Q3 2019 Earnings Call
Good morning, welcome to the Agncs investment Corp. third quarter 2019 shareholder.
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And of course already Katie Wisecarver <unk> Investor Relations. Please go ahead.
Thank you Keith and thank you all for joining Aegean Sea investment Corp. third quarter 2019 earnings call before we begin I'd like to review the Safe Harbor statement.
This conference call and corresponding slide presentation contain statements that to the extent they are not recitations of historical facts constitute forward looking statements within the meaning of the private Securities Litigation Reform Act.
90 95.
All such forward looking statements.
Our intended to be subject to the safe Harbor protection provided by the Reform Act actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control the G.M.C.
All forward looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.
Certain factors that could cause actual results to differ materially from those contained in the forward looking statements.
Included in the risk factor section.
Oh the agencies periodic reports filed with the Securities and Exchange Commission.
These are available on the Fccs website at <unk> I see see dock that we disclaim any obligation to update our forward looking statements unless required by law.
An archive of this presentation will be available on our website and the telephone recording can be accessed through November 14th.
By dialing 87734475 to nine.
Or for one to 317 years Euro eight eight.
And the conference I'd number is 1013553 too.
The view this slide presentation turn to our website Aegean Sea Dot com and click on the Q3 2019 earnings presentation link in the lower right corner.
So like the webcast option for both sides and audio or click on the linking the conference calls to action to view the streaming slide presentation during the call.
Participants on today's call include Gary Kain, Chief Executive Officer.
Or anybody else senior Vice President and Chief Financial Officer, Chris Kill Executive Vice President Aaron <unk>, Senior Vice President and Peter Federico President and Chief operating officer with that I'll turn the call over to Gary can.
Thanks, Katy and thanks to all of you for your interest in agency.
During the third quarter global growth continued to decelerate with weakness evident in almost all major regions of the globe.
Economic activity in the U.S. was also impacted by trade tensions, causing business activity to slow during the quarter.
Against this backdrop equity prices declined intra quarter financial market volatility increased and interest rates fell.
In response to the deteriorating financial conditions central banks around the globe supplied further accommodation via interest rate Cogs and in the case or the easy be renewed quantitative easing.
The fed did its part is well cutting the funds rate twice during the third quarter and then again yesterday.
The moved down in interest rates with significant intra quarter with the yield on the 10 year Treasury following almost 60 basis points to 1.4 or 5% through early September before giving up about a third of that moved to close the quarter at 1.66%.
Despite the rate cuts by the fed the yield curve continue to flatten with twos tends to actually in hurting a couple of times during Q3.
The S&P 500 on the other hand was able to raise all of the August weakness and closed the quarter slightly higher with a large part of the recovery attributable to easier monetary policy.
Credit spreads were generally weaker during the quarter, though some sectors, including GFC credit risk transfers did improve.
Agency MBS spreads on the other hand continued their widening trend.
As to the interest rate volatility fast TB ace beads.
And it inverted curve pushed risk premiums materially higher.
Specified pools, while still wider in the quarter outperform tire coupon TBS.
Finally, the underperformance of Treasury and agency MBS repo remains a significant had when given the well publicized spike in repo rates late in the quarter.
Given the backdrop I just described Agncs Q3 performance was quite remarkable that's where we're able to generate a 2.7% positive economic return with book value largely unchanged.
At a high level Agncs strong financial results can be attributed to both the optimization of our specific MBS holdings and the significant repositioning of our hedge portfolio discussed on our last earnings call.
While many factors can materially impact our perspective financial results.
We currently believe that the majority of the improvement in our net spread and dollar roll income in Q3 should be sustainable over the near term.
Before turning the call over to Bernie I want to close my prepared remarks with a high level look at the prospects for our business over the intermediate term.
First of all.
Regardless of your choice of measure option adjusted or static spreads mortgage evaluations are currently sitting near multiyear wipes.
At the same time, some fixed income credit spreads are near multiyear types.
This dichotomy can be explained by the long running equity bull market boosting the credit sector.
Well outsized agency MBS supply interest rate volatility and inverted yield curve funding pressures and fast TV a prepayments have all combined to put material pressure on agency MBS.
That said these headwinds.
Should be fully priced in at this point and some of the fundamental factors like repo funding and the inverted curve are beginning to abate given the significant actions announced by the fed.
Additionally, the impact of the fast TB a speeds is largely a non event for agency given the composition of our portfolio.
From a technical perspective, the significant increase in gross and net MBS supply, which was probably the largest driver of the M.B.S. underperformance over the past several months should also improve given the combination of the backup in mortgage rates.
The somewhat larger fed purchases and as a function of the slower winter mortgage origination period.
On the interest rate from the current backdrop should be more favorable for agency MBS.
The feds three insurance Cogs and the potential for a trade traders have somewhat reduce the downside risk to the economy and interest rates.
On the other hand, despite the recent risk on move in equities and credit.
Inflation pressures are non existent and the global economy should continue to under well likely keeping interest rates relatively range bound over the near term.
Putting this all together, especially against the backdrop of our strong quarterly results. We are increasingly optimistic about the prospects for our business as we look ahead over the next year or so and at this point I'll ask Bernie to review our financial results.
Gary.
Turning to slide four we had total comprehensive income of 42 cents per share for the quarter.
That's spread and dollar roll income, excluding catch up and it was 59 cents per share up 10 cents from the second quarter largely due to hedge repositioning actions taken in recent quarters.
As we mentioned during our last earnings call. We did not expect to see the benefit of these actions until the third quarter.
Led by lower rates projected CP ours increased to 13.4% as of the ended the third quarter up from 12.4% as of last quarter.
As Chris will discuss shortly or actual CPR for the quarter also increased but at 13.5% remained materially lower than prepayment speeds observed on other generic higher coupon MBS.
As Gary mentioned, despite significant interest rate fluctuations and wider mortgage spreads tangible net book value was largely unchanged for the quarter.
Down three cents per share to $16.55 per share at the ended the quarter.
Including 48 cents of dividends paid for the quarter, we had a positive economic return of 2.7% third quarter, bringing our year to date economic return to 9.1%.
We will announce or October 31st net book value and a couple of weeks, but our current estimate is largely unchanged from September .
Moving to slide five our average at rest leverage ratio was unchanged at 10 times, our tangible net equity.
As of the ended the third quarter average leverage was slightly lower at 9.8 times.
The capital front, we opportunistically repurchased just over $100 million or slightly over 1% of our outstanding common stock at an average repurchase price at $14, a 90 cents per share during the third quarter.
These repurchases at an average price to put discount of approximately 8% were accretive to net book value.
Importantly, this action demonstrates management management's commitment to aggressively repurchase stock when the economics are compelling.
And that's what the ended the third quarter, we had approximately $900 million remaining available for future stock repurchases under our current stock repurchase program.
In late September we priced a public offering $403 million of our series E, 6.5% fixed to floating rate preferred stock.
This transaction was both our largest preferred stock issuance and our lowest fixed rate coupon to date.
Because the transaction settled in early October this capital was not reflected in our quarter in leverage calculation.
Lastly, we recently announced that we will redeem our 7.75% series B preferred stock on November 20. So.
Meaningfully reducing or total cost of preferred.
With that I will turn the call over to Chris to discuss the agency market.
Thanks, Bernie, let's turn to slide six the third quarter got off to a good start with relatively stable rates in risk assets performing well in the month of July However, as Gary mentioned earlier volatility picked up materially in August with 10 year Treasury notes rallying 57 basis points to 1.4 or 5% in early September only to.
Then sell off in the quarter at 1.66% with heightened volatility and lower rates MBS spreads widened, but performance very dependent on coupon specified pool, <unk> category and hedge position on the yield curve.
More specifically, what the yield curve flattening 22 basis points twos tens.
Hedge position like ours bias towards shorter term hedges resulted in materially better performance. During the third quarter, then would be implied by Oh, yes were static spread measures.
Turning to slide seven you can see that the investment portfolio declined slightly to 102.6 billion as of September thirtyth.
During the quarter, we added approximately 13 billion 30, or 3% and lower coupon MBS at attractive spreads, while continuing to reduce more generic higher coupon holdings.
Breads, one lower coupon MBS have been pressured by heavy supply driven by the spike in origination volumes and the continued reduction in the Feds MBS portfolio.
The supply has led the compelling valuations, especially considering the limited prepayment risk inherent lower coupons.
Additionally, the outstanding floating production coupon MBS should benefit over time from the Feds reinvestment that now that run off is in excess of the 20 billion per month cap.
Turning to slide eight we provide an updated version of a slide that we included last quarter.
As you can see on the right side of the table pools that represent the GBA deliverable and three and a half through four and a house are paying between 40 and 55% CPR. In contrast, prepayment speeds on Agncs portfolio remained very well behaved. It's important to note that we've elected to keep some lower pay up.
30, or three and a hobson fours better prepaying, well above our average speed for the coupon because there's still profitable to retain relative to our TV. A short positions. For example, if you subtract that our fastest 3 billion fours, an amount equal to or TV, a short our average speed on the coupon would drop from 20 CPR.
The 16 CPR.
In part for this reason then because we will likely continue to migrate our more generic pool holdings to lower coupons. We believe our portfolio CPR is likely biased lower over the near term, even if aggregate speeds pick up marginally.
On this lastly on this slide we've included the average dollar roll trading levels or price drops for the most recent October November roll cycle. As you can see there's a dramatic difference in carry on lower coupons versus higher coupon TBS.
As a reminder of the price drop represents one months worth of income inclusive of implied funding costs, but excluding hedges. The prices are in 30 seconds of 1% as you can clearly see 30 or threes have positive carry higher coupons do not importantly, the inclusion of hedges actually improves the relative carry advantage.
For lower coupons, given their longer durations and the inverted yield curve.
The reason higher coupon rolls are trading so poorly is due to very fast prepayment assumptions that are warranted given the recent speeds we have seen within the TV.
Overtime prepayment speeds on higher coupon should slow burn out as the most responsive borrowers will have refinance and this should lead to improved valuations and better dollar roll levels on higher coupon TV is however, given current rate levels and the adverse characteristics of many of the pools currently in the float we expect.
Higher coupon roles to remain under pressure over the near term I'll now turn the call over there and so disgusted non agency sector. Thanks, Chris Please turn to slide nine and I'll provide a quick update on our credit investments.
Our non agency portfolio remained constant at 1.7 billion roughly 4% of equity in the third quarter.
The majority of the changes in the portfolio were driven by changes in the prepayment landscape, we reduced exposure to investment grade new issue RMBS subordinate bonds as these outperformed our hedges into the rally and no longer looked attractive in light of faster prepayments as well as some rotation within the crts space.
Over the quarter credit spreads were somewhat mixed with high yield cdx spreads leaking marginally wider while investment grade spreads remain largely unchanged.
Within CRT CMBS in CMBX dining credit generally performed well as the feds more accommodative stance with supportive for risk assets and lower mortgage rates, particularly beneficial for CRT at the lowest parts of the capital structure.
Since quarter end spreads it remained largely relatively firm well equity stood at all time highs. However, there are some signs of investor concern on the corporate side, particularly for higher leveraged and weaker credit companies.
This can be seen in triple C credit spreads drifting wider and a decline in prices for leverage loans over the last few weeks.
On the credit risk transfer front, we see somewhat limited opportunity for tightening and price appreciation and more recently issued mtwos and we would likely sell into a further tightening with that I will turn the call over to Peter to discuss funding and risk management. Thanks, Aaron I'll start with our finance he summary on slide 10.
Our average repo funding cost in the second quarter was 2.48% down 14 basis points from the prior quarter.
Despite the decline repo rates remained elevated in the third quarter.
In mid September a confluence of factors, including corporate tax payments Treasury settlements cash withdrawals related to the oil price shock and the market carry an unusually high overnight repo balances due to uncertainty related to the September fed meeting resulted in a significant spike in repo rate.
As for both Treasury and mortgage collateral.
The repo shock in September negatively impacted our cost of funds, but the impact was relatively small given it only affected incremental funding over the last two weeks as the quarter.
On slide 11, we provide additional color on the funding environment.
The two graphs highlight the divergence between repo funding levels and other benchmark rates.
The graph on the top shows the difference between three month repo and three month LIBOR.
As the line shows although funding cost by this measure improved somewhat during the quarter they were still unusually volatile.
The bottom graph shows the rate difference between one month repo and the one month overnight index swap rate, which is a good proxy for the expected average overnight fed funds rate over the same period.
The large spike in mid September clearly shows the dislocation that occurred in the repo market relative to the Feds primary benchmark rate.
The disruptions in the repo market being so pronounced and so public turned out to be a catalyst for the fed to act, which over time should be a positive for our business.
First the fed reinstituted daily open market repurchase operations. These overnight and term operations added significant liquidity to the repo market and quickly pushed funding rates back down.
Second and more importantly in mid October the fed announced its plan to purchase approximately $60 million of Treasury bills.
Per month for at least six months as well as Upsized the overnight and term open market operations 220 billion and 45 billion respectively.
Together these actions could add more than $500 billion of liquidity to the system over the next six months.
As such we are optimistic that the repo headwinds that we faced throughout 2019 will soon abate.
That said given balance sheet constraints at large banks and the fact that defense purchases will take time to accumulate we expect funding to remain a headwind in the fourth quarter before improving materially next year.
Turning to slide 12, we provide a summary of our hedge portfolio, which in aggregate increased to 97 billion and cover just over 100% of our funding liabilities.
The increase was driven by additions to both our swaps and Swaptions portfolios.
The increase in our swap position was predominantly through the addition of shorter term swaps that allowed us to lock in attractive all in funding levels.
We also transitioned a material percentage of our swap portfolio away from LIBOR based swaps to swaps indexed Oh, I asked and so for.
These swaps not only eliminated our exposure to lie bar, but also carries substantially lower pay rates and we believe will better track our actual funding overtime.
All of these swaps were executed at prevailing market rates.
As Gary mentioned in his opening remarks, our swap portfolio has already provided us substantial benefits.
As a reminder, why we materially increased the size of our swap book in the second quarter.
We also terminated a significant amount of longer term pay fixed swaps and short treasury positions.
Additionally, the carry on our swap portfolio benefited our aggregate cost of funds measure, which dropped 39 basis points in the third quarter to 1.85%.
On slide 13, we show our duration gap and duration gap sensitivity.
Despite the significant rally in interest rates, our duration gap remained flat over the quarter as we continue to rebalance our hedge portfolio.
In addition, as we show on the table extension risk for our portfolio and for the market as a whole has increased and is an important consideration and how we determine our duration gap and hedge portfolio composition.
With that I'll turn the call back over to Gary.
Thanks, Peter and at this point, we'd like to open up the lines to questions.
Yes. Thank you well now begin the question and answer session.
If you ask speakerphone, please pick up the handset before pressing that he's just trying to question. Please press star then to.
This time, we'll pause momentarily to assemble the roster.
And the first question comes from Douglas Harter with Credit Suisse.
Gary I think you mentioned that that.
[noise] I'm sure I'm so.
Just to repeat what I said in my prepared remarks.
We do feel I mean, obviously there was a large difference between net spread in dollar roll income in Q3 versus Q2, and so what we believe is that you know that the majority of that increase looks to be you know sustainable over the over the long term barb.
Sorry over the shorter term that said you know there always factors outside of a hit our controller knowledge that can affect things, but more importantly, getting to the the question around dividends. What we've always said I mean, you know we know the market cares a lot about net spread and dollar roll.
All in Comminutes, an important measure, but it's never been the you know the sole driver of our dividend choices and realistically. We think about you know the the economic or true earnings.
Potential of the portfolio and you know we we look at that you know kind of assuming current market conditions and an embedded in that is almost see assumption. If we bought our portfolio today, what do we think the returns are and you know they are still quite.
Right attractive and then we believe they certainly don't exceed the dividend, but I want to stress that if you. If you look at Agncs performance over the you know in the past we recognized as the <unk>, we recognize the pluses and minuses of net spread and dollar roll income and you know that's never been they.
Thanks, Gary and then Peter.
Options that.
Moved more of your your new hedges kind of away from LIBOR based can you just talked about.
What the mixes between LIBOR base, the non non LIBOR based is as of today.
The last 15 or 20% of our portfolio is LIBOR based and we really felt like [noise].
It was a good opportunity to move away from the LIBOR based swaps I mean, there's number of reasons, obviously when LIBOR is going to go away over time, so everybody is going to have to face this issue.
But it was also we think a good time in terms of.
Our desire to receive Oh, I ask versus Ly bar in the current environment those two.
Indexes actually were the same rate in this and in the third quarter. They both were the overnight average overnight rate and the average LIBOR rate actually came out at the same level at 220.
And then as I mentioned, you also get materially lower pay rate, which was about 25 basis point difference.
Consideration is then we really think that.
Livewatch <unk> or repo funding will actually better track Oh, I ask overtime versus LIBOR, you know a LIBOR, obviously can have a lot of.
Factors.
And what I would just sat is really the the perfect answer for us it would be middle having to receive like be so for which would essentially be tied to.
Really a repo the overnight repo rate by itself right now those swaps to be perfectly Frank aren't very liquid there are times. When you can enter into them you know at Mark you know at good levels, but that is something that you. What you. All you should look for us to you know.
To increase over time as those swaps really.
A step back and you just think about.
Our business and how we should be the best way to hedge our business.
And we have the interest rate risks so to pay fixed on a swap and receive a repo rate back is the perfect <unk> is really a bunch much much cleaner trade than.
Yes, so I think the long Ron you know we were pretty confident we'll get there. We just have to be practical about the the market you know liquidity and it's starting to improve.
Got it just to make sure I understand so so these moves all else being equal should reduce the volatility of your.
Of the cost of funds swings quarter to quarter.
Yes, and importantly, I think this important to stress and Peter mentioned, a couple times, but.
Yes, it is a risk management benefit and should reduce the volatility in our cost of funds, but we were able to you know you're able to enter into the is at 2025 basis point lower pay rates. So it's not something we have to pay.
You know a lot of money to reduce risk you. These were attractive as well. So it's a combination of being in a better risk position and I think it's because of the unique attributes of our business, which is our funding is tied to government securities. It gives us the ability to.
And to be at a benefit from the lower rates.
Great. Thank you.
Thank you and the next question comes from Bose George with KBW.
Hey, guys good morning.
Versus TV aid and then actually on slide eight I was just trying to understand that a little better as well be.
Contracted pretty meaningfully.
Yeah, Hey, those as Chris. Thanks for the question. So you know just contextually yields are around to 70, you know with a spread to swaps around 105 to 110 basis points. So just use round numbers with 10 times leveraged that generates.
Gross spot or we just above 13% before convexity cost year specs or there's a wide range of a pool types and pay ups, but contextually in the same area.
You know with respect to the TV a position you know it did come down a fair amount during the third quarter as we added newer production lower coupon pools versus selling higher coupon TV A's and since quarter end.
And it's a function of implied financing rates the prepayment environment.
Are delivering pulled out versus the role.
Ladies first so when rolls are trading weaker we can carry the pools versus repo. So there's a lot of flexibility and carrying a position you know a lower pay up pool position. So in other words, there is a fair amount of option value in carrying lower payables.
Okay and helps answer.
It does I guess I was just so trying to understand is is there the difference in holding.
Enrolling versus holding pulls just given the differences in return from the different coupons.
Well just this is Gary what I'd add so if you want to just get specific and say like let's look at our 4% coupon position, where we have a short TBA position of 3.3 billion right and.
Then we have these other pool positions you know, let's separate out the kind of the higher quality specified pools. These other pool positions essentially many of these have very low pay ups.
At where maybe they have I pick pay up or something.
Like that there are some that have a bigger pay ups, but if essentially if the role is pricing a 50 CPR and you have a pool that you think is going to pay at 45 CPR.
You don't want to deliver that into TV as yes, it's going to raise our average CPR for the quarter, Okay, because it's going to pay at 45, but it's actually going to be more advantageous to to keep that pool.
Versus you know where the dollar roll is trading and so that's the trade off that you make sometimes if you can get a decent pay up for it then you obviously can sell it but to Chris is point, there's a lot of optionality, but generally speaking if there is no pay up if a pools going to prepay five or 10.
Due to either the roles improve and are speeds on on these pools, increasing we may flatten out the position, but it was just to reiterate the point is a very low risk positive carry position Avalon.
Okay, great. Thanks, a lot.
No problem. Thank you Bose.
Thank you and the next question comes from Rick Shane with JP Morgan.
Hey, guys. Thanks for taking my questions. This morning.
I think that there are three.
Factors that.
We've sort of hard from you guys want as you think that asset pricing is attractive with wider spreads should we expect funding to normalize as we move into 2020 and then three when we look at hedge ratio, it's as high as its at the high end of what we've seen historically.
All of that suggests.
That there's an opportunity for you guys to grow the balance sheet as you move into 2020.
Curious given where leverage is.
Do you see that driving that through additional leverage.
Look that's a that's a good question and essentially you know I think what I said on the last call around leverage is that we see the current operating kind of environment.
They are being a range of leverage in the nine and a half to 10 and a half times is where we would expect to operate.
Now look we may be outside of that range at some periods and where are totally comfortable with that.
You know and to your point I mean, when we look at the return kind of kind of prospects going forward.
We feel like they look good mortgages as I kind of set earlier mortgages are definitely on the wide end of the valuation range, both an absolute space and probably even more so on and relative space.
That's a on a positive.
And you know the interest rate environment.
Youre.
In shop, a little they did state get where they want it to get it's not Canada [laughter] I don't think anyone is thinking it can it can get too Hot you know in the you get away in the foreseeable future realistically. So I think you have a one way risks to rates eight or so.
That's a that's an easier situation to manage generally so from those perspectives you could argue for being at the higher end to the leverage range I would say you know kind of given year and the volatility we've seen.
We feel like in the very short run there might be better entry points.
And you know will will kind of watch for it but.
Big Picture I, you know, where we're operating largely in the range that you know that we've set up but we do feel like you know the environment is becoming more favorable.
When we look at what you guys did during the quarter you kind of barbell things you took shorter swaps, but added significantly to the swaption position.
And is that sort of consistent with expectations low volatility, but basically buying.
Cheap insurance in a low rate low vol environment.
Is very low but look there's the we have to be practical about who's the steps that we've highlighted in the when Chris has described the portfolio.
We feel like the portfolio is extremely well positioned.
For carried to make money in this environment to be able to handle a down rate shock.
But we do have longer duration mortgages, we have lower coupons and we have specs we have to be practical about the fact that there is extension risk.
In those holdings and so to your point the optional protection is the best way you know to to sort of by some insurance.
If.
You know if that shock a temporary shock comes along.
But you know where we're being practical about the composition of the portfolio. It's for all the reasons, we've talked about it. It's critical that we have this composition of the portfolio, but you know, but you can't ignore the other attributes and I think that lends itself to be at all having protection ghetto Bob option.
No protection.
Great. Thank you for taking the all my questions I apologize for taking so much time this morning.
Thank you, but no problem. Thanks.
Hey, thanks.
And then listening to Gary's comments, he sort of indicated that she viewed.
Great risk is kind of one sided to the downside.
I was wondering if you could elaborate a little bit on how are you guys are thinking about extension risk within the portfolio and how you are constructing the asset composition.
And just elaborate on that a little bit if you could thanks.
Sure I I'll start.
Again, I think it's consistent with what chairman Powell said yesterday.
Inflation.
The fed raises rates and rates go up because of inflation inflation expectations. Okay, I mean, I'm, depending on what part of the curve you're looking at.
We see that as a very low probability and I think.
That view is shared by a lot of people I don't think thats, an outlier, which means that the the risk of and operate shock and rates have backed up obviously from their lows noticeably.
We think the risk of that up rate shock is relatively low, but again, we have to weigh that against the composition of our portfolio and and enter Peters earlier comment the composition of the market, which means that we have to be practical that if there was an up rate shock even if it didn't last.
You know that that will and could catch market participants up a little on prepared given the fact that it it seems unlikely so that's.
Really the driver.
We we have to factor that in I mean, we we can have an opinion on rates, but it what you'll notice, but the size of our hedge portfolio the increase in the options.
And.
And then second question would be.
As you as you guys move towards year end, if you could comment on sort of how you're approaching approaching that and how much of the book your sort of expecting to get funded across your and sort of well in advance of December given the potential for more rate volatility.
Sure Trevor and as Peter I'm happy to take that.
Good question, you know, it's really difficult to answer the first part of that question right now and that's one of the reasons why we sort of set in a couple places in our prepared remarks than we thought the fourth quarter still may be a funding headwind it's hard to.
Said another way, it's taking term repo rates, it's taking time for those rates to come down as much as we would like them to come down Directionally. They are improving as one of the reasons why we had the issue the market as a whole and in September is because the term market wasn't properly pricing all of them.
Markets expectations around the fed now that the fed has eased again yesterday and sort of changed its language and given the indication that it may be on hold for awhile I think term rates will come down over the next couple of weeks the fed is adding more liquidity.
The overnight rate I think our average repo book will average something like 10 to 20 basis points above that.
But again a lot has to happen between now and year end with respect to your question about yearend I expect a lot of of the term market to open up. This you know in November and December will carry us sort of typical position into year end I'm right now year end still seems to be trading into high.
I think year end will show another little spike because there are those balance sheet constraints from large banks and that's the issue that the fed is facing is it's difficult for the liquidity that the fed is providing to make its way all the way through the system because of balance sheet constraints. So that's I think one of the reasons why the fed wants to add so much liquidity.
Over the next six months. So that you know we're back to around two trillion dollars of excess reserves and there's ample money in the system. So that's where we're going that's just going to take us a little while to get there, but I hope that's responsive.
Yeah that was great I appreciate that color. Thank you.
Thank you and the last question comes from Mascara with Nomura.
Thanks, most of my question has been answered, but again I just wanted to ask.
Your size has one of the largest holders of agency mortgage backed securities GNC is look like they're moving quickly to to exit. The conservatorship you. Once worked at one of them what are your thoughts how does impact your business, we see higher GTS alterations just maybe could you comment on what you see happening with those two entities.
Sure I'm you know GRC reform is definitely a topic thats gotten a lot more discussion of late.
What I would say I mean big picture.
While you know there is definitely.
You know that we've we've seen yet we got the.
Now for the plan finally released.
You know from the administration and I think you know the bottom line was that you know the intent is yes for the for the GRC is to build capital and yes that.
Importantly, the.
The.
Government has acknowledged the administration has acknowledged the need.
For them to maintain a government guarantee that's going to require a legislative solution.
When you put all that together I you know I really don't think anything.
Fundamental is going to change with the with the GRC is.
Yes for a number of years on I put that as you know something like five years. It. There's there's nothing short term that's going to change in terms of them exiting conservatorship from our perspective they'll be talk but it's it you know that's a ways off now your other question and the.
The one that's maybe a little more relevant is the incremental changes that you know that could occur or likely will occur.
That's FH Bay can sort of administrate on their own and yeah, I think it's logical to see the GRC footprint shrank a little bit.
And.
And I think from from the perspective, or how does that impact us I think one thing is it will it should over the next let's say few years it should help.
Agency MBS trade, a little tighter than where they otherwise would and it will in a sense kind of be constraints. So net supply a little bit and alternatively, if we were to get into an environment where credit risk.
Was was more attractively priced I think from Agncs perspective, we'd be very happy to you know to increase our credit book in in response.
Currently as we've talked about on so many calls we get a we view the mortgage credit space says as relatively fully valued or a tight and and the levered or are we use are insufficient, but in a world over time and more.
Normal credit environment, we'd love to see product move from the Gses to the private ghetto markets and as a levered investor you know, we're very well positioned to take advantage of that so in the short run I think theres a lot more bark then there is bite to the G.
See I'm kind of discussion.
But no I don't see it being you know a significant driver.
Of our business our business decisions.
Okay, and then just because you don't eminent is in some talk to the agency spreads are widening sac the government could could could move the PSP a out and try to you don't you does any risk or any spread widening due to.
Due to possibly them moving trying to get out of conservatorship.
So there was concern like four or five months ago, and I said on a couple of committees a assessment committee, which is the bid over the bond market Association or and we.
Then I.
I think those fears have received it.
That you know there was some concern I'm probably at the beginning of the summer along those lines, but at this point I think those concerns have been assuaged.
Great. Thanks, Gary.
Thank you.
Well, thanks, I would like to thank everyone for their participation.
On our Q3 call and we look forward to talking to next quarter.
Thank you.
Thank you.