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Annaly Capital Management (NLY 1.15%)
Q4 2022 Earnings Call
Feb 09, 2023, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Annaly Capital Management fourth-quarter 2022 earnings conference call. All participants will be in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today's event is being recorded.

I would now like to turn the conference over to Sean Kensil, director of investor relations. Please go ahead, sir.

Sean Kensil -- Director, Investor Relations

Good morning, and welcome to the fourth-quarter 2022 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.

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Content referenced in today's call can be found in our fourth-quarter 2022 Investor Presentation and fourth-quarter 2022 Financial Supplement, both found under the Presentation section of our website. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, chief executive officer and chief investment officer; Serena Wolfe, chief financial officer; Mike Fania, deputy chief investment officer and head of residential credit; and Ken Adler, head of mortgage servicing rights. And with that, I will turn the call over to David.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Thank you, Sean. Good morning, and thank you all for joining us on our fourth-quarter earnings call. Today, I'll provide an update on the market and how it impacted our performance, then discuss the macro landscape, our portfolio activity this past quarter, and conclude with our outlook for each business as we begin the new year. Serena will then discuss our financial performance, and we are also joined by our other business leaders to provide additional context during Q&A.

Starting with the market backdrop, risk assets ended 2022 on a more constructive note, driven by improved inflation data and a moderation in the size of Federal Reserve rate hikes. Given the cumulative hikes delivered thus far, inflation and wage growth are slowing and the decline in volatility has improved investor sentiment and led to fund flows into fixed income. Mortgage and credit spreads tightened from the peak spreads exhibited in October with November representing the best month of excess returns in the history of the Bloomberg MBS Index. The strong finish to 2022 helped drive our 8.7% economic return for the quarter and our economic leverage decreased from 7.1 turns to 6.3 turns quarter over quarter, attributable to a modest decline in portfolio size, as well as book value appreciation.

Now, turning to the macro environment. Following the 25-basis-point hike last week, the Fed expects to hike a couple of more times and hold interest rates at elevated levels subject to inflation and labor market developments. This scenario should make for a more stable environment for fixed income in 2023, with certain risks out the horizon remain. But, one, the failure to result the debt ceiling has the potential to cause disruption in markets.

And moreover, although inflation is cooled in recent months, these readings offer little information about the medium-term run rate of inflation once base effects dissipate. But all considered, we are optimistic but still cautious on the outlook. With respect to the housing market, activity declined meaningfully over the course of 2022 given the upward shock in mortgage rates and the resulting reduced affordability. Existing home sales, for example, are now a third lower than at the end of 2021.

However, the slowdown in activity is coincided with a reduction in available inventories. According to Redfin, new home listings have decreased 28% year over year as borrowers opt to stay in their homes in the current higher rate environment. And as long as the labor market remains robust, we foresee few core sellers keeping inventories below historical averages. As a result, home prices have been slower to decline than initially expected with the Case-Shiller National Home Price Index falling 3.6% from its peak level in June, though this dynamic may change in the spring selling season.

Nevertheless, we feel good about the state of the housing market as long as the labor market remains strong. Consumer balance sheet and lending standards are sound and the shortage of supply supports prices, all else equal. Now, shifting to our portfolio activity during the quarter. Within Agency, we continued to shift modestly up in coupon to take advantage of wider spreads and improved carry in production coupons.

We grew our allocation of 4.5 and higher, which now represent over 50% of our portfolio, up from 40% last quarter. We believe historically wide nominal spreads in these coupons provide more than adequate compensation for taking on the incremental convexity exposure relative to lower coupons. In addition, we reduced our exposure to TBAs as rolled specialists dissipated over the quarter, and we are likely to favor pools over TBAs going forward given their better return profile. Regarding prepayments, the mortgage universe remains firmly out of the money and even with mortgage rates trending lower toward 6%, only 1% of borrowers have an incentive to refinance, meaning our convexity risk near the lowest levels we've seen over the past five years.

Our portfolio paid 7.5 CPR in the fourth quarter, more than 30% faster than the 30-year universe, and our weighted average seasoning of 42 months and our WACC roughly 1% higher than the broader agency market positions us well for the current discount environment. Our hedge portfolio kept us well insulated as interest rates reached a multi-decade high in the fourth quarter, and the notional balance of our hedges remains in excess of our liabilities as seen in our 107% hedge ratio. Within the portfolio, we rotated from treasury futures into SOFR swaps given the contraction in swap spreads. And going forward, we will remain defensively positioned on the rate front until the path of policy becomes clear, although we are encouraged by the lower rate volatility seen year to date.

Now, moving on to residential credit. Our portfolio ended the fourth quarter at 5.0 billion in market value, essentially unchanged quarter over quarter, and the strategy currently represents approximately 19% of the firm's capital. Nonagency credit participated in the broader risk on rally with benchmark below investment grade stacker M2s, 125 basis points tighter, and AAA non-QM spreads, 20 basis points tighter. Whole loan spreads did lag the tightening in securities, however, resulting in our transactional activity being predominantly focused on residential loans where we settled 685 million in loans during the quarter.

In the current decelerating housing market, our loan business represents our preferred approach to investing in the resi credit market given our ability to control our credit strategy, our partners, the diligence process, and pricing. We maintain a focus on preserving the credit quality of our portfolio with our fourth-quarter whole loan acquisitions exhibiting characteristics consistent with the quality of our GAAP consolidated residential whole loan portfolio. Of note, our underlying borrowers have seen their mark-to-market LTV improved to roughly 58% on average. Our OBX securitization platform had a record year of issuance, supported by our correspondent channel, acquiring nearly 2 billion in loans during the year.

And since the beginning of 2022, we closed 17 securitizations totaling 6.6 billion and generated 760 million of proprietary assets with a low to mid double-digit return profile, utilizing minimal recourse leverage. With credit spreads tightening post quarter end and capital markets execution improving year to date, we expect to continue accessing the securitization market to efficiently fund our whole loan portfolio. Now, to discuss MSR, as we noted during last quarter's earnings call, we were measured in our approach to further growing our holdings, resulting in muted activity in the fourth quarter. Over the course of 2022, however, we have significant growth in the strategy, increasing our portfolio by nearly 3 times to 1.8 billion in market value and ending the year as the third largest buyer of bulk MSR in the market for 2022.

We added new originator partners, expanded relationships with sub-servicers, and put in place new dedicated financing as an additional source of liquidity to support future growth. And our focus on very high credit quality, low loan rate MSR has proven to be valuable. The portfolio paid 3 CPR for the quarter and experienced minimal delinquencies, generating stable cash flows while providing a hedge to current dynamics in the housing market. Now, shifting to our outlook.

We are encouraged by the supportive investing environment for each of our three strategies, but we remain deliberate with respect to our leverage profile and capital allocation strategy considerate in the aforementioned risks to the operating environment. Within our core agency business, we see a strong setup for the year with historically attractive nominal and risk-adjusted spreads coinciding with declining interest rate volatility, a more predictable prepayment environment, and healthy financing conditions. As it relates to the supply and-demand picture, higher rates should mitigate Fed runoff in agency MBS supply, while demand expectations appear more mixed. Buying from banks and overseas investors is likely to be subdued, thus, further spread tightening will be reliant on inflows from the money manager community.

Also to note, should recessionary risks increase, agency MBS have typically outperformed other fixed-income sectors and times of economic weakness. Accordingly, we plan to maintain our overweight positioning and agency relative to our long-term capital allocation target, though, we remain committed to expanding our housing finance footprint and are proud of the considerable progress we have made to date. In residential credit, as the leading nonbank issuer of Prime Jumbo and Expanded Credit MBS, we anticipate maintaining our market leadership given our capital and certainty of execution, and we believe our portfolio should remain relatively well insulated from a further deterioration in housing fundamentals as a result of our robust credit standards. Furthermore, our securities portfolio provides an additional lever for opportunistic growth when returns are accretive.

In an MSR, we expect there to be significant supply in the market, given sustained monetization efforts by originators. While we are comfortable with the scale and quality of our current portfolio, we have capacity to opportunistically add MSR should this elevated supply lead to more attractive returns. Now, before handing it off to Serena, I wanted to make one last point as it relates to earnings available for distribution. While we generated EAD that covered our dividend this quarter, we witnessed the moderation discussed in recent quarters, and we anticipate some further pressure on EAD going forward.

As a result and subject to determination by our board, we expect to reduce our quarterly dividend in the first quarter of 2023 to a level closer to Annaly's historical yield on book value of 11% to 12%, which compares to the approximately 16% yield on book we are paying today. We believe this decision allows us to appropriately manage the portfolio within conservative risk parameters while also delivering a more sustainable yield that is competitive with the peer set and broader fixed income benchmarks, which has always been our objective. Overall, we are constructive on each of our businesses, and we are enthusiastic about the multi-pronged platform that we have built out over recent years, but we remain vigilant and careful stewards of our shareholders' capital. Now, with that, I'll hand it over to Serena to discuss the financials.

Serena Wolfe -- Chief Financial Officer

Thank you, David. Today, I will provide brief financial highlights for the quarter ended December 31st, 2022, and discuss select year-to-date metrics. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. Our book value per share was $20.79 for Q4, which increased by $0.85 per share for the quarter, primarily due to basis timing amid slower rate volatility.

Strong gains on agency investments of approximately $1.61 per share, contributed significantly to the book value appreciation for the quarter. These gains were partially offset by losses in our derivative positions of roughly $0.60 per share and lower valuations on residential and other investments of approximately $0.14, primarily related to our MSR portfolio. After combining our book value performance with our fourth-quarter dividend of $0.88, our quarterly economic return was 8.7% compared to negative 11.7% in Q3. We generated earnings available for distribution of $0.89 per share for the fourth quarter.

The $0.17 reduction in AID compared to last quarter is attributable to the continued rise in repo expense and lower TBA dollar roll income due to less specialness. Partially offsetting these factors, however, was the approximately 146 million increase in swap income quarter over quarter and a further rotation into higher-yielding agency MBS. Given the continued increase in financing costs, runoff of swaps, and the mismatch between economics and earnings related to futures, all things equal, we currently expect further pressure on EAD in the near term. Average yields ex-PAA were 58 basis points higher than the prior quarter at 2.82% due to the previously mentioned acquisition of high-yielding assets and a further decline in amortization.

The factors that impacted EAD are also illustrated in NIM for the quarter with the portfolio generating 190 basis points of NIM ex-PAA, an 8-basis-point decrease from Q3. Net interest spread does not include dollar income. Therefore, the news was comparable quarter over quarter at 1.71% versus 1.7% in Q3. Turning to financing.

Despite market volatility throughout 2022 in the rates market, funding markets for our agency and nonagency security portfolios remained resilient and ample. With current expectations that the Federal Reserve is in the final innings of the hiking cycle, liquidity in agency funding markets should extend out the curve in future quarters. However, we currently continue to see liquidity concentrated in overnight and term markets out to the Fed meeting date. With this landscape in our mind, our Q4 reported weighted average repo days were 27 days, down from 57 days in Q3.

Our sustained assets and procuring dedicated financing for our growing whole loan and MSR businesses continue to enhance the firm's liquidity profile while generating capacity to softer growth in these respective businesses. As David mentioned previously, we continue to be a programmatic sponsor of OBX securitizations, pricing and settling an additional three transactions from the end of Q3. As of the end of Q4, our disciplined approach has resulted in 90% of our GAAP consolidated whole loan portfolio currently being funded through securitizations and a weighted average cost of funds of 3.38%, approximately 260 basis points below the current non-QM cost of funds. In addition to the below-market financing rate of our securitized debt, 95% of the debt is locked in at a fixed rate.

Shortly after quarter-end, our team also took advantage of the robust liquidity in the financing markets to upsize one of our existing facilities by approximately 200 million to 400 million in total. We remain well positioned with ample liquidity in our residential whole loan business with 2 billion in financing capacity across several diversified providers. Our warehouse utilization remains low as we finished the quarter with approximately 720 million drawn against our whole loan position. Shifting to MSR financing.

With the addition of our newest committed warehouse facility recently closed, we currently have 750 million in dedicated financing for our MSR business among diversified counterparties with additional capacity available subject to customary conditions. As reported in Q3, outstanding advances on this business stand at 250 million, leaving us with 500 million of additional capacity at our disposal to draw against our MSR position. The continued rise in repo rates and higher average balances impacted our total cost of funds for the quarter, rising by 57 basis points to 211 basis points in Q4. Meanwhile, our average repo rate for the quarter was 372 basis points, compared to 225 basis points in the prior quarter.

We ended the quarter with a repo rate of 4.29% compared to 3.13% as of September 30, 2022. And as previously mentioned, swaps positively impacted cost of funds during the quarter by approximately 76 basis points. We ended the year with an opex-to-equity ratio of 1.4%, which is at the low end of the range discussed on previous earning calls, reflecting cost savings from the disposition of our MML and A creek businesses. Lastly, we modestly increased our liquidity profile with 6.3 billion of unencumbered assets compared to the prior quarter of 6.1 billion, including cash and unencumbered agency MBS of approximately $4 billion.

The increase in unencumbered assets primarily came from a reduction in leverage on resi credit and the settlement of an MSR package in October. That concludes our prepared remarks, and we will now open the line for questions. Thank you, operator.

Questions & Answers:


Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today's first question comes from Bose George with KBW. Please go ahead.

Bose George -- Keefe, Bruyette and Woods -- Analyst

Hey everyone, good morning. Could I get an update on book value quarter to date?

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Sure, Bose. Good morning. So, as of week's end, book was up roughly 8% to 9%. Post payrolls, we've come off just a touch.

And as of last night up, roughly 7%.

Bose George -- Keefe, Bruyette and Woods -- Analyst

OK. Great. Thanks a lot.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

You bet.

Bose George -- Keefe, Bruyette and Woods -- Analyst

And then talk about normalized leverage. Is the current level of leverage kind of where you're comfortable unless or until things change?

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

It is for this capital allocation. It's going to be dependent upon how we allocate our capital, but with 67% agency and the other third allocated between resi and MSR, we feel good about the level of leverage. We do have the capacity to take it up given our liquidity, but we're very comfortable with it right here, Bose.

Bose George -- Keefe, Bruyette and Woods -- Analyst

OK. Great. Thanks.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

You bet, Bose.

Operator

Thank you. And our next question today comes from Doug Harter at Credit Suisse. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Just a little bit more about the dividend. Obviously, book value has been incredibly volatile and just how you kind of think about kind of setting and targeting that 11% to 12% yield on book in an environment like this where book is moving around.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Sure. Good morning, Doug. And look, it's a function of where asset yields are and the leverage we apply. And just to run through it, you know, in the agency market, current mark-to-market levered returns range between 13% to 15%, depending on what collateral we're buying.

In residential credit, looking at OBX securitization and retained holdings with very modest leverage, we're talking 12% to 15%. And then in the MSR market, unlevered returns around 10%. And so, we get to an average yield in the market today of around, call it, 14%, 13% to 14% across the assets and 135 to 145 basis points to run the business, which we think is incredibly efficient, brings you down to that level of 11% to 12% roughly. And, Serena, you want to add something?

Serena Wolfe -- Chief Financial Officer

Yeah. And, Doug, we've always been really clear that our dividend policy is to set a dividend that is consistent with our historical yields but also something that we can consistently achieve. And so, we do -- as David mentioned in his remarks, that we believe that what we've referred to as a very sustainable level given new money returns that David just walked through.

Doug Harter -- Credit Suisse -- Analyst

Great. And then just one follow-up on the returns you just mentioned, David. I guess, are those the returns that you see at your current leverage? And is there flexibility or risk or opportunity to kind of move leverage up or down over time? And, obviously, how that impacts returns?

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Sure. There is. So, there is flexibility to move it up or down, but that is using the agency market, roughly eight turns of leverage, which is approximately where we're currently levered in the agency portfolio. And just to break it down a little bit in terms of what we're buying, generally, we're buying production coupons, and we're somewhat barbelled between really low pay up but what we think to be good quality pools, for example, new production, retail bank service pools with low WACs coming to pay up of just a few ticks.

And that's going to get you on a levered basis, a little over 15%. But we're obviously considerate of the possibility of a rally in the sensitivity of production coupons to prepay in a rally. And so, we are kind of barbelling that with higher-quality pools. For example, high loan balance collateral and [Inaudible] coupon comes at a cost of about two points roughly.

And the levered return on that is around 13%. So, you take the average and you get to 14%. In resi, and Mike's done obviously a number of securitizations over the recent past and the retained bonds with around 1.5 turns of leverage, end up to that low to mid-teens type returns. In MSR, we currently apply very, very minimal leverage to the portfolio.

It's simply a liquidity source. But the fact of the matter is we do have the capacity to lever that portfolio. And when you look at the composition of our MSR and the loan rate, given how deep out of the money it is, that's very different than production coupon MSR from a variability of cash flow standpoint as rates move. The fact of the matter is, you know, if rates can move a meaningful amount, you're not going to change the cash flows on that MSR that much.

And so, all else equal, you're not going to see a lot of price volatility we expect. And so, as a consequence, you do have the ability to apply leverage to that, but we currently don't. Does that help?

Doug Harter -- Credit Suisse -- Analyst

Really helpful. Thanks, David.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

You bet, Doug.

Operator

And our next question today comes from Trevor Cranston with JMP Securities. Please go ahead.

Trevor Cranston -- JMP Securities -- Analyst

Hey, thanks. A question on the MSR market. It seems like there's the potential for a fairly large amount of MSRs to maybe come to market over the next few months. Can you talk about like how you think that will impact the MSR market and valuations overall? And if you think there's going to potentially be an opportunity to deploy a significant amount of capital into bulk MSRs? Thanks.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Sure. I'll start it off, and good morning, Trevor. And then I'll hand it off to Ken. So, yes, there is -- as I mentioned in my prepared remarks, we do expect a fair amount of supply to come to market.

Last year was obviously quite a heavy year, and we took advantage of it. But the supply will continue in terms of how it can impact the market and pricing. We do think there's a lot of capital that is ready, including ourselves. But if you look at our mark for Q4, we did mark our MSR down modestly, and that was a function of that pending supply.

Ken, do you want to elaborate?

Ken Adler -- Head of Mortgage Servicing Rights

Yeah. I mean just -- thank you very much. Last year was record supply for the industry, and the flow's were somewhat balanced, as you can see where much of it went, including ourselves. And 2023 is certainly shaping up to be a higher amount of supply than 2022, and we're evaluating several opportunities, and we're opportunistically going to participate in those.

So, yeah. We're ready. And as Dave mentioned, that was the reason for the mark up.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Exactly. And also why we remain relatively quiet last quarter. It's currently 15% of our capital, which is lower than we like, but we're going to remain patient and wait for the opportunities to come to us.

Ken Adler -- Head of Mortgage Servicing Rights

Yeah. Just one last thing. I mean, this markdown, I mean, it's just a pure technical. The cash flows are higher in quality and certainty than they've ever been because of the money -- of the collateral.

So, you know, we're certainly looking as a great opportunity.

Trevor Cranston -- JMP Securities -- Analyst

Great. OK. That makes sense. Thank you.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

You bet, Trevor.

Operator

And our next question today comes from Kenneth Lee at RBC Capital Markets. Please go ahead.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi, good morning. Thanks for taking my question. Just one on the potential dividend change. Is the assumption there that the underlying economic earnings over the near term is not going to change much? In other words, you're assuming that Annaly is not going to get a lot more aggressive in terms of investment or leverage over the near term even if the rate volatility, for example, were to settle down somewhere in the middle of the year? Thanks.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Well, we certainly could get more aggressive if the market is cooperative. But the way we look at it, again, is based on our current leverage and what returns are, Ken. And that's where we feel the market is offering returns for this business model.

Kenneth Lee -- RBC Capital Markets -- Analyst

Gotcha. Very helpful there. One follow-up. You touched upon this in the prepared remarks.

Wondering if I could just get your thoughts on what you think could be potential implications if the government does not resolve the debt ceiling? Thanks.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Yeah. So, look, it's very difficult to handicap the implications, Ken. It is something that we should pay attention to. You know, on one hand, the market did rally in 2011.

But look, it's a different world right now and you only have to look back to what occurred in September with the U.K. situation on the trust tax cuts, and you saw tenured guilds, for example, sell off 120 basis points based on somewhat of a lack of confidence. And it is somewhat of a precarious circumstance. In D.C.

right now, I think we've all seen what's going on down there, and it's a little bit disconcerting. Our base case is that this gets resolved, and it's not going to lead to certainly passing the X state without a resolution. But look, we have a contingent down in D.C. currently that is larger than it was in 2011 in Freedom Caucus, and they're playing for a different outcome.

It's more of a base outcome and even mainstream members of both parties are thinking about the broader -- the broader country. But it's a little bit uncertain. We do think it's going to be resolved. But nevertheless, there's a lot of -- there's a lot of outcomes that could occur.

And so, that's one of the reasons why we're being somewhat conservative.

Kenneth Lee -- RBC Capital Markets -- Analyst

Gotcha. Very helpful there. Thanks again.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

You bet, Ken.

Operator

[Operator instructions] Our next question comes from Vilas Abraham with UBS. Please go ahead.

Vilas Abraham -- UBS -- Analyst

Hi, everybody. Thanks for the question. Just a follow-up on the MSR conversation. So, moving forward, would you look to grow that book by allocating more equity or increasing the leverage there? It just sounds like you have some capacity.

How are you thinking about that?

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Yeah. We would expect more equity allocated to it, certainly, with the option to apply a modest amount of leverage. As Serena talked about in our warehouse financing, we have an upwards of $1 billion worth of capacity. And so, that will remain an option.

But generally speaking, it's a liquidity arrow for us in the quiver, and we do expect to add more equity to the sector.

Vilas Abraham -- UBS -- Analyst

OK. And then in terms of capital allocation between agency MBS and resi credit right now, are you leaning one way or another?

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Generally, we're a little bit more fond of agency. Our base case, notwithstanding some of the risks out of horizon is that volatility does continue to come down, which would favor agency. And while housing has outperformed our expectations over the past six months modestly, there is a little bit of risk with the sector, particularly as we do get into the spring selling season, and we'll really see what kind of implications mortgage rates and other factors have on home prices. So, we're a little bit cautious, but with Mike's residential securitization business and the acquisition of whole loans, that collateral, we're very comfortable adding, particularly given his lending standards and the ability to control all aspects of the acquisition of a loan.

So, we'll add, but, generally, we're marginally favorable toward agency right now.

Vilas Abraham -- UBS -- Analyst

OK. That's helpful. And just lastly, on the nonsecuritization market, execution has gotten a lot better since Q4. Just any color that you can kind of add there on just what you're expecting.

And are these level of spreads that you're seeing there sustainable and just what could move it one way or the other moving forward here? Thanks.

Mike Fania -- Deputy Chief Investment Officer and Head of Residential Credit

Sure, Vilas. This is Mike Fania. I would say, yeah. I think a lot of what we saw in 2022 was gross issuance in non-QM.

It was at 39 billion, 40 billion. It was a record for the sector. So, consistent with risk off plus the technical landscape, it certainly pressured the non-QM market, pressured non-QM spreads. I think what you've seen to start is that there is a high percentage of the market that seems to be pricing in a soft landing, and you're seeing that in terms of risk on from probably late October, November, to where we sit today.

And then from a technical landscape, supply will certainly be significantly lower than what it was last year. We think supply in non-QM maybe 25 billion to 30 billion this year. So, you know, with that, I think investors have realized that there is a scarcity of the asset class. And we've seen spreads now tighten to probably, call it, 150 over on the AAA, whereas the Ys, we were probably mid-high 200s.

So, we do think that it can be sustainable to the extent of the macro environment.

Vilas Abraham -- UBS -- Analyst

Great. Thank you.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

You bet, Vilas. Thank you.

Operator

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Finkelstein for any closing remarks.

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Well, thank you, everybody, and we look forward to talking to you again after the first quarter.

Operator

Thank you, sir. This concludes today's conference call. [Operator signoff]

Duration: 0 minutes

Call participants:

Sean Kensil -- Director, Investor Relations

David Finkelstein -- Chief Executive Officer and Chief Investment Officer

Serena Wolfe -- Chief Financial Officer

Bose George -- Keefe, Bruyette and Woods -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

Ken Adler -- Head of Mortgage Servicing Rights

Kenneth Lee -- RBC Capital Markets -- Analyst

Vilas Abraham -- UBS -- Analyst

Mike Fania -- Deputy Chief Investment Officer and Head of Residential Credit

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