio included $5.4 billion in Agency mortgages, $900 million in Agency CMBS, and our liquidity position remained robust, with $453 million in unrestricted cash and unencumbered assets. We remain positive on Agency mortgages following the sharp decline in volatility, though we view near-term risks as balanced, given recent strong performance and the announcement of $200 billion in Agency mortgage purchases by Fannie Mae and Freddie Mac. Agency CMBS continues to provide attractive risk-adjusted yields and diversification benefits. Longer term, we believe conditions for agency mortgages will remain favorable, given lower interest rate volatility and expectations for broadening demand and a steeper yield curve. I’ll now turn the call over to Brian for additional detail.

Greg Seals, Investor Relations, Invesco Mortgage Capital: Thanks, John, and good morning to everyone listening to the call. I’ll begin on slide four, which provides an overview of the interest rate markets over the past year. As depicted in the chart on the upper left, despite two 25 basis point cuts to the Fed funds rate during the fourth quarter, the 10-year Treasury yield was largely unchanged, increasing less than two basis points to end the year at 4.17, 40 basis points lower than where it started the year. Although 10-year yields were relatively stable over the quarter, the yield curve continued to steepen meaningfully, with 2-year Treasury yields falling 14 basis points, while 30-year yields increased 11 basis points. The difference between 2-year and 30-year Treasury yields ended the quarter at 137 basis points, 83 basis points steeper than a year ago.

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: ... The steeper yield curve benefits longer term investments such as agency RMBS and agency CMBS, and is supportive of our strategy. The chart in the upper right reflects changes in short-term funding rates over the past year, with the fourth quarter highlighted in gray. While financing capacity for our assets remained ample and haircuts unchanged, one-month repo spreads began to indicate broad-based funding pressures in late September and continued into October, widening approximately five basis points. Positively, the Fed’s decision to end quantitative tightening in December alleviated the pressure, and its announcement at the December meeting to initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves, led to notable improvement in repo spreads as we head into 2026.

Lastly, the bottom right chart on slide 4 highlights the significant decline in interest rate volatility since April, which provided tailwind for risk assets, including Agency MBS, in the second half of the year. Although we do not anticipate further declines in 2026, the current level of volatility is in line with longer-term averages and remains supportive of the Agency RMBS sector. Slide 5 provides more detail on the agency mortgage market. In the upper left chart, we show 30-year current coupon performance versus U.S. Treasuries over the past year, highlighting the fourth quarter in gray. Agency mortgages delivered strong performance both for the quarter and the full year, driven by reduced interest rate volatility that kept money manager and mortgage rate demand robust, while net supply remained below expectations.

Two additional cuts to the Fed funds rate, the end of quantitative tightening, and the beginning of monthly T-bill purchases by the Federal Reserve, all announced during the fourth quarter, provided significant support for risk assets in general and agency mortgages in particular, as funding markets improved notably. Although bank and overseas purchases remained subdued, increased demand from the GSEs provided additional support, resulting in strong returns for the sector. Net GSE purchases began to increase late in the second quarter and accelerated in the second half of the year, providing notable support for agency mortgage valuations.

Not only did the unexpected demand provide an immediate lift to valuations, but it also strengthened expectations that the GSE’s retained portfolios could serve as a stabilizing backstop for the sector, helping to reduce spread volatility going forward and providing support to the agency mortgage market has lacked since Federal Reserve and bank participation waned in 2022. This supply and demand environment also helped support the TBA dollar roll market, as you can see in the lower right chart. Implied financing improved notably during the quarter, whereas for most of 2025, financing via the dollar roll market was relatively unattractive compared to funding via short-term repo markets. As illustrated, that advantage narrowed late in the quarter, and the shift is indicative of strong demand for agency mortgage collateral amid limited net supply.

As this environment persists, the sector becomes more attractive, allowing institutional investors to fund purchases at implied levels significantly below short-term funding rates. Lastly, 30-year mortgage rates declined modestly to end the quarter near 6.25%, as tighter mortgage spreads offset slight increases in the 10-year Treasury yield and primary secondary spread. This decline in mortgage rates continued to weigh on the performance of higher coupons relative to those lower in the coupon stack, with discount coupons modestly outperforming premiums as investors were reluctant to increase prepayment risk in their portfolios. In the upper right-hand chart, we show higher coupon specified pool payups, which are the premium investors pay for specified pools over generic collateral and are representative of the bonds that IVR owns.

Positively, payups improved during the quarter, offsetting some of the underperformance of higher coupons relative to lower coupons, to give an increased investor demand for additional prepayment protection in premium dollar price bonds. We continue to believe that owning prepayment protection via carefully selected specified pools, particularly in premium priced holdings, remains an attractive investment for mortgage investors and helps mitigate convexity risk inherent in agency mortgage portfolios. Slide 6 details our agency RMBS investments as of year-end. Our agency RMBS portfolio increased 11% quarter over quarter as we invested proceeds from ATM issuance and pay downs, and modestly increased leverage as the investment environment for agency mortgages improved. Purchases were primarily focused in 5% and 5.5% coupons, with a decline in our 6% and 6.5% allocation, a result of pay downs and the overall growth in the portfolio.

Although we continue to focus our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environments, price appreciation in our holdings has resulted in a higher percentage of our pools valued at premium dollar prices. Therefore, we continue to favor specified pools with lower loan balances, particularly in our higher coupon exposures, given their superior predictability of future cash flows. While we remain well-diversified across collateral stories with limited changes during the quarter. Overall, we remain constructive on agency RMBS as supply and demand technicals are favorable and lower levels of interest rate volatility should continue to encourage demand for the sector. We believe near-term risks are balanced following recent outperformance, with nominal spreads tightening approximately 15 basis points during the fourth quarter and another 10 basis points year to date.

Despite the decline in risk premiums, levered returns on agency RMBS hedged with swaps remain attractive, with the current coupon spreads to 5- and 10-year SOFR blend ending the year near 140 basis points, equating to levered gross returns in the mid- to upper teens. Slide 7 details our agency CMBS portfolio. Risk premiums were largely unchanged during the quarter, as higher issuance levels were well absorbed via money manager inflows and continued bank demand for stable cash flow profiles. Given more attractive relative value in agency RMBS, we did not add to our agency CMBS position during the quarter, and our allocation declined modestly due to the growth in the overall portfolio. Despite the lack of new purchases, we continue to believe agency CMBS offers many benefits, mainly through its inherent prepayment protection and fixed maturities, which reduce our sensitivity to interest rate volatility.

Levered gross ROEs are in the low double digits and consistent with ROEs and lower coupon Agency RMBS. We have been disciplined in adding exposure only when the relative value between Agency CMBS and Agency RMBS accurately reflects their unique risk profiles. Financing capacity has been robust as we continue to fund our positions with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation to the extent relative value becomes attractive, recognizing the overall benefits to the portfolio as the sector diversifies risks associated with Agency RMBS. Slide 8 details our funding and hedge book at quarter end.

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

Despite the recent widening, we remain comfortable focusing the majority of our hedges in interest rate swaps, as we continue to believe swap spreads are historically tight and offer an attractive hedge profile relative to Treasury futures. To conclude our prepared remarks, financial market volatility declined notably in the second half of 2025, resulting in strong performance for agency mortgages. IVR’s economic return of 8% during the fourth quarter is a result of that positive momentum, which has continued into 2026, with book value up approximately 4.5% since year-end through Wednesday of this week. While agency mortgage valuations have improved significantly over the past year, we believe the current environment is reflective of a more normalized investment landscape that continues to provide investors with attractive levered returns.

The January announcement of the MBS purchase program by the GSEs was well-received by the market, and the reduction in interest rate and spread volatility has broadened the investor base and enabled modestly higher leverage. The conclusion of quantitative tightening in the fourth quarter, along with announced T-bill purchases by the Fed, helped solidify funding markets and tightened repo spreads, serving as another tailwind for our strategy. Lastly, we believe our liquidity position provides substantial cushion for any potential market stress, while also allowing sufficient capital to deploy into our target assets as the investment environment evolves. While we view near-term risks as somewhat balanced, we believe the current environment of low volatility in interest rates and spreads, along with further steepening of the yield curve and supportive supply and demand technicals, will provide a positive backdrop for agency mortgages over the long term.

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

Conference Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one. You will be prompted to record your name. To withdraw your question, you may press star two. Again, press star one to ask a question, and one moment, please, for our first question. Our first question comes from Trevor Cranston with Citizens JMP. Please go ahead.

Trevor Cranston, Analyst, Citizens JMP: Hey, thanks. Good morning. I think in the prepared comments, I heard you characterize your view on MBS, you know, post the GSE buying announcements as a little more balanced. Can you talk about, you know, how you’re approaching the leverage level post the tightening that’s occurred and kind of where you guys are finding value within the coupon stack with marginal deployments today? Thanks.

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: Hey, Trevor, it’s Brian. Yeah, so, you know, we did take leverage up a little bit in the fourth quarter, just reflective of that positive environment that we’ve continued to kind of see in the second half of the year. And so, you know, I think we’re still relatively comfortable there. You know, I think, you know, with the announcement, with spreads a little bit tighter, we do kind of let leverage drift a little bit. So as book value increases, leverage could come down just a little bit. But, you know, I think we’re still pretty comfortable because the environment overall, even though spreads are tighter, it’s pretty supportive with limited spread volatility.

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

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

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: Yeah, I wouldn’t necessarily say that we’ve seen any surprises. You know, we certainly saw an increase over the second half of the year in higher coupons. You know, in our sixes and six-and-a-halves, prepayment speeds did increase. But, you know, because we do own, you know, prepayment protection, they certainly were less impacted than what you would see in generic collateral. You know, loan balance continues to, like I said in the prepared remarks, continues to be, you know, superior predictability of cash flows, and we continue to feel that way. You know, I think, you know, certain FICO and LTV and even geo stories, you know, a little bit less so, but still, you know, relatively in line with expectations heading into it.

Jason Stewart, Analyst, Compass Point: Okay. That’s helpful. Thank you.

Conference Operator: Thank you. Our next question comes from Jason Weaver with JonesTrading. Your line is open. You may ask your question.

Jason Weaver, Analyst, JonesTrading: Hey, guys. Good morning. Maybe just to tee off of Trevor’s first question there, year to date, with new capital invested, have you continued rotating down in coupon? And maybe you can talk a little bit about the trade-off you see between elevated prepay risk and the positioning in some of those 5.5 and 6 pools?

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: Sure. Yeah. Hey, hey, Jason, it’s Brian. Good morning. Yeah, you know, I think certainly there is a push by the administration on housing affordability and, you know, they’re directly focused on the mortgage rate and bringing that down. So, you know, to the extent that that impacts, you know, higher coupons, you know, I think the goal is likely to, you know, not necessarily reduce the allocation by selling, but to, you know, future purchases come a little bit lower in the coupon stack. So, you know, like I said earlier, you know, more belly and lower coupons.

Like I said, you know, the TBA dollar roll market is pretty attractive in those coupons right now, so that’s providing a nice boost as implied funding levels are significantly below so far.

Jason Weaver, Analyst, JonesTrading: Got it. Thank you for that. The only other thing is, did you give an updated estimated book value as of today?

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: I did say we were up about 4.5% through Wednesday, year to date.

Jason Weaver, Analyst, JonesTrading: Okay, thanks. I missed that one, but I appreciate the color. Thank you.

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: Of course.

Conference Operator: Thank you. Our next question comes from Doug Harter with UBS. Your line is open. You may ask your question.

Doug Harter, Analyst, UBS: Sure. Thank you. You know, in terms of continued kind of modest capital actions in the quarter, you know, some small, common issuance and some small preferred buyback, you know, can you talk about how you’re thinking about, you know, capital structure, and kind of the ability to raise capital going forward?

John Anzalone, CEO, Invesco Mortgage Capital: Yeah. Hey, hey, Doug, it’s John. Good morning. Yeah, you know, I think in terms of capital structure, you know, we’re feel like we’re in a better place than we’ve been. And it’s been improving, so that’s, you know, we’re, we’re happy about that. But as far as the ATM goes, you know, we do selectively access the ATM when the common stock provides clear benefits to shareholders. And we, we continue to view the ATM as the most efficient mechanism for raising capital. You know, it was a pretty modest issuance during Q4. And, you know, conditions were slightly better in Q1. So you’ll get an update later this month when our...

Actually, in February, when we, when we report our, our monthly dividend, we’ll, we’ll provide more, color on that.

Doug Harter, Analyst, UBS: Great. Appreciate that, John. Thank you.

Conference Operator: Thank you again. If you’d like to ask a question, press star one. Our next question comes from Jason Stewart with Compass Point. Your line is open. You may ask your question.

Jason Stewart, Analyst, Compass Point: Hey, thanks. Good morning. To follow up on the capital raising and just putting it in context with the investment environment, is the decision on the ATM, you know, solely where the stock is, or is part of this equation, you know, what the pro forma ROEs look like? And on that front, you know, would additional government action, like an increase to the limit of the GSEs or removal of the PSPA cap or like a standing repo facility, change your view of a spread range for MBS and change your view of capital raising on the second half of that?

John Anzalone, CEO, Invesco Mortgage Capital: Yeah, I’ll start with the first part, and I’ll let Brian tackle the harder part, second part. You know, I think it is a combination of things when we make a decision on whether to issue. I mean, obviously, price to book is important. I mean, that’s the first metric. And then after that, it’s are there accretive investment opportunities? And so we tend to look at it as through the prism of you know, how long is the payback period in terms of, okay, we’re making accretive investments, and you know, if we’re trading slightly below book, we need accretive investments. If you’re trading above book, and so, you know, you’d like to have your accretive investments.

But yeah, so I mean, that’s how we kind of look at it. It’s a combination of those two things. And then the second part of the question?

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: Yeah, yeah, I would just add to that just, this is Brian. Hey, Jason. Yeah, I would just add, you know, those are certainly kind of more quantitative aspects of it. There is a qualitative aspect as well, just, you know, I mean, I guess even economies of scale on reducing expenses, improving liquidity in the stock. Those are all things that kind of go into the factor on whether we are utilizing the ATM or not. As far as, you know, available ROEs, you know, I did mention as of year-end, you know, spreads versus SOFR were still pretty attractive, around 140. We’ve seen about 10 basis points of tightening since then. So, you know, knock 1%-2% off the available ROEs that we’re seeing.

But, you know, I think with the presence of the GSEs being more substantial now, and being more prescriptive, that does help reduce volatility, brings you know, greater comfort into potentially, you know, higher leverage. So I think there’s a lot of positive things that, you know, despite slightly lower ROEs, that you know, there’s a lot of reasons to kind of like the space right now.

Jason Stewart, Analyst, Compass Point: Yeah. Okay. That’s helpful. Thanks for that color, Brian. But on the government intervention side or the presence of GSEs, is there anything that would sort of get you to the next level where it’s less of a backstop view and more of the view that it’s a tighter spread range and a lower spread range?

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: Yeah, lower than, than where we are now?

Jason Stewart, Analyst, Compass Point: Um, yeah.

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: Yeah, certainly, you know, if there was announcement that, you know, they increased the caps from currently the $450 billion, you know, that would be a signal. You know, and maybe as we move along here throughout the year, you know, if we start to see that the pace of purchases has increased notably. I think in December, the GSEs added a combined $24 billion between loans and mortgages, agency mortgages. So, you know, I think, you know, if we were to see that pace continue to increase, that would be a pretty clear signal that at some point, the administration or the Treasury and the FHFA plan to increase those caps.

That could potentially take us into another spread regime and take us another 10-15 basis points tighter from here.

Jason Stewart, Analyst, Compass Point: Okay. Thanks for the color. Appreciate it.

Conference Operator: Thank you. And our last question comes from Eric Hagen with BTIG. Your line is open. You may ask your question.

Eric Hagen, Analyst, BTIG: Hey, thanks. Good morning, guys. All right, so spreads have already tightened a lot. How should we think about the book value sensitivity and just, like, the overall upside to further spread tightening? Like, would you say that the sensitivity or the magnitude is kind of similar, you know, as when spreads were, you know, relatively wider? Or how should we think about the magnitude because of the fact that spreads are-

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: Yeah

Eric Hagen, Analyst, BTIG: kind of recent tighter? Thanks.

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: Hey, Eric, it’s Brian. Oh, sorry, didn’t mean to cut you off there. But hey, good morning, and thanks for- thanks for calling in. I would say the magnitude of the change in book value to spread changes is the same, you know, just given that our leverage is relatively in line with where it has been here recently. But you know, our expectation for further spread tightening is significantly reduced, and so, you know, we kind of saw a lot of spread tightening in 2025. You know, we certainly would not expect that to occur unless there are, again, like I just mentioned, you know, significant changes in the caps for the GSEs and their use of those, you know, those retained portfolios.

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

Eric Hagen, Analyst, BTIG: It’s really helpful commentary. Thank you, guys.

Brian Norris, Chief Investment Officer, Invesco Mortgage Capital: Of course.

Conference Operator: At this time, I turn the call back over to the speakers.

John Anzalone, CEO, Invesco Mortgage Capital: Okay. Well, thank you, everybody, for joining us, and we will talk to you next month. Thank you.

Conference Operator: Thank you, and this does conclude today’s conference. We thank you for your participation. At this time, you may disconnect your lines.