Q4 2019 Earnings Call
Thank you, Jamie. And thank you all for joining a GMC investment corpse fourth quarter 2019 earnings call before we begin. I'd like to review the Safe Harbor statement on a conference call and corresponding slide presentation contains statements that to the extent. They are not recitations of historical fact constitute forward-looking statements within the meaning of the private Securities litigation Reform Act of 1995 month and results could differ materially from those forecasts. Do you see the impact of many factors beyond the control of agency?
We're 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 are included in the risk factors section of agencies periodic reports filed with the Securities and Exchange Commission copies are available on the website at sec.gov. 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 February 13th by dialing 877-344-7529 or 412-317-0088. And the conference ID number is 1 a.m.
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880 to view the slide presentation turn to our website and click on the Q4 2019 earnings presentation Link in the lower right corner wage like the webcast option for both slides and audio or click on the link in the conference call section to view the streaming slide presentation during the call participants on the call include getting a chief executive officer for any bail senior vice president and Chief Financial Officer Chris Executive Vice President, Aaron pass senior vice president in Peter Federico resident and Chief Operating Officer with that. I'll turn the call over to Gary Kane.
Thanks, Katie and thanks to all of you for your interest in a GMC. We are extremely pleased with agencies performance in the fourth quarter as our economic return totaled 9.6% This was our strongest quarterly performance in over five years. It also brought our full year 2019 economic return to 18.7% during the fourth quarter risk assets performed extremely well with most often indices hitting new highs credit spreads also tightened during the quarter with many sectors trading at or near multi-year tights on the interest rate for off the deep end with the 10-year treasury increasing about 25 basis points to 1.92%
swap spreads wide
Significantly across the curve as the fed's massive treasury bill purchases and the commensurate Improvement in GC repo funding expectations drove a material reprice off of government bonds.
Against this backdrop spreads on agency MBS Titan close to ten basis points on average. We specified collateral continuing to trade. Well while the magnitude of the move was impressive the strong performance of agency MBS was completely consistent with the views. We discussed on our Q3 earnings call as we noted on that came with spreads near multi-year wides. We expected aging agency MBS to outperform given the improving funding backdrop importantly off despite the strong fourth-quarter performance. We remain optimistic about the prospects for our business as we enter twenty-twenty spreads on agency MBs are closed 2 months your averages While most credit based fixed income assets are back to
Excuse me. This is the conference operator. We do apologize. Our Winters appears to be a technical difficulty at this moment, but please hold the line and the meeting will begin shortly again. Please continue to be patient and the meetings shouldn't restart shortly. Thank you.
In 2019. The coronavirus is clearly a risk to the global economic backdrop in a worst-case scenario, but its impact on interest rates is likely to be both temporary and limited in magnitude. Lastly as Peter will discuss shortly the funding backdrop a critical component of a GNC levered investment strategy should be a material Tailwind going forward a welcome reversal from the headwinds. We experienced over the past eighteen months.
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219 was a tremendous year for a GMC and it reinforces the benefits of best-in-class asset selection and active portfolio management wage. For example, the model based interest rate sensitivity and basis risk tables that we provided at the start of the year would have predicted a very different outcome for our portfolio. Then what actually occurred given the sharp rally in rates and the MBS spread widening in 2019, the sensitivity tables which I assume no entry or changes to our portfolio would have predicted a decline in Book value of more than 10% based on applying simplifying assumptions of a faith basis point rally and interest rates and a 10 basis-point widening of agency MBS spreads inputs that approximate the moves we experienced in swaps and yep.
Yes.
Stark contrast our book value increased more than 6% in 2019 two major factors drove the outperformance relative to the model. The first is asset selection and opportunistic changes to our asset portfolio specified collateral which comprised a large percentage of our portfolio wage significantly outperformed tva's give an elevated concerns about prepayment speeds as rates felt additionally are avoidance of higher coupon TV off early in the year and opportunistic purchases of lower coupons later in the year. Also boosted our returns.
The second major factor was active management of our hedge portfolio as interest rates began to Rally. We proactively adjusted both the duration and composition of our Hedges these changes some of which we highlighted on our second quarter earnings call had a significant impact on our actual interest rate sensitivity off as compared to where we began the year and explain a lot of the difference between our actual Book value gain versus the Los projected by the model.
in summer
We are extremely pleased with agencies performance in 2019, especially in light of a less-than-ideal operating environment and given our expectations for a relatively benign interest rate environment and more favorable funding conditions. It is hard not to be optimistic about agencies future as if we enter 2020 at this point. I will ask Bernie to review our financial results for both Q4 and the full year 2019.
Thank you. Gary turning to slide for we had total comprehensive income of about 57 cents per share maintaining much of the improvement from the third quarter the $0.02 declined for the fourth quarter was primarily due to slightly lower average invested assets and your engine is related to incentive compensation expense looking ahead the temporary nature of these factors and the improved funding conditions that Peter will discuss should provide a positive tone know Jeanette spread and dollar roll and come over the next couple of quarters.
Book value increased 6.7% for the quarter as our asset valuation significantly out performed interest rate Hedges recovering much of the spread widening experience earlier in the year including dividends. Our economic return on tangible common equity for the quarter was 9.6%
We will report our January month and Netbook value in a couple of weeks, but our current estimate is at it is unchanged from your end.
Turning to slide five our Investment Portfolio increased by 5.3 billion during the fourth quarter to 107.9 billion as of the end of the quarter despite the increase. Our ending leverage was 9.4 times tangible Equity down from 9.8 times as of September 30th due to the combination of Book value appreciation and increase in preferred equity.
Our average leverage was also lower for the quarter at nine point five times compared to ten point compared to ten times for the third quarter forecasted cprs declined to 10% from 13.4% during the quarter due to the combination of higher rates and changes in a set composition actual prepayments for the quarter averaged 15.5% compared to 13.5% for the third quarter.
moving to slide
For the year, we had total comprehensive income of $3.08 per share and $2.16 of net spread and dollar roll income excluding ketchup in and last name is Gary mentioned despite challenging market conditions. We generated in 18.7% economic return for the year.
With that, I'll turn the call over to Chris to discuss the agency market. Thanks, Bernie. Let's turn to slide 7000 intermediate and longer-term rates moving higher during the quarter more specifically 10-year treasury yields end of the quarter at 1.92% up from 1.66% at the end of Q3 in a contrast to your treasury yields fell five basis points to 1.57% on the heels of another rate cut by the fed and improving expectations for government repo stemming from the feds Bill purchase as in other actions to improve liquidity in the funding markets these same Dynamics also push swap spreads wider by eight to ten basis points risk assets traded. Well throughout the quarter with agent Smith performing especially well in the month of December higher rates a steeper curve expectations for lower interest rate volatility and improvements in the funding markets were all factors that led to the
strong performance late in the fourth quarter
Let's now turn to slide eight. You can see that the Investment Portfolio increased by approximately $5 billion to $100 billion as of year-end during the quarter. We continued to take advantage of Attraction spreads when production coupon 30-year MBS while reducing exposure to hire coupon Holdings, most exposed to prepayment risk with the continued outperformance of specified pools. We allowed a full percentage to decline a little and focused or incremental purchases in more generic production coupon MBS TV, a role implied financing rates remained weak relative to historical Norm vs repo during the fourth quarter. However, since you're in roles have been trending somewhat better with improvements and other funding markets lastly on the top right of slide Aid you can see that our prepayment speeds slow down over the last two months given a combination of portfolio repositioning higher rates and slower seasonal factors for housing activity despite the recent decline in interest rates. We continue to age
Jack's prepayment speeds on our portfolio
Main below the peak speed seen last quarter in the absence of a further bond market rally. I'll now turn the call over to Aaron to discuss the non-agency sector. Thanks Chris, please turn to slide 9 and I'll provide a quick update on our credit Investments credit markets exhibited some volatility and spread widening early in the fourth quarter while the Fed was still grappling with repo related issues. However, as Gary mentioned a credit spreads firmed and ended the year at or close to multi-year tights in many cases as an example over the quarter investment-grade and high-yield CD acts indices for 15 and 16 basis points tighter respectively both ending the year at the tightest levels. We've seen in five years.
This translated into tighter spreads on many of our non-agency holds as a result. We continue to shrink our non-agency portfolio. Margin at quarter-end the portfolio total of 51.6 billion which translates to between three and four percent of that.
The decline came predominantly in her credit risk transfer transfer portfolio portfolio with the focus on on the Run paper CRT is continued to perform well throughout January even with Rome.
due to
Between mortgage originations and CRT issuance Supply in the first half of this year will remain elevated given origination volume in the second half of last year.
Well, the backdrop for Residential Mortgage credit performance continues to be quite favorable investments in CRT are becoming less attracted to us in light of the increased Supply and materials in throughout the capital structure over the last several months, but that'll turn the call over to Peter to discuss funding and risk management.
Thanks, Aaron. I'll start with our financing summary on slide ten are weighted average repo funding costs in the fourth quarter declined to 2.12% down basis points from the prior quarter. This was a big improvement from the third quarter, but still higher than it should be given the current fed funds Target as we discussed last quarter. Our expectation was for repo rates to remain elevated in the fourth quarter, but then gradually improve as the market repriced to the additional liquidity provided by the Fed.
this liquidity was
Indeed very significant with the FED adding close to $420 billion over a year end through a combination of open-market operations and outright treasury bill purchases and to the feds credit overnight repo at year-end didn't fact trade very close to the FED funds Target.
The term repo Market however was more challenging these rates remained elevated throughout the quarter due mainly to uncertainty about the fed and how Bank regulatory requirements would adversely impact year and funding rates. For example term repo prices implied and overnight funding rate of between 4 and 8 p.m. For year-end substantially above where the turn actually traded.
We were reluctant to lock up longer-term funding at these rates and as such short and the weighted average maturity of our funding somewhat in anticipation of better funding opportunities later in the quarter.
As we show on slide eleven funding levels did improve materially throughout the quarter in the chart on the top. You can see the gradual Improvement that occurred in 3/4 rates relative to the overnight index swap rate from its peak in early October repo rates by this measure improved by about 25 basis points as the FED added in an increasing amount of liquidity importantly repo rates have remained favorable so far this quarter,
The chart on the bottom shows one month repo rates relative to OAS. This rate was obviously much more volatile given the timing and uncertainty associated with them.
Spike in December for example corresponds with when 30-day repo first crossed over a year end the key takeaway. However is that 30-day repo has also improved significantly and is now back to the level of April of last year looking ahead. We expect our funding to improve further over the next couple of quarters and to be a Tailwind to Thursday mornings, but that said the next six months will be particularly important for the repo Market as the FED transitions away from its initial stop GAAP measures to more permanent measures wage, which will focus on treasury bill purchases, but may also include a combination of regulatory reform a permanent repo facility and open market operations as needed. We are confident. This will happen is the Fed has clearly demonstrated its commitment to resolving this repo issue.
Turning to slide 12.
We provide a summary of our hedge portfolio, which total $99 billion a slight increase from the prior quarter and covered 102% of our funding liabilities.
Headquarter in close to ninety percent of our swap portfolio was indexed off or Soffer. These swaps We Believe will better track our actual funding and took it should provide for a more stable aggregate cost of funds over time.
Finally on slide 13 we show our duration Gap and duration Gap sensitivity. Even the increase in longer-term interest rates and are minimal rebalancing activity are duration Gap increased slightly 2.4 years with the rally that we've had in January our duration Gap today is now back to Flat 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.
Ladies and gentlemen at this time will be in the question-and-answer session to ask a question. You may press star in and one using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys to withdraw your questions. You may press star into again that is star and then one to ask a question will pause momentarily to assemble the roster wage.
Our first question today comes from Doug harder from credit Swiss, please go ahead with your question.
Thanks. It's just wondering how you're thinking about, you know, kind of balancing the portfolio risk between potential risk, or you know, if I if you know if this is short-lived and and rates kind of snapped back and and kind of how you're thinking about the portfolio and and hedging in that context. Sure. I mean first off I think from a big picture perspective as we said in the prepared remarks. We do think 2020 at least up until will save the you know, the election start potentially affect financial markets. We do expect interest rates to be kind of tough to remain in a relatively tight range that said we've obviously had this rally in January that's brought us to kind of what we believe is the lower end of that of that range.
but big picture
You know, we don't expect a break out, you know to the high side in other words who have tenure raids getting much over 2% off. So, um, you know, that's a risk that we're sort of willing to take in the portfolio and when we make those decisions, we're obviously cognizant of the fact that we're 11:00 portfolio and we can't make big bats. But the thing we usually focus on in these environments to to make kind of decisions in terms of how we bias. The portfolio wage is how we expect mortgages, you know, our major asset to trade in different, you know, if interest rates move in different directions and clearly the risk to my name is under performance is biased to a down rate scenario. And for that reason, you know, I think we're we're definitely more focused on Mekong.
Sure, the portfolio is not.
Over hedged into a rally. So that's that is our priority amongst these two and Peter. I don't know if you want to add something I would just add that, you know, this environment given birth rates are now is sort of similar to where it wasn't a third quarter and although as Gary pointed out. We are worried obviously about mortgages in the downright scenario. We're always cognizant of extension risk in our portfolio. And if you look at our sensitivity table, we actually have significant amount of extension risk. And so what we've done like in the third quarter and and likely again given where rates are today is to a job opportunity Stickley add, you know, potentially more option based Hedges to our mix even though it is not our base-case scenario that rates go up we obviously want to protect against that move up and raids and so I tend to be a good choice for us off in an environment like this.
Great, and then just following up on your commentary that that book value is relatively flat. I mean, it looks like agency spread.
You know have have definitely widened this month, you know, I guess it could you talk kind of about what you're seeing that that's kind of led to that kind of better better performance in Book value. Just make sure I think it relates somewhat to what you saw this quarter where the performance of our portfolio out performed. Let's say just TV spots and higher coupon in particular higher coupon specify collateral have performed really well year to date and I think that's the biggest driver of maybe need the, you know, the difference in our actual portfolio performance or what I should say is our estimate of our actual portfolio performance, which has Bernie said is essentially unchanged wage versus maybe what a generic calculation might kick out.
Great. Thank you.
Our next question comes from those George from KBW, please go with your question. Hey, good morning. I should I don't know if you mentioned this. But where do spreads currently stand and you know, just delivered our leads if you're off whatever 9 and 1/2 leverage. Hey, this is Chris. So, you know Thirty or three s or production coupons as an example yield around two and half percent with nominal spreads to the swap curve around a hundred basis points or so depending on the prepayment Assumption. So to use round numbers with 10 times leverage that would generate, you know, a gross spataro we of around twelve and half percent before uh convexity cost and you know as facts as we've talked about have performed well and and so, you know spreads are a little tighter there, um, you know, but are always are still in the in the low double-digits wage, but there's a range depending on the category. Okay, great. Thanks, and then just, you know, given that backdrop and you know where you're trading on price-to-book can just give us updated thoughts on on Capitol new capital.
Sure. I mean as you guys know in 2019 we did not.
To a common offering and we you know early in the year that decision there was based on the fact that we really wanted to avoid higher coupon TBA sand and I talked about that on our first quarter call, you know, and that was at a time when you know, there was a lot of capital being raised. You know, I think in this environment took some of those concerns are, you know have been mitigated where where can you know, we're comfortable with lower coupon Tas that being said, you know, this is an environment where you're going to want to look at, you know, the economics and you know, if there are opportunities for a creative equity and wage and if we're comfortable with what we can add to the portfolio and the fact that we can do it, you know within a reasonable amount of time we're willing to raise Equity but as wage,
You said last year? Um, we the benefits in terms of raising equity in terms of our operating efficiency are still there, but definitely lower than they were a couple of years ago, given our current size and scale. And so therefore for us to raise Equity, we have to believe that it's a creative to shareholder is off and make sense kind of just from an economic perspective. Okay, great. Thank you. Next question customer exchange from JP Morgan, please go ahead with your question.
Hey guys. Thanks for taking my questions.
Morning, first of all, Gary and I apologize part of your initial comments got cut off. So I'm not sure you're aware that if you guys want to post a transcript that might be helpful and with that in mind. I was curious if during that part of the commentary you provided an update on direction of Book value quarter-to-date.
You know, we did provide that I'm sorry, if there were you know, if there were issues with the the the call but yeah quarter today Book value. Is that what Bernie talked about that is essentially unchanged. That's our best estimate today. Obviously, we haven't run through all of our processes and so forth, but our best estimate is unchanged in response to an earlier question, you know, I think the performance of specified collateral is a Big Driver of that versus Young's.
Got it, okay.
Must have missed that employees kind of those didn't come through. That's that's my fault. Second question. You had talked about not wanting to be over hedged in a down rate environment. And when we look at the Hedge ratio, it says is approaching as high a level as you been at over the course of the time. We followed you guys is the way to bring that hedge ratio down basically at this point to grow the book as opposed to reverse the swaps. So one thing is it's a really important thing to focus on the Hedge ratio and focus more on the duration of the hedges versus, you know, the duration of our assets off cuz you know as we talked a lot about and it's something that really helped us last year is even though we were raising our hedge ratio. We were significantly shortening the duration of our dead.
and so
The key really around not being over hedged is managing not the number of 1/3 or swaps or or that you have. It's more around longer-term Hedges, and that's that's much more of our Focus. We're not you know, we we obviously the duration gaps a good indicator of that but it even goes beyond just the duration Gap the thing that will hurt you in terms of, you know Book value. And in terms of really being over hedged is Thursday, is that are outside of three years and in particular closer to ten years and that's really the area that we're focused on and by having reduced those positions pretty substantially beginning really in the second quarter of last year. You know, I think that you know, that's our our biggest area of protection.
In in just around that out.
Yeah, it's going back to your point about the Hedge ratio. If you look at our our hedge portfolio will likely have something like about ten billion dollars worth of swaps. Just you know, a maturity of less than a year off. So naturally if you think about it that hedge ratio would come down about 10 or so percent if we did nothing just allowing those shorter-term Hedges to Gary point. Just run off.
Got it. And you won't use you will with the Curve starting to normalize again, you won't be using swaps as in in forgiveness in order to in article word, but it's offensively as you did last year to generate income Yeah. Well, yeah, that's essentially right because what we saw last year is you needed to put on the Box in order to lock in all of the FED eases that were being priced into the market and that turned out to be at this point a good trade because the FED is now looks like it's on paused at at 3 a.m. As those swaps mature funding should you know stabilized and in a sense you don't have to replace your those hedges in order to get the same benefits of you know, ultimately are repo rates going to decline in and it should stabilize down around the FED effective. So we won't need to replace those in order to take advantage of the funding opportunity.
To your time. Thank you. Thank you and ask question comes from Trevor Cranston from JMP pleased with your question.
Hey, thanks. You guys mentioned a couple of times the you know, Tailwind you see to earnings in 2020 particularly on the on the funding costs I'd wage I guess when we when we look back to earnings over the last couple of quarters, you know, they've been substantially higher than they were when you set the the $0.16 dividend level wage. Um, and I guess in light of that and the the Tailwinds we've talked about can you you know, share any current thoughts you guys have around the the dividend level as you look forward into 2020. Thanks. Yeah. Sure. I'll be happy to address that and it's a logical question. And yes, I think you're right. We do expect the our net worth $10 will income to be substantially above the dividends for the foreseeable future that said, you know, we don't have any plants to Thursday.
Is the dividend?
And you know, the bottom line is where we are definitely focused on trying to optimize shareholder returns and and maximize them but we're much less focused on which pocket in a sense that money goes and we actually think it's best to have wage, you know some retained earnings and you know, therefore, you know, we have a Tailwind to book value as we look ahead and we think that's the you know the optimal place phone holders.
Okay. Got it. That's helpful. Thank you.
Our next question comes from Brock vandervliet from UPS, please go ahead with your question.
Good morning. Thanks for taking a question. Obviously. I think you were you were marked on the coronavirus and the move in the in the tenure just kind of refreshing scary on where the you know where the 10-year would need to be and probably more importantly where it would need to stick to really change your some of your prepay assumptions off.
You know.
That's a good question. And you know, it's it's certainly it would have to be probably sub 140, you know on tens before or you know, we get to kind of you know, we get materially lower in terms of mortgage rates than what we saw, you know in September 3rd September October . So I think big picture we we do have some cushion there. It's not it's not a huge cushion, but on the other hand we've seen a pretty healthy rally am in short. I mean in in interest rates and this rally does feel somewhat temporary. So I think big picture, you know, the prepayment picture of wage and it will call it 1 and 1/4 1:30 on tens does start to get a you know, more dicey and and certainly in heading down there. We'd expect mortgages to log.
underperform
In terms of price. One thing to keep in mind is a sort of a a built-in hedge there as mortgages tend to underperform in price, you know, and obviously negatively impacts wage value in the short run but on the other hand, it actually gives us some protection around the actual cash flows on our mortgages because the prepayment picture is better than it otherwise would be but that that gives you sort of a feel for what we expect the one of the thing I'd add is that on like let's say the first part of the rally, you know last Thursday or or let's say the the second leg second or third leg of the rally last year, you know, we've had more time at this point to optimize our portfolio for a lower rate environment. And if you look across the board almost essentially all of our higher coupons are prepaid protected that have gone through the environment of last year and then the rest of the month
Foley it was low coupon brand new TV.
Is you know that are also going to perform reasonably well, and then you know, there are straightforward mitigating, you know strategies to use such as down and coupon and Suave back into newer mortgages that we can use, you know, to further protect that part of the portfolio. So the other thing to keep in mind is that you know, the port phone number was is much more kind of suited for the environment that I just described if it were to materialize.
Got it. Okay, and another big picture question on the on the gses. It's often tough to separate some of the policy suggestions as opposed to what may actually happen. Is there anything that you see coming down the pipe in the next year or so in terms of a structural change or policy change that could affect your business from the gse's?
In short no, you know, there's going to remain noise but we don't see anything fundamental that's going to change. I guess the one thing that could change over the next couple of years is that it would be based on kind of what you know, we've heard publicly. I think there's a reasonable chance that reads get, you know access back to to the flubs wage, but you know, no no guarantees on that, but that looks like it might be in the cards. I'm not in the near-term but let's say over a 2-year period which would be a benefit. Other than that. I think it changes look like they're going to just be on the margin.
Okay, great. Thanks for the questions nice quarter. Thank you.
Our next question comes from Henry coffee from wedbush, please go ahead with your question. Yes, good morning everyone and and it's great to be back listening to your call. Gary great quarter of a couple of issues number one going back to the dividend of given some Dynamic around taxable earnings. Is there any specific pressure on the tax side that would either cause you to have to increase the dividend or even allow you to tick it lower?
So no, I mean our taxable income for a number of reasons one of which is dollar Rose and one is accumulated other income losses wage is materially below our you know, our economic earnings and that's spread and our own income. So taxable income which historically has been a constraint for REITs and kind of forced them, you know to pay these very high dividends and dividends that kind of money will essentially the totality of your potential earnings isn't a problem for us for the foreseeable future. So it does give us a lot of flexibility with respect to where we set the dividend that being said, you know as the earlier question related to we do we a dog
dissipate that our net spread into
Our low income and our economic earnings are likely to exceed the current dividend for the foreseeable future as such a you know, they're they're really, you know, that's a comfortable place for the company and I think we do think about this and we think about it intellectually, you know, it's nice to have a positive Tailwind for Book value and we think that's a good thing for shareholders. So we like the current situation and we would you know an overtime. We'd like to stay in a position where there's a positive Tailwind to book value and where we are able to retain some earnings. We do think that that's the right place to be over the long term. But in this environment, you know, the it looks like you know, we're we're going to be able to do that.
No, I think that's a great strategy. If you're if you're soliciting votes, the other thing is, you know, the the the success of the company is been around. Your ability to outperform wage is specified collateral. Is there anything you can do from an operating perspective and I don't even know what that would be to broaden your ability to in essence create assets, whether it's on the side of the CRT bonds which you know buying him in the open market doesn't look that attractive or somehow partnering with an originator of some sort of flow arrangement. I I know you don't want to get too complex on the operating side, but you know, give give it given the importance of that part of the strategies are there any
thoughts you might have
And what you could do from an operating perspective to positively impact that side of the business.
Well, I think look first off. It's it's a good question. What I would say is, you know, I think a component of our success or alpha or our performance relative to the space over. The last ten years is clearly been asset selection. But one thing I would want to say is that asset selection is broader than just specified collateral. I think it starts in most importantly with avoiding the worst which is something we're very good at and and where you don't need let's say specific access to you know to collateral or or you know unique access to Collateral in order to do that the other area where I think you know, we add Alpha and that's helped us in the long run, you know is around the hedging side of it. So one thing is specified collateral is important, but I'd say it's a component of that active management.
Man that I think has distinguished.
Agnc now with respect to specify collateral, you know, we are with respect to kind of moving closer to origination. It is something that we look at we you know, we pay attention to potential opportunities over time, but I think we also have two years ago about our size and scale which brings significant benefits to the company both in terms of operating efficiency. And in terms of realistically the way the stock trades and so those kind of strategies have to be really scalable and that's you know, that's definitely something that we view as a challenge along those lines. So it's something we'll pay attention to it's something if there were significant Market disruptions that we pay more attention to but it you know, but we woke
Comfortable, you know in a sense.
Being an agency mortgage-bond investor as we are today still perform provides a substantial opportunity to outperform and and you know actively manage the portfolio great. Thank you very much.
Thank you. And our final question today comes from Mark De Vries from Barclays, please go ahead with your question. Yeah, thank you Peter in your prepared comments. You you alluded to kind of be upcoming transition to more permanent measures by the FED to stabilize liquidity in the repo markets. Could you talk a little bit more about you know, kind of what you expect from those measures what impact you know, it could have talked to your to your cost and what if anything you can do to kind of hedge any volatility, you might see in those repo cost. Sure. Thanks for the questions good question mark first, you know at first the FED deserves a lot of credit for adjusting and adapting over the quarter to the Market's needs and really getting control of the repo situation the challenge in the fourth quarter that we knew the Fed was taking action generally the market news at but it was hard to quantify because the Fed was evolving its own position and ultimately as I said by the end of the year, they really had dead.
Had a significant positive impact on the market, but it didn't get fully reflected in to turn prices. It's starting to get.
Reflected now and I think the FED is on the record and this is the important thing. It's not it's not whether the FED is going to handle this issue. It's how are they going to handle this issue the chairman a comment yesterday, I think give us more confidence about that. And I think what the FED is is going to do is transition to and it's permanent measures using asset purchases as its primary tool which they were clear about yesterday buying at least sixty billion dollars through May and then continuing importantly to grow its balance sheet. So, I think what the FED is essentially saying is that they're going to initially address this issue by making the excess reserves. So significant in the system that they really won't have to worry too much about transition mechanism problem.
But also willing to do open market operations on an as-needed basis the two other things that I mentioned I think are still on on the feds agenda which include potentially regulatory reform and a permanent repo facility those two things could have a very significant impact on the transition mechanism meaning month. It will make money flow a little easier than it flows today through, you know, the feds purchases or through its open market operations, but I think the FED is going to do that. I think the comments yesterday made clear that they're committed to doing that in a gradual way and making sure that the markets continue to operate efficiently and if that's the case and we believe it's the case. I think you'll see our funding come down to a much tighter spread relative to the FED funds Target. I think that's the easiest Benchmark to think about for us as the FED funds Target and the natural spread off.
Sort of stable environment. It's probably closer to
To fifteen or Twenty basis points not 50 like it was in the fourth quarter. So that gives you a order of magnitude of where we think the Improvement is going to go.
Okay, so it sounds like you don't expect the the transition to create any kind of added volatility which could push those spreads back out at all. I don't and in fact what the FED is already done is they've already provided a calendar of open-market operations through February . So we have certainly around that with open overnight in term operations. And as of yesterday the chairman committed to open market operations through April now so we know that they are going to continue to provide liquidity to the system while they grow their balance sheet of gives them sort of the permanent injection of liquidity.
Okay, that's great. Thank you and ladies and gentlemen with that will conclude today's question-and-answer session at this time. I'd like to turn the conference call back over to Gary came for any closing remarks. I'd like to thank everyone for their interest in a GMC and we look forward to talking to you next quarter.
Thanks.
Everyone the conference has now concluded we do thank you for joining today's presentation. You may now disconnect your lines.