Peter Federico: Yes. Let me start with hedging question. What we’re trying to do with our hedge portfolio, if you think about it at a high level, we’re trying to achieve two purposes. And the two purposes are, one is that you want the right mix of hedges that you think gives you the best opportunity to offset the value changes, the market value of your asset portfolio. I think that’s the way most people think about it. But there’s also another objective of the hedge portfolio, and that is to give you the most stable cost of funds. In order to have a very stable cost of funds, you have to have essentially a 100% hedge ratio, meaning all of your short-term debt is hedged with the same notional amount of hedges. So we’re trying to find a mix this sort of achieves both those purposes because both of those objectives are really important.
When we think about the hedging the portfolio in the third quarter is a good example because as both Chris and I mentioned in our prepared remarks, there was a lot of variation in mortgage performance across the yield curve because the 10-year moved up so much in the five-year didn’t move as much in the two-year hardly moved. If you think about the market value exposure of a mortgage, you can think about that duration being broken down across the key rates, if you will, two-year part of the curve, the five-year part of the curve and the 10-year part of the curve. For our portfolio, for example, if you took our mortgage portfolio duration and you broke it down across the curve, it would be something like 20% of the sensitivity of the mortgage would be to the two-year and less about 30% around the five-year and around 50% to the back end of the curve.
If you look at our hedge portfolio, often I think people look at the notional and they say, well, AGNC has a lot of short-term hedges. We do from a notional perspective, 44% of our hedges, for example, are three years and in. But when you think about the market value sensitivity of our hedge portfolio, only about 18% of the duration of our portfolio is coming from the two-year part of our curve. So we don’t have a lot of interest rate sensitivity from our short-term hedges. In fact, we have from a model perspective, if you will, just the right amount of two-year hedges. So we have 44% notional hedges, but only 18% of our hedge sensitivity comes from our two-year part of the curve. So I point that out because as we think — as you ask about the hedge ratio, we’ve operated with a really high hedge ratio and a mix of hedges across the curve to try to achieve both those purposes.
We’ve talked about for several quarters now that we’ve moved more and more of our hedges to the longer end of the curve. In fact, Chris mentioned in his prepared remarks, that 70% of the duration exposure of our hedge portfolio is seven years or more. And we will continue to likely move more of our duration to the longer and intermediate part of the curve as we expect the yield curve to steepen as we expect the Fed to pause. And I think at this next meeting, the Fed will, in fact, stay constant. Again, I think they’ll talk about the fact that the economy and the outlook is continuing to move in their direction. So I don’t expect the Fed to make any move. At this meaning, in fact, I don’t expect the Fed to tighten at all anymore. I expect the next move from the Fed to be an ease ultimately down the road.
