Welcome to Invesco Mortgage Capital Incorporated First Quarter 2024 Investor Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Now I would like to turn the call over to Greg Seals in Investor Relations. Mr. Seals, you may begin.

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. The press release and presentation are available on our website, invescomortgagecapital.com. This information can be found by going to the Investor Relations section of the website. Our presentation available include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcast are located on our website. Again, welcome, and thank you for joining us today. I'll now turn the call over to John Anzalone.

All right. Well, good morning, and welcome to Invesco Mortgage Capital's first quarter earnings call. I'll provide some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning are our President, Kevin Collins; our CFO, Phegley; and our COO, Dave Lyle. The first quarter was characterized by sharply higher interest rates across the yield curve as persistent inflation and strong economic data led to a repricing of the market's expectations of future monetary policy. These expectations, as reflected in the federal funds futures market, adjusted from projecting over 6 cuts in the Federal Reserve's benchmark rate during the balance of 2024 for less than 2 cuts today. Despite the sharp increase in interest rates, interest rate volatility fell as market expectations for monetary policy converged with official projections by the FOMC. In addition, organic mortgage supply remains at very low levels, while demand from money managers, commercial banks and overseas investors broadly outpaced expectations. Against this backdrop, higher coupon agency mortgages outperformed treasuries, given the decline in interest rate volatility and improvement in supply and demand dynamics in the quarter. These factors led to a positive economic return of 4.8% for the quarter, consisting of a 0.8% increase in our book value combined with a $0.40 common stock dividend. Our debt-to-equity ratio ended the quarter at 5.6x, down modestly from 5.7x as of year-end. At the end of the quarter, 94% of our $5 billion investment portfolio was invested in agency mortgages, 5% invested in agency CMBS with the balance in credit assets. Our liquidity position remains strong as we maintained a sizable balance of unrestricted cash and unencumbered investments totaling $451 million at quarter end. We began to build an…

Thanks, John, and good morning to everyone listening to the call. I'll begin on Slide 4, which provides an overview of the interest rate and agency mortgage markets since the beginning of last year. As shown on the chart in the upper left, U.S. treasury yields increased across the yield curve, largely in parallel fashion during the first quarter. Yields on maturities from 2 years to 30 years rose between 25 and 40 basis points, given a pause in the disinflationary trend in the U.S. amidst resilient economic growth. The chart on the bottom left details pricing in the Fed funds futures market over the past year. At the end of the first quarter, market pricing reflected expectations for just three 25 basis point cuts in the target rate in 2024 after beginning the year pricing at more than six. Since the end of the first quarter, this has declined to less than 2 cuts in 2024 as first quarter inflation data remained elevated. Given the Fed's dot plots indicate 2 to 3 cuts this year, the market has moved from pricing in more accommodation than the Fed's projections to largely being in line, leading to a decline in interest rate volatility despite the increase in interest rates. The decline in interest rate volatility, combined with the increase in interest rates provided a supportive backdrop for higher coupon agency mortgages. While runoff of the Federal Reserve's holdings of agency mortgages continues to increase net supply to the market, domestic bank holdings in agency MBS also increased, supporting the supply and demand dynamics of the sector. Slide 5 provides more detail on the agency mortgage market. In the upper left chart, we show a 30-year current coupon performance versus U.S. treasuries' over the past 12 months, highlighting the first quarter in…

[Operator Instructions] Our first question comes from Jason Weaver with JonesTrading. Jason, your line is open. Our next question will come from Trevor Cranston with Citizens JMP.

On the new allocation to agency CMBS, looking at the spread tightening that's happened in that asset class over the last several months, would you look to be continuing to add that to the portfolio where spreads sit today? Or is that something where you'd like to see spreads widen out further before increasing the allocation further there?

Sure, Trevor. It's Brian. Like I said, spreads have tightened really throughout the first quarter end and through April as well to where ROEs are kind of in the high single digits at this point. So we certainly slowed down our purchase activity at this point. It continues to be a relative value play between the 2 sectors. And right now, we think agency RMBS is a little bit more attractive. So certainly, there are benefits to the agency CMBS portfolio to our overall portfolio. But at this point, we think that spreads there have gotten pretty stud here, so we've slowed down.

[Operator Instructions] Our next question comes from Eric Hagen with BTIG.

Can you share any perspective on the supply of prepay-protected specified pools in the higher coupons and how active you guys have been there? And then just kind of separately, we're talking about the higher coupon product in your portfolio just in general, but how much prepayment variability do you maybe see like developing within the coupon stack at different levels of interest rates?

Yes, sure. Eric, it's Brian. I think at our size, the supply of specified pools is certainly not prohibitive. I wouldn't necessarily say we've been active. We haven't really been increasing the size of the portfolio, given where volatility is and are, I guess, hesitant to increase leverage at these levels. So we're pretty pleased with the allocation that we have currently, split between the various stories that you see in the presentation there. So I wouldn't say that we've been too active. And like I said, we were mostly in the first quarter reinvesting paydowns into the agency CMBS allocation. So there hasn't been any additional purchases there. As far as variability of prepayments, I think we've been hesitant, obviously, to add significantly higher coupons, 6.5 and 7s. Those prepayments have been fairly well contained at this point just given what we've seen in rates. But our overall belief is that the Fed will be, at some point, cutting rates, rates should be moving lower and that those very high coupons could come under some pressure in that scenario. So we're pretty comfortable continuing to own kind of 4s through 6s at this point.

Okay. Great. That's helpful. I mean when you set the dividend and you see the yield and the stock kind of trading near the highest in the sector right now, I mean, how do you think the stock could trade at higher levels of leverage from here? I mean, do you feel like there is support for the dividend if the Fed leaves rates higher for longer and you need to maybe raise your leverage at some point?

I think it's mostly about interest rate fall for us. I think we certainly have the capacity to add leverage if we deem that it's -- if we're comfortable doing so. But at this level, at the current dividend, we feel pretty comfortable with where we are. So we don't feel the need that we need to increase leverage.

[Operator Instructions] And at this time, we have no further questions.

Okay, well, thank you everybody for joining us, and we look forward to meeting you again next quarter. Thanks.

Thank you. That concludes today's conference. Thank you for participating. You may disconnect at this time.