Welcome to the Invesco Mortgage Capital Third Quarter 2025 Earnings 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 the call.

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 today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding the 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 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's CEO, John Anzalone.

Good morning, and welcome to Invesco Mortgage Capital's Third 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 for Q&A is our President, Kevin Collins, our COO, Dave Lyle; and our CFO, Mark Gregson. The strong momentum that began in mid-April continued throughout the third quarter as expectations for easing monetary policy, strong corporate earnings and improved economic growth fueled rallies across the financial markets. Financial conditions remained accommodative as volatility measures declined sharply and equity market has performed well with the S&P 500 Index in NASDAQ both posting strong gains. Inflation measures continue to run hotter than the Federal Reserve's 2% target over the quarter. With a headline consumer price index rising to 3% in September, up from 2.7 in June. While the core CPI increased from 2.9% to 3%. Investor expectations for future inflation seen through [ TIPS ] breakeven rates increased modestly, reflecting concerns about the potential impact of fiscal and trade policies on consumer prices. Meanwhile, prior to the pause in data caused by the government shutdown on October 1, labor market data pointed to continued sluggish growth. The economy added an average of 51,000 jobs in July and August, down slightly from 55,000 per month in the second quarter, while the headline unemployment rate increased to 4.3% in August. Despite persistent inflation above the Fed's target, the FOMC lowered its benchmark Federal funds target rate by 25 basis points in mid-September, exciting signs of a weaker labor market. On Wednesday, the FOMC cut its target rate an additional 25 basis points to a range of 3.75% to 4% and announced the end of quantitative tightening. Futures pricing now indicates…

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 markets over the past year. As depicted in the chart on the upper left, despite further easing of monetary policy in September, treasury yields declined only modestly during the quarter as the deterioration in employment data was offset by robust economic growth, fueled in part by the boom in AI investment. Positively, the yield curve continue to steepen with 2-year treasury yields falling 11 basis points, while 30-year yields were down just 4 basis points. The difference between 2-year and 30-year treasury yields ended the quarter at 112 basis points, roughly 65 basis points steeper than a year ago, and remain supportive of longer-term investments, such as our Agency RMBS and Agency CMBS. The chart in the upper right reflects changes in short-term funding rates over the past year, with the third quarter highlighted in gray. While financing capacity for our assets remained ample and haircuts unchanged, 1-month repo spread began to indicate funding pressures in late September and continued into October, widening approximately 5 basis points. Steady issuance of [ T-bills ] caused dealers to become very long collateral, squeezing balance sheet and putting upward pressure on repo rates. We believe that FOMC announcement on Wednesday to end quantitative tightening at the end of November was largely in response to this pressure, but further adjustments may be necessary before repo spreads can unwind the recent widening. Lastly, the bottom right chart highlights the significant decline in implied interest rate volatility since the middle of April. This improvement has provided a tailwind for risk assets in recent months, particularly Agency RMBS and is largely driven by diminishing tail risks across fiscal, monetary and trade policies as…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Trevor Cranston with Citizens JMP.

You're just talking about the changes in the hedge portfolio moving a little bit towards treasuries this quarter. Can you talk in general about kind of where your net duration exposure is at? And kind of if you have any general position on with respect to the shape of the yield curve? And then a second question on the hedge portfolios, how you guys are thinking about potentially using options given the decline in the cost of volatility.

Sure, Trevor. Thanks for the question. Yes, I'll tackle yield curve first. We kind of had a bit of a steepener on a while now. And we started to reduce that a little bit, preferring to move more of our hedges into the front end of the curve. Obviously, the Fed did cut rates on Wednesday. Chair Powell did express that future cuts are a little less certain than the market was expecting. And so I think that would result in a bit of a flatter curve than what we've been seeing. So as potentially those cuts start to get priced out of the market. So we like being -- we're still positioned for a bit of a steepener, but we did reduce that just a little bit. As far as the overall net duration of the portfolio, we like -- we have historically preferred to have empirical duration as close to 0 as we can get it. But given the fact that most of our tools are, a larger percentage of our tools are now in premium prices. We do think that we have a little bit more risk towards a rally in interest rates. And so at least from a model duration perspective, we are running model duration is slightly long versus kind of being more historically flat. So we still do prefer interest rate swaps. We do think that, like we said, we do expect swap spreads to continue to normalize. And as that occurs, we'll kind of continue to move more into treasury futures, just given some of the benefits that we see there from a liquidity and margining perspective. But right now, we still think that there's, we still have a bit of widening to do in there. So we'd like to lean more heavily into swaps.

Got it. Okay. That's helpful. And then with the tightening that we saw in agency spreads in the last quarter, can you talk about where you're seeing returns on kind of marginal capital deployment relative to the existing dividend level? .

Yes. So at the end of the quarter, levered gross returns were in the upper teens. So net returns were kind of mid-teen area. So that's pretty consistent with where our dividend to book yield is. So we feel like is supportive of that level. And we've seen a little bit of compression so far in October, just given further outperformance in mortgages that. Recently, we have seen those levels kind of back up a little bit since the Fed meeting. So I think mostly in line with what the earnings power of the portfolio currently is.

[Operator Instructions] Our next question comes from Doug Harter with UBS.

Can you talk about your appetite for continuing to kind of change the capital structure with the buyback of the preferred issuance common. And I guess, as you look at those transactions, the combined effect of that transaction, does that have any impact on book value in the quarter?

Yes. Doug, it's John. Yes, on the preferred buybacks, I mean, those are relatively small. Obviously, I think there is -- so the impact was pretty minimal on that. I think around $2 million we bought back. So I mean those -- it's just harder sliding on those because the volume of trading is relatively low. So we'll continue to, to buy those back as long as that makes sense and they're trading below 25%, which -- so that didn't have a big impact on, on the capital structure, although in the right direction. Yes. And then just comment. Obviously, in terms of common stock, I mean, we're trading at -- we've been trading at a discount. So we have not issued any recently, which would go in the right direction for improving the capital structure. In terms of going the other way, in terms of buybacks, we have been active in the past buying back shares. Typically, we look for times when the price-to-book ratio is persistently low over an extended period of time. I mean it kind of bounces around quite a bit. And so if we look for persistent discount and also when investment opportunities are not accretive. So right now, we're still seeing relatively accretive investment opportunities. So we're not buying back shares now. Certainly, if those conditions occur, we will certainly look at doing that.

Great. And then moving back to the investment opportunities, just how you're seeing the relative value between Agency CMBS and Agency RMBS today?

Yes, Doug, it's Brian. Yes, I mean, Agency RMBS continues to provide a more attractive ROE. I think Agency CMBS, like I said in my comments, the return potential there is a bit more in line with what we would call lower coupon Agency RMBS and continues to have a lot of benefits. So I think -- to the extent that Agency RMBS is still mid to upper teens, we would probably look to see a bit more compression between the 2 before we would look to significantly moved more towards Agency CMBS, but we do like continuing to hold those securities as they do provide a lot of convexity benefits for the portfolio.

At this time, I'm showing no further questions. I'll turn the call back over to the speakers.

Thank you, everybody, again for joining and look forward to speaking to you next quarter. .

Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.