Invesco Mortgage Capital (NYSE:IVR) reported a negative economic return for the third quarter of 2026 as sharply higher Treasury yields, increased interest-rate volatility and wider Agency residential mortgage-backed securities spreads pressured its book value.
Chief Executive Officer Kevin Collins said the company generated an economic return of negative 11.6% during the quarter, consisting of monthly dividends of $0.12 per share and a 16.1% decline in book value per share. Collins added that quarter-to-date book value had recovered by roughly 4%, which, together with the accrued dividend, represented an economic return of about 6%.
“We operated in a very challenging environment,” Collins said, citing resilient economic growth, tighter financial conditions, expectations for further Federal Reserve rate increases, fiscal-deficit concerns and increased Treasury supply.
Rates and Mortgage Spreads Pressured Results
Treasury yields rose sharply during the quarter, with two-year yields increasing by more than 70 basis points and 10-year yields rising by more than 80 basis points, according to Collins. Chief Investment Officer Brian Norris said 10-year and 30-year Treasury yields increased by 81 and 68 basis points, respectively, ending the period at their highest levels in nearly 25 years.
Interest-rate volatility increased notably, particularly in September. The MOVE Index ended the quarter at 110, compared with 83 at the end of the second quarter. The Federal Open Market Committee raised the federal funds rate by 25 basis points at its September meeting, its first increase since July 2023, Norris said.
The higher volatility and rate move weighed on investor demand for Agency RMBS, while prompting deleveraging by hedge funds and some convexity-related selling by servicers, Norris said. Agency CMBS spreads were largely unchanged for most of the quarter and widened modestly near the end of September.
Portfolio Shift Toward Specified Pools
At quarter-end, Invesco Mortgage Capital held an $8 billion investment portfolio composed of $6.6 billion of Agency RMBS specified pools, $700 million of Agency TBA positions and $700 million of Agency CMBS.
The company increased its allocation to specified pools to 83% of the investment portfolio from 73% in the prior quarter. At the same time, Agency TBA exposure declined to 8.3% from 14.7%, while Agency CMBS exposure fell to 8.3% from 11.1%.
Norris said the company invested monthly cash flows and ATM issuance proceeds into specified pools early in the quarter, primarily in 30-year 5.5% and 6% coupons. It also swapped part of its Agency TBA allocation into specified pools to improve the portfolio’s convexity profile and reduce sensitivity to interest-rate volatility.
Invesco Mortgage Capital sold its remaining Agency interest-only positions and reinvested the proceeds into 30-year 6.5% Agency TBA securities. Norris said the TBA positions benefited from an attractive dollar-roll market, producing a return on equity of more than 20%.
The company also reduced its Agency CMBS allocation in September, moving from 11% to 8.5% and redeploying proceeds into Agency RMBS as those securities became relatively more attractive following spread widening. Norris said the company rotated some CMBS holdings into lower-coupon 2.5% and 3% specified pools.
Leverage, Liquidity and Hedging
Invesco Mortgage Capital’s economic debt-to-equity ratio increased to 8.3 turns at quarter-end from 7.5 turns in the prior quarter. Collins said the company maintained more than $400 million of unrestricted cash and unencumbered investments. Norris quantified quarter-end liquidity at approximately $401 million, equal to 44% of total equity.
Repurchase agreements collateralized by Agency RMBS and CMBS rose to $6.8 billion from $6.2 billion, primarily reflecting the company’s rotation from TBA positions into specified pools. The notional value of hedges also increased to $6.8 billion from $6.1 billion.
The company hedged 99% of its borrowing costs using interest-rate swaps and U.S. Treasury futures. Norris said interest-rate swaps accounted for 76% of the hedge portfolio by notional amount. During the quarter, the company reduced hedges maturing in less than three years and extended exposure across longer maturities as higher rates extended the duration of its Agency RMBS portfolio.
Collins said earnings available for distribution declined to $0.47 per share from $0.50 in the second quarter, largely because of the repositioning of the swap portfolio. Norris said the lower figure did not affect economic return because the lower-coupon swaps generated substantial market-value gains.
Capital Activity and Outlook
The company raised approximately $51 million through its at-the-market equity program during the third quarter, with the stated goals of increasing scale, reducing expenses per share and improving the liquidity profile of its common stock. Collins said Invesco Mortgage Capital had not raised capital through the program during the fourth quarter as of the call.
Addressing questions about the dividend, Collins said management would discuss the payout with the board, emphasizing market conditions, current earnings, portfolio composition and available investment opportunities. He noted that target-asset returns on equity were in the 18% to 20% range.
Management said its outlook for Agency RMBS and Agency CMBS remains constructive despite uncertainty around inflation, monetary policy and geopolitics. Collins said wider spreads have improved expected returns and relative value, while Norris identified lower interest-rate volatility, a clearer path for monetary policy and progress in the Middle East as potential drivers of mortgage-spread normalization.
“We’re really focused on maintaining prudent leverage, ample liquidity, and portfolio diversification,” Collins said.
About Invesco Mortgage Capital (NYSE:IVR)
Invesco Mortgage Capital Inc (NYSE: IVR) is a real estate investment trust that invests primarily in mortgage-related assets. The company focuses on residential and commercial mortgage-backed securities, including securities issued or guaranteed by U.S. government-sponsored enterprises and agencies, as well as non-agency mortgage-backed securities and other mortgage-related investments.
Invesco Mortgage Capital seeks to generate income from its investment portfolio through interest payments and other returns associated with mortgage assets.
