American Capital Agency (AGNC) Q3 2020 Earnings Call Transcript

American Capital Agency (AGNC -1.18%)
Q3 2020 Earnings Call
Oct 27, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. And welcome to the AGNC Investment Corp. third-quarter 2020 shareholder call.[Operator instructions] I would now like to turn the conference over to Katie Wisecarver, Investor Relations. Please, go ahead.

Katie Wisecarver -- Investor Relations

Thank you all for joining AGNC Investment Corps. third-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 fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Also, 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 forecasts 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 Factors section of AGNCs periodic reports filed with the Securities and Exchange Commission.

Copies are available on the SEC's web site at sec.gov. We disclaim any obligation 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 -- Chief Executive Officer

Thanks, Katie, and thanks to all of you for your interest in AGNC. We were extremely pleased with the performance of our portfolio in the third quarter with an economic return totaling almost 9%. We have now recovered the vast majority of our Q1 economic loss over the past two quarters. Importantly, as demonstrated by our strong network spread and dollar roll income for the quarter, we remain optimistic about the earnings power of our portfolio.

During the third quarter, equity markets continued to strengthen, and interest rate volatility remained muted despite the upcoming election and the inability of lawmakers to agree on a new stimulus package. The continued resilience in financial markets is a testament to the tremendous liquidity provided by global central banks and the market's confidence that future monetary and fiscal support will be able to bridge the remaining economic gap before a vaccine becomes widely available. Agency MBS performance was generally strong during the quarter, with the exception of 30-year threes which comprise a very small percentage of our portfolio. MBS continued to benefit from ongoing Fed support, negligible interest rate volatility, favorable funding conditions, and the plateauing of prepayment speeds on many cohorts, albeit at elevated levels.

In aggregate, specified pool performance was somewhat stronger during the quarter with performance dependent on the coupon and other attributes. Lower coupon TBAs which benefited from both solid price performance and very strong dollar role funding levels were the best performing component of our portfolio, both in terms of earnings and economic returns. Looking ahead, the investment environment for Agency MBS should remain attractive given the favorable funding backdrop, ongoing Fed support, and lack of exposure to credit risk. With respect to dollar rolls, we expect the implied funding advantage relative to the repo to contract somewhat from the very strong levels experienced in Q3, but to remain a significant positive contributor to our financial results in light of the combination of heavy origination volumes, and ongoing Fed purchases.

At this point, I will turn the call over to Bernie, to review our financial results for the quarter.

Bernie Bell -- Senior Vice President and Chief Financial Officer

Thank you, Gary. Turning to Slide 4. We had a total comprehensive income of $1.28 per share for the third quarter. Net spread and dollar roll income, excluding catch-up amortization, was $0.81 per share for the quarter, which is our highest level in over five years.

TBA dollar roll specialness and very low funding cost which are now fully reflected in our aggregate cost of funds were the primary drivers of our net spread and dollar roll income for the quarter. Looking ahead over the next several quarters, we expect some downward pressure on the net spread in dollar roll income as a significant funding advantage of our TBA position likely declined somewhat, and portfolio turnover continues to be reinvested at prevailing asset yields. That said, we do expect the majority of the improvement in our net spread and dollar roll income experienced in Q3 to be maintained over the coming several quarters. Tangible net book value increased 6.4% for the quarter as our portfolio of largely lower coupon assets, and higher coupon specified pool holdings significantly outperformed our interest rate hedges, including dividends of $0.36 per share.

Our economic return on tangible common equity was 8.8% for the third quarter. So far, in the fourth quarter to date as of last Friday, we estimate that our tangible net book value is up about 2%. Turning to Slide 5. Our investment portfolio at quarter-end totaled $97.6 billion, largely unchanged from the second quarter.

Our ending leverage was 8.8 times tangible equity, down from 9.2 times as of last quarter end largely due to book value appreciation. Our liquidity position remained very strong in the third quarter with cash and unencumbered agency assets totaling $5.2 billion at quarter-end, which excludes both unencumbered CRT and non-agency securities, as well as assets held at our broker-dealer subsidiary, Bethesda Securities. Actual prepayment speeds on our portfolio increased to 24.3% for the quarter, but importantly this does not include the lower coupon component of our holdings which is held on TBA form. Our forecasted life CPRs decrease to 15.9% as of the end of the quarter, from 16.6% at the end of Q2, largely due to changes and asset composition.

Lastly, during the third quarter, we repurchased $154 million of our common stock at a meaningful discount to our tangible net book value. For an average repurchase price of $13.95 per share. With that, I'll turn the call over to Chris to discuss the agency market.

Chris Kuehl -- Executive Vice President

Thanks, Bernie. Let's turn to Slide 6. Much like the second quarter, interest rate volatility was muted. The yield curve continued to modestly steep in with two-year treasury rates ending the quarter 2- basis-points lower at 13-basis-points, while 10-year treasury rates ended the quarter 3-basis-points higher at 69- basis-points.

Agency MBS spreads generally tightened with lower coupon TBAs outperforming higher coupons, specified pools generally held onto their gains from the second quarter but pay up changes were mixed depending on the coupon and underlying TBA performance. The continued support from the Fed purchasing $40 billion in agency MBS per month in addition to reinvesting pay downs on its portfolio into production coupon MBS drove the outperformance in lower coupons. As you can see in the lower-left table on Page 6, 30-year two's increased in price by more than a point despite 10-year treasury prices selling off a little more than a quarter of a point. Higher coupon TBA performance was mixed with 30-year threes, clearly the worst performer during the third quarter.

However, given rich valuations and prepayment concerns, we maturely reduced our generic holdings in the coupon during the second quarter. Let's turn to Slide 7. You can see in the top-left chart that the size of the investment portfolio at $98 billion was little changed as of September 30th. However, we continued to shift the composition to lower coupons in both 30-year and 15-year MBS.

During the third quarter, we reduced holdings in 2.5% coupons and above by approximately $18 billion versus adding 30-year and 15-year twos-in one-and-a-half's. As I mentioned on the call last quarter, we expected dollar roll financing to trade well as the combination of heavy origination, and Fed purchases create an ideal backdrop for dollar rolls. Given this favorable backdrop, we increased the size of our TBA roll position and carried an average balance of $28 billion during the third quarter, which was up from an average balance of $16 billion during the second quarter. TBA roll financing on lower coupons averaged around negative 60-basis-points during the third quarter.

Since quarter-end, roll specialness has moderated somewhat especially in more costly coupons like 30-year two-and-a-half's, but 30-year twos continue to trade exceptionally well. Currently at around negative 65-basis-points or about 80-basis-points through repo. 15-year production coupon roll financing is currently trading around 10-basis-points to 20-basis-points through repo. As we mentioned last quarter, roll specialness can contribute materially to total returns, so the degree of specialness over time will likely trend to more modest levels.

While mortgage spreads have tightened, we remain optimistic about the investment environment given attractive roll carry and low-interest rate volatility. And while the prepayment backdrop is challenging, our diversified portfolio of higher coupon specified pools and production coupon TBA has to offset in risk characteristics that position as well for the environment. I'll now turn the call over to Aaron to discuss the non-agency market.

Aaron Pas -- Senior Vice President

Thanks, Chris. I'll quickly recap the quarter, our current positioning, and then update you with our outlook on credit. Please turn to Slide 8. The significant rally in Q2 across structured products continued in the third quarter with force selling well behind us down and credit led the way as the credit curve ball flattened across most asset classes.

With respect to our holdings, we reduced exposure to higher-rated CMBS, RMBS, and RPL bonds by close to 100 million. Demand has been strong for these securities and in many cases, they have retraced the majority of the widening that occurred in the first quarter. Additionally, our CRT portfolio contracted marginally over the quarter by sales and pay downs. I'll touch on the composition shift in a moment.

Our outlook for house prices and in turn residential credit performance remains relatively favorable, while the mortgage credit box has tightened somewhat. Affordability levels are back at the most attractive level in years, coupled with a historically low housing supply. Additionally, conventional forbearance rates continue to tick lower declining by about 30% during the quarter. in light of this, we've tilted this year to portfolio a bit further down in credit, and in dollar price in deals where we think the risk of loss remains fairly remote.

I'll quickly touch on the repo as it relates to our non-agency holdings. We continue to see favorable trends on the repo side both in improving rates and haircuts, while the depth and availability of repo across structured products are not what it was pre-COVID this is a welcome improvement. As we said on last quarter's call with the Fed's actions as a tailwind, we expect structured product spreads for good credits to remaining well-supported over the coming years. However, economic recovery clearly still presents risks with significant challenges in certain areas.

As such, any longer run tightening in spreads will likely face bouts of widening along the way in some sectors such as retail and hospitality in the commercial space are clearly not out of the woods. With that, I'll turn the call over to Peter to discuss funding and risk management.

Peter Federico -- President and Chief Operating Officer

Thanks, Aaron. I'll start with our financing summary on Slide 9. As expected, our average repo funding costs dropped to 40-basis-points in the third quarter from 76-basis-points in the prior quarter. This improvement reflects the Fed's very accommodative monetary policy stance and short-term forward rate guidance.

I expect this favorable funding environment to continue with borrowing costs from overnight to one year staying in the 15-basis-points to the 30-basis-point range. As such, I expect repo costs to trend marginally lower over the next several quarters. Our aggregate cost of funds which includes the funding cost associated with our TBA position, as well as the cost of our swap hedges declined more sharply in the third quarter. Our average cost of funds for the quarter was 15-basis-points, down meaningfully from 88-basis-points the prior quarter.

This improvement was due to the combination of lower repo costs, very attractive dollar roll funding levels on TBAs, and materially lower swap hedging cost. The improvement in our cost of funds more than offset the decline in our asset yield and as such drove the significant improvement in our net interest margin which for the quarter increased to 215-basis-points from 168-basis-points the prior quarter. Looking ahead, I expect our net interest margin to be biased somewhat lower, as asset pay downs and portfolio repositioning will likely push the yield on our asset portfolio gradually lower. On Slide 10, we provide a summary of our hedge portfolio which totaled 59 billion and covered 71% of our funding liabilities.

While our aggregate hedge position was largely unchanged, we did continue to alter the composition tenor of our swap portfolio. Most notably, we continue to shift to SOFR index swaps, as we believe these swaps will be correlated well with our repo funding. At quarter-end, about 70% of our swap portfolio was indexed to the secured overnight financing rate, and we had no LIBOR base swaps. This transition to SOFR swaps drove the decline in our swap cost during the quarter.

The average maturity of our swap portfolio also increased again this quarter to 5.3-years as we added slightly longer-term swaps. Lastly, on Slide 11. We show our duration gap and duration gap sensitivity. Our duration gap at quarter-end was flat relatively unchanged from the prior quarter.

Given the current asymmetry in our risk profile and the potential for some incremental volatility in longer-term rates associated with the election and prospects for fiscal stimulus, we will continue to actively manage this extension risk. With that, I'll turn the call back over to Gary.

Gary Kain -- Chief Executive Officer

Thanks, Peter. And at this point, we'll open up the call to questions.

Questions & Answers:

Operator

We will now begin the Q&A session. [Operator instructions] The first question comes from the line of Doug Harter with Credit Suisse. Please, go ahead.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Gary, can you talk about how you're thinking about the dividend. Clearly, you guys are very significantly covering it from a spread income basis. And as you mentioned, the economic return has recovered the 1-Q decline.

So, how are you thinking about the dividend? Sure. And. Thanks, Doug.

Gary Kain -- Chief Executive Officer

Sure. And thanks Doug for the question. Look, first of all, our priority really continues to be on generating risk-adjusted returns and enhancing the earnings power of the portfolio. And rather than on how we allocate these returns between dividends and the reinvestment in the business like other companies.

But look that said, as we talked about in the prepared remarks, we are really confident about the outlook for net spread and dollar roll income. And yes, we expect that measure to be well above the current dividend for the foreseeable future. And not only that, we expect our true economic earnings to exceed the dividend as well. And importantly though as I said on the last call, we do believe that having a tailwind to book value really is positive for investors.

And against this backdrop, management and the board will look at the market landscape and the earnings picture over the next several months, and we'll evaluate what dividend level we think is optimal for shareholders as we enter next year. The decision whether to raise the dividend by how much we -- or if we do is really just a function of assessing the optimal, or appropriate cushion really between expected earnings and the dividend. In a way, that though facilitates some growth in book value over time because we really do think that's important. So look, big picture though.

I mean the most important thing here is, this is a great problem to have as we're currently paying and comfortably as you mentioned, a dividend in excess of 10% which is extremely attractive in today's environment. While we're building book value, and we're buying back our stock. So that's a great combination where we sit right now. So, thanks again for the question.

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you, Gary.

Operator

The next question comes from the line of Bose George with KBW. Please, go ahead.

Bose George -- KBW -- Analyst

Well, good morning. Can you just give us an update on where returns are now just under a couple [Inaudible].

Gary Kain -- Chief Executive Officer

Go ahead, Chris.

Chris Kuehl -- Executive Vice President

Ok. No, I was just going to say -- so, spreads are certainly tighter now than they were last quarter, given the outperformance of mortgages versus hedges. With respect to higher coupon specs given the strong performance and prepayment environment ROEs are generally in the very high-single digits. But I'd say, the majority of our incremental purchases have been concentrated in production coupons where the gross are -- we for example in 30-year two is around 11% without roll specialness.

But -- and then if you assume 25-basis-points of roll advantage that adds a little over 2% ROE which puts the gross ROEs always around 13% before convexity cost.

Bose George -- KBW -- Analyst

Ok. Great. Thanks. And then in terms of the size of your TBA long position.

I guess this quarter understandably it increased. What are the thoughts system sense where that could go. Is this the level, or is it attractive enough could this go up further. Just how do you think of that in terms of the other side.

Chris Kuehl -- Executive Vice President

Sure. I'd say given the environment it's likely that roll positions going to stay in the 25 billion to 30 billion average balance area. But it is early in the quarter, and so that's just the best guess based on current conditions. I'd say generally speaking it's tough to project the size of the TBA position because there are going be technical situations where rolls spike or temporarily get hit, and we'll move the TBA position versus our pool position when there's an economic reason to do so.

But again I'd say, based on current conditions which are favorable for roll financing, we'll likely continue to carry a significant TBA position in lower coupons. The backdrop is, it is very supportive with heavy supply from origination, and the Fed absorbing $115 billion of the worst to deliver each month. And so the technicals are extraordinarily supportive, and so I think it's reasonable to assume that production coupon rolls will trade better than long-term historical averages for some time to come.

Bose George -- KBW -- Analyst

Ok. Thank you. Can I ask one more just on leverage. It's obviously ticked down just with your book value going up.

Just curious what your thoughts are on leverage.

Gary Kain -- Chief Executive Officer

Sure. It's probably ticked down a little more or quarter to date to probably the mid-eights. But we view that as somewhat temporary. I mean look let's be clear, we have the election.

We're going to get results from the vaccine trials where -- we're obviously seeing some volatility and COVID cases around the world at this point. So, given the strong earnings power of the portfolio anyway, at this point, it seems logical for us to tone down leverage temporarily. Just in light of the potential volatility over the next month or so, but then I think we would likely look for opportunities to bring it back up to let's say low to mid-nine's which I would say is our current expected run rate.

Bose George -- KBW -- Analyst

Ok. Great. Thanks a lot.

Operator

The next question comes from the line of Trevor Cranston with JMP Securities. Please, go ahead.

Trevor Cranston -- JMP Securities -- Analyst

Thanks. Good morning. You mentioned a couple of times the potential for some volatility in rates and markets around the election and other things. Can you comment more specifically on the duration profile of the portfolio.

More specifically around the long end of this curve as opposed to the parallel shifts that you give in the slide deck.

Gary Kain -- Chief Executive Officer

So. I mean what's important is first, in a sense -- it's not quite 50/50. I mean, we still have more or higher coupon seasons specified pools than we do lower coupons, but it's getting closer. But those two pieces of the portfolio will react very differently to changes in interest rates.

And that's something that we're -- that we really like about the composition of our portfolio. So we have our new low coupons which to your point are clearly going to track the 7-year to 10-year part of the curve whereas the higher coupons, wow in a model they show a fair amount of duration of exposure to the back end of the curve for the first 50-basis-points of a move. We really don't expect them to be very reactive because basically if the back end of the curve were to sell off, they'd benefit on the prepayment front. In terms of slower expectations over time, and that's going to help them more than they're going to get hurt on the discounting front.

So we think we'll be in for relatively small upward moves, et's say sub-50-basis-points, the spec portfolio, the higher coupon portfolio isn't going to show a lot of sensitivity to the back end of the curve. Whereas obviously, lower coupons have the duration and that's why we have hedges and which we pretty well detail. But we feel like we're pretty well hedged for an initial move if we were to get it in the back end of the curve. I'm focusing this discussion on the back end of the curve because I think for obvious reasons, we're unlikely to see a movement really the inside of five years given what everything we've heard from the Fed and the obvious economic backdrop.

So, a big picture like as we have sold off this quarter, as we mentioned earlier, book value looks to be up a couple of percents as of last Friday. And we've seen the benefit from our hedges. We've actually seen the higher coupon portion of our portfolio do very well. And lower coupons two's have actually done well relative to or done ok relative to hedges.

We've continued to see weakness in the middle of the coupon stack, like two-and-a-half in three's. But again that's a smaller component of the portfolio at this point.

Trevor Cranston -- JMP Securities -- Analyst

Ok. That's helpful. And then in terms of the share buybacks. I mean first, can you say with the weighted average price growth picture as was in 3Q and then more generally.

Can you comment on how are you thinking about the share repurchase opportunity versus new investments into the portfolio. Thanks.

Gary Kain -- Chief Executive Officer

Let me start with the big picture question. I think it was 13.95 I think was our weighted average purchase price. But -- and in terms of the discount to book ballpark over that was in the will say upper 80s percent of the book give or take. So that was noticeably higher than where we bought back stock in Q2 which was the right lower 80s, low or very low 80s on average.

But if you went back to August of 2019, we repurchase shares and what we said at the time was that those repurchases were low 90s a book. So that gives you a range of three different time periods with three different kinds of price to book spots so to speak. But I mean big picture, we look at the overall environment. We look at what we think in terms of what the opportunities are to reinvest to deploy capital in investments in the mortgage market versus the discount, versus the liquidity environment.

But I can't stress enough that for AGNC the -- we have so much liquidity in our mortgage portfolio in particular given the large TBA position that when we think about buying back shares, we're not forced to think of are we willing to increase our leverage by buying back shares. I mean, we essentially can do that on a complete leverage neutral basis where if we buyback 100 million in shares, we sell a billion in TBA mortgages. And everything else is neutral, and we're really isolating the discount to book. So I think what investors should take confidence both in what we say but more so, in our actions which is that we're going to look at this logically.

We're going to look at the fight and the conditions in the market. But we're very willing to buy back shares when they make sense and the liquidity of our portfolio affords us the ability to do that in almost any environment.

Trevor Cranston -- JMP Securities -- Analyst

Appreciate. Thank you.

Operator

And our next question comes from the line of Rick Shane from JP Morgan. Please, go ahead.

Rick Shane -- J.P. Morgan -- Analyst

Hey, guys. Thanks for taking my questions this morning. Look, I think we're in a unique environment. Your portfolio construction and hedging are always multivariate in terms of having the balance potential direction of rates, and timing of movements.

And I think realistically rate risk is asymmetric as it's ever been during the existence of the company. But I'm curious how you guys think about this. Does it mean from your perspective that risk is lower than it would normally be. And then, how do you use this opportunity to either generate excess returns or what's the long term implication.

And then if that sort of framework is correct, I think the biggest challenge for you guys is managing the timing of giving up some of those access returns. How do you think about that manage that timing risk.

Gary Kain -- Chief Executive Officer

Well, I think you bring up two really good points which one is that the cost of hedges right now is historically very low. Just given how low swap rates are. And on the risk management front or the asymmetry, You're right. As long as you believe rates can't go substantially negative then the downside of a short position or pay fixed position is much lower than it's been in the past.

Now, we absolutely have talked about that on prior calls. We feel that way. But you also don't want to lose track of it. And one thing that we are very focused on is that we are more concerned that mortgage spreads would widen into a rally from here.

And they would actually perform reasonably well like what we've seen quarter to date in particular higher coupons if we sell-off. So, one of the other factors that you're quote model doesn't capture is this -- the performance of mortgages and mortgage spreads in different rate moves. And so the one thing that gives us pause from let's say, hedging even more than what we're doing today is the fact that we do believe at least for smaller upward moves in rates, mortgages would perform, it would perform pretty well. Whereas, if we were to retest sub-50-basis-points on 10-year notes for instance that environment would likely be an environment that's going to put pressure on mortgage spreads.

So we overlay that in as well into the overall hedging equation. But in the end, what you see from us is a portfolio that's pretty well hedged. And as you can see in our swap portfolio, we put on a lot of swaps when near the lows in rates. Peter, if you want to add anything.

Peter Federico -- President and Chief Operating Officer

Yes. I'll just add Rick, if you look at the composition of our swap portfolio it is gradually increasing over the last couple of quarters. And I would expect that to continue. We obviously, only had a 71% hedge ratio now, and to the extent, we add swaps.

As I mentioned this quarter, we're adding longer-term swaps. I would expect the marginal swaps that we add to our portfolio maybe over time we'll look at options to our portfolio once we get better clarity on the interest rate environment. But there are going to be more in the 5-year, 7-year, and 10-year part of the curve to give us that protection against the back end of the yield curve moving because obviously, as Gary mentioned earlier, the front end of the curve is really, is really very little volatility given what the Fed is going to do. So, I think over the next couple of quarters as we get better clarity on the interest rate environment post-election the composition of our portfolio it wouldn't be unreasonable to expect our hedge portfolio to increase a little further.

Rick Shane -- J.P. Morgan -- Analyst

Great. That's what I expected and very helpful. Thank you guys, very much.

Peter Federico -- President and Chief Operating Officer

Ok. Thank you.

Gary Kain -- Chief Executive Officer

Thanks, Rick.

Operator

And our last question comes from the line of Mark Reeves of Barclays. Please, go ahead.

Mark Reeves -- Barclays -- Analyst

Yes. Thanks. Could you talk a little bit more about your prepayment expectations and what risk you see from speed accelerating if you were to see more of compression in the primary, secondary spread as originators at capacity which a lot of them have really been doing in recent months.

Gary Kain -- Chief Executive Officer

Yes. Sure. I mean, Chris why don't I go first and you can chime in. Look first off, while the speed the average speed in our portfolio increased a lot of quarter over quarter.

If you look at that increase on the increase in speeds in the market it has really been in these costs B coupon, two-and-a-half some three's. If you actually look at our portfolio and we added -- we have the one-month speeds on three-and-a-half of four's and in four-and-a-half, you see there was like a one CPR increase in fours and hour-and-a-half's on our portfolio from like in the case of fourth from twenty to 30. So we're not seeing a big increase in those in speeds on the Cs and higher coupon portion of the portfolio. So even if mortgage rates were to continue to come down then we do think those have plateaued.

So to speak. Where you're going to see more volatility and speeds that are going to be very much a function of the mortgage rate is in the two-and-a-half 3s and to some degree three-and-a-half percent coupon. And those are not insignificant to us certainly, but they're a very, very manageable component of the portfolio. So I think what's first and foremost to keep in mind is, we really do like the split between a mostly twos in 30-years in lower coupons.

And then the higher coupon season and specify pools where again, we're already seeing this the plateauing of speeds. Now that said, I don't think there's as much room for a primary, secondary spreads to compresses. Maybe a lot of many people, or if you just look at history or look at the time, and a time period prior to the pandemic just in that. There are changes to the market servicing multiples are lower, and they're going to stay lower for good reason.

And then, there are other hindrances to primary, secondary spreads of getting back to historical norms. And they don't normally get there in the midst of a big refi boom like what we're seeing here. So the big picture. I think we, we expect to see prepayments pick up on two-and-a-half soon threes, and in a particular pick up on two-and-a-half's.

But that's a -- that's a coupon that we've been shrinking our exposure to. So when we look at it as a whole for the portfolio, yes you have to manage speeds. And yes, there is a risk of faster prepayments. But it's something like we feel that we can manage.

I hope that answered it. Chris, I don't know if you want to add anything.

Chris Kuehl -- Executive Vice President

No. I think you covered it well.

Mark Reeves -- Barclays -- Analyst

Okay. Great. Thank you.

Gary Kain -- Chief Executive Officer

Thanks, Mark.

Operator

We have now completed the Q&A session. I'd like to turn the call back over to Gary Kain, for concluding remarks.

Gary Kain -- Chief Executive Officer

I'd like to thank everyone for their participation in our Q3 earnings call. And we look forward to talking to you again next quarter. Thanks again.

Operator

[Operator signoff].

Duration: 43 minutes

Call participants:

Katie Wisecarver -- Investor Relations

Gary Kain -- Chief Executive Officer

Bernie Bell -- Senior Vice President and Chief Financial Officer

Chris Kuehl -- Executive Vice President

Aaron Pas -- Senior Vice President

Peter Federico -- President and Chief Operating Officer

Doug Harter -- Credit Suisse -- Analyst

Bose George -- KBW -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

Rick Shane -- J.P. Morgan -- Analyst

Mark Reeves -- Barclays -- Analyst

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