0001423689-26-000099
SEC filingQ1 2026 delivered GAAP net loss of $148 million due to interest rate swap income declines from higher pay rates on new positions and Middle East-driven volatility, offset by strong $387 million operating cash flow supporting liquidity.
GAAP net income reported a loss of $148 million for the three months ended March 31, 2026, compared to income of $50 million in the prior year quarter, primarily because interest rate swap periodic income declined. This decline resulted from higher pay rates on pay-fixed swaps, as lower-cost legacy swaps matured and the position grew at higher prevailing rates, compounded by lower receive rates. Diluted EPS reflected this pressure, falling to -$0.17 from $0.02 year-over-year.
Tightening in swap spreads contributed to the earnings challenge, largely driven by increased demand for swap hedges amid heightened Middle East uncertainty. This geopolitical tension amplified market volatility, erasing early-year Agency RMBS gains and producing the GAAP loss despite the company's focus on Agency mortgage-backed securities.
Offsetting the net loss, net cash provided by operating activities strengthened significantly to $387 million from $192 million year-over-year. This robust cash generation occurred as non-cash unrealized losses, which impacted net income, added back in the cash flow reconciliation, demonstrating underlying operational resilience amid portfolio dynamics.
In the Agency RMBS market, lower coupon securities significantly outperformed higher coupon ones due to strong index demand from money managers, fueled by outsized bond fund inflows. Supply-demand technicals also improved from higher mortgage rates, increased bond fund inflows, and proposed regulatory capital changes, supporting the portfolio's positioning.
Liquidity remains a key focus, with management stating belief in sufficient liquidity and capital resources to meet obligations and execute strategy. Equity capital markets serve as a source for growth and liquidity needs. However, haircut levels, initial/additional margin requirements, and potential margin calls when collateral values decline reduce unencumbered assets and borrowing capacity. Margin thresholds may rise during elevated volatility, potentially affecting liquidity.
Looking forward, the longer-term outlook for Agency RMBS remains constructive despite near-term challenges from heightened geopolitical and macroeconomic risks. With potential resolution or easing of Middle East tensions, increased interest rate volatility and uncertain Federal Reserve policy could revert to positive catalysts for Agency RMBS.