Q2 2020 Dynex Capital Inc Earnings Call
[music].
Ladies and gentlemen, thank you for 75 and welcome to the Dionex Capital's second quarter 2020, earning results in conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question answer session to ask a question. During this session you'll need to press star one on your telephone if you require any further assistance. Please press star zero.
I'd now like to hand, the conference over to your Speaker today, I would think Griffin Vice President Investor Relations. Thank you. Please go ahead.
Thank you Casey good morning, everyone and thank you for joining up with me today, It's Byron Boston President and CEO.
The Pompano, Pvp, CIO and Steve Benedetti E V P CFO and COO.
Press release associated with today's call was issued as filed with the FCC. This morning July 29, 2020, you made either press release on the home page of the Dionex website at <unk> capital Dot com as well as on the Fccs web site at DC Dot Gov.
Before we begin we must remind you that this conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. The words believe expect forecasts anticipate estimate project plan and similar expressions identify forward looking statements that are inherently subject to risks.
At and T.'s.
What's cannot be predicted or quantified the companys actual results and timing of certain events could differ considerably from those projected and or contemplated by those forward looking statements as marigold unforeseen external factors for Brett.
For additional information on these factors and risks please refer to the annual report on form 10-K for the period ending December 31, 20, Nineteena filed with the FCC.
And it may be found on the dynamics website under Investor Center as well as on the Fccs website.
This call is being broadcast live over the Internet with a streaming fly presentation, which can be found through webcast link on the home page of our web site. The slide presentation May also be referenced under quarterly report on the Investor Center page I.
I now have the pleasure of turning the call over to our CEO Byron Boston.
Good morning, and thank you very much for joining our call today.
As a CEO and a shareholder of dynamics capital I am excited about the future of our business.
I was strong and experienced team of professionals managing our capital.
We believe it isn't of exceptional environment to generate solid cash flows for our shareholders.
But if you rates are low in the liquid assets were invested in offer attractive risk adjusted returns and are generating solid net interest income.
And our balance sheet gives us flexibility to navigate the complex environments.
Well over 30 years dynamics capital was managed leveraged securitize asset portfolios to generate cash income for our shareholders. We've managed every asset class that you see represented across the mortgage riet industry today.
Over the past few years, however, as global risk of intensified we have chosen to limit our investment focus to assets with the highest credit quality and highest levels of acquity.
Addition, we've chosen to maintain a higher level of overall liquidity on our balance sheet.
This is a choice that has served US well if you look at <unk> comparative long term returns through the second quarter of 2020.
We believe the key to a successful long term strategy of managing a mortgage riet is risk management first and effective capital allocation across multiple asset classes.
We have been consistent in our approach to the market. So let me recap what we've said to help you understand why we're excited about our business today. So since the fall of 2018.
When the fed was still tightening credit and allowing the balance sheet the run down.
We pointed out to you that we did not believe the fed could continue on that path and that our financing costs will begin to decline.
As a result, our net spreads would increase.
Well today, our financing costs or pegged at low levels and as a result, we're generating substantially more net interest income.
We noted that surprise events were highly probable because global risk of intensified in fact March of this year represented a surprise event similar to what we saw in 1998.
We had we had the experience so we were prepared to weather the storm.
We also highlighted the we were excited about the future out for our business model because the demand for yield would increase globally, we feel strongly about our expectations now the global yields have continued to plummet further towards zero and below.
And finally for the past decade. We've also said the government policy would drive returns, but we did not anticipate the extent to which this would involve a profound shift is taking place in economics as we all the just to a super sized level of state intervention and the economy and financial markets.
I will now turn call over to Steve Benedetti to go through our second quarter results.
Thanks, Byron and good morning to everyone listening.
For the quarter, we posted a total economic return of a dollar five cents per common share or 6.5%.
Book value per common share was the largest contributor increasing a net 62 cents or 3.9% to $16.69.
This increase 79 cents per share came from changes in the value of the investment portfolio net of hedges. This volatility during the quarter in credit spreads tightened versus benchmarks across the investment portfolio.
This was partially offset by seven cents and declared dividends in excess of core U P. S. ICD 10 cents in costs related to restricted stock grants made during the quarter.
From an earnings point of view, we reported comprehensive income of $1.15 per common share and core net operating income of 36 cents per common share.
Declining core EPS from last quarter was really a function of the size of our investment portfolio as we maintain a lower leverage profile and a higher liquidity buffer early in the quarter.
For the quarter average interest, earning assets, including TV a securities were approximately 3.2 billion versus 5.1 billion last quarter.
Offsetting the smaller size of the investment portfolio was an increase of 49 basis points and adjusted net interest spread.
Net interest spread and adjusted net interest spread benefited from the rapid decline in financing costs by 112 basis points driving the interest spread expansion and more than offsetting the decline in earning asset yields of 48 basis points from sales of higher yielding assets and the addition of new assets on balance at lower overall yield.
Yes.
Drop income on TV gaze also increases we added them throughout this quarter given implied financing costs on dollar rolls being more favorable versus repo. This summer if he will discuss later in the call.
Our hedging activity continued to favor a mix of interest rate swaps options and treasury futures. The average notional outstanding for swaps was 351 million down from 2.9 billion in the first quarter.
The notional balance of our swaps at the ended the quarter was 475 million with a fixed rate of just over pay fixed rate of just over 70 basis points. The notional balance of our outstanding options and Treasury Futures was 2.65 billion.
With that I will turn the call over to Smith.
Thank you, Steve and good morning, everyone.
I will briefly we view our performance for the quarter.
And I'll talk about our actions taken last quarter.
And discuss our current outlook and strategy.
In terms of performance.
Turning to slide 22 title fixed income market update.
Steve mentioned, our book value moved up during the quarter by 4.9%. This was partially offset by 1% from dividends in excess earnings.
Capital stock transactions, bringing overall book value up 3.9% for the quarter.
This was primarily driven by spread tightening on agency CMBS iOS, which you can see on the bottom of this page spreads tightened in approximately 140 basis points from 400 275 on agency iOS App for 50 to 300 on agency non agency C M.
Yes, I and we also saw modest tightening in agency CMBS stuff you can see that on the next page page 23 on the top right hand side and as well as a tightening in agency passers.
It's important to note that law spreads on par priced agency CMBS does have come in almost 35 basis points you can see on the top right panel on page 23.
Premium dust did not experience similar tightening premium death, or actually only 11 basis points tighter on the corner.
Our current rough estimate is that book value in July is a little over 1% higher than at quarter end, although we have not yet completed our standard month, then closing process.
Turning to our actions last quarter.
In March we shifted our thinking on cash flow risk and started to reevaluate our agency CMBS dusk portfolio for the increase possibility of delinquencies and defaults.
While dust paper has a government guarantee of principle in a default scenario the entire premium of the bond over par goes away and a repayment.
Our bonds were very high premium.
Just a 118 $120 price and during the month of April we reduce that position from 2.1 billion to 800 million realizing gains of $193 million and cutting the majority of our premium exposure in that sector.
These sales as well as those made earlier in March.
Oh, Hi, premium agency, RMBS pools floors, and four and a half.
<unk>, our leverage to total capital down to about four times at the end of April.
In may we rapidly deploy that capital into agency RMBS aligning the investment strategy with government policy actions focusing on liquidity and flexibility.
If you turn to page seven titled Business activity, you can see we increased our leverage from a low 0.4 times in the fourth in the quarter to eight times by the ended the quarter.
Investing primarily in lower coupon pass throughs and Tvs.
As you can see on slide 10, titled investment portfolio as of June Thirtyth Agency, RMBS was 76% or the portfolio.
15% of the portfolio was agency CMBS and 96% of the portfolio is agency guaranteed.
On page 11, we have allocated you can see we've allocated capital to lower coupons with a mix of TB and specified pools, primarily choose to want to house.
Our diversified and specified pools between higher pay up stories and lower pay up story.
TV a market in the 2% coupon currently offers attractive financing relative to pools as Steve mentioned in the evil market.
At some points in the last settlement cycle.
The financing rate.
In the dollar all market was as low as minus 90 basis points.
And advantage of 120 basis points, all enforces fools almost doubling the return in TB A's versus owning pools.
We see structural demand in the 2% coupon that supports continued specialness in the role in the coming months.
Please turn to page 12, we are operating today with a larger liquid diversified portfolio focused on liquidity and flexibility.
As you can see on this chart, our net interest spread has been widening as financing costs have declined.
Our current leverage levels and the mix between pools and TB age we feel the portfolio has the flexibility to navigate the coming months.
Assuming no changes from the current portfolio size and with financing cost trending as described in the forward markets batching and leveraging prepayments <unk> earnings from the portfolio are expected to exceed the level of the dividend for the remainder of 2020.
Turning now to our macroeconomic opinion and outlook.
We have assessed the environment as a health and economic crisis layered on top of the already existing fault lines that we identified before social economic global debt technology, environmental geopolitical and demographic factors.
A major consequence of this crisis is a significant disruption to cash flows which is now colliding.
With huge amounts of government intervention monetary and debt driven fiscal policy.
Many questions still abound, well the government actions be enough to minimize the disruption to cash flows out of the structural factors evolve as we see the duration and severity of the health and economic crisis play out.
What is the risk we turned trade off we need to make in a short medium term versus a long term. These are all still open questions.
We're also still tracking risk events in the upcoming quarters, we have known unknowns like the election and continued geopolitical and trade friction as well as the continued possibility of and Axogen is shot.
It is very likely that we will have an environment with periods of com created by massive central bank interventions.
The weighted by bouts of volatility from surprise outcomes.
With this in mind and so many factors in play our investment strategy is built around what is relatively more certainty in the short and medium term. So that capital is preserved and available for opportunities in the long term.
What we see clearly is that financing costs are low and we expect will stay low for high quality assets for some time. This is a major positive for investing in agency RMBS.
Government policy Central Bank policy and specifically the fed is also aligned with investing in this sector and the assets continue to offer an attractive return in the low teens or a week as you can see on page 13.
With front end rates anchored central banks actively purchasing their own country sovereign debt volatility in interest rates has materially declined and will likely continue to remain contained in the absence of exhaustion a shock.
This is also supportive for investing in agency RMBS.
Please now turn to page 24.
Our portfolio is constructed.
For this environment to capitalize.
On earning returns with flexibility with just the port position up or down as conditions warrant.
The low coupon allocation acts as a buffer against lower rates.
The modest high coupon RMBS and DUS allocation RM mitigant against higher rates, our hedge position.
Is designed to cushion book value and higher rates scenarios with option that do not degrade book value performance and lower rates.
You can see that on this chart, our sensitivity to up and down 50 parallel scenarios versus up and down 100 scenarios.
Significantly lower than it wasn't in March of 2020.
This is really reflective of the short dated options that are that are within the portfolio and when rates go up they they actually turbo and and cushion the up rate scenario when rates go down they really don't impact out your book value other than the amount of premium that use that you put out at the end initiation of the trade.
So to wrap up we continue to believe that up in credit and up and liquidity is the right strategy for this macro environment.
Our capital is allocated to assets aligned with Central Bank and government policy.
The position is flexible.
We have more liquidity on hand today than in prior months in quarters, we have over 280 million in cash and unencumbered assets as of last night.
We will focus on earning returns and preserving capital and the short and medium term it'd be available to allocate opportunities develop in the long term.
With that I'll turn it over to fire.
Oh I made a mistake it was on mute [laughter], a we're really excited about our prospects are generating increasing.
Amount of income, but we take most comfort in our disciplined process that scenario planning and preparation.
We continue to believe surprises are highly probable as we settle into the fact that global central banks and other government policy makers are now the undisputed kingpins and determining the winners and losers in our economy and financial markets.
Since we have aligned ourselves with the government policies being implemented today and we're very nimble.
Furthermore, we continue to believe there are positive long term trends supporting our business model as a goal continues to age there are fewer and fewer options for investors to generate cash income.
Global yields have plummeted and may continue to decline further.
However, the yield on our common stock now offers approximately 1000 basis points more in cash yield than the U.S. Treasury tenure.
With a solid prospect that we will continue out earning our dividend is financing costs are expected to remain low.
Well then what's your investor do.
Long term outcomes in the mortgage REIT space will be determined by how their respective companies risk managed overtime.
And how the company how the management team to respond to the inevitable surprises that are bound to come in a world where global risk have intensified.
Let's look at our long term chart on slide 16.
If you add total returns all mortgage Reits in the short.
Or to this chart.
That includes commercial residential reach you'll see the cost ratio efficiency ratios or scale did not have and will not have immaterial impact on long term returns.
Disciplined capital allocation matters disciplined risk management matters.
Take another look at our long term shirt.
Oh sound like a broken record.
But we're managing for the long term. It is our philosophy that investors should also think on a long term basis and build a diversified portfolio companies with experienced management teams and disciplined risk management and capital allocation.
My teammates and I have managed securitized assets through every crisis since 1986.
Were internally managed in a material amount of our personal net worth is invested in dining just capital stock.
We're all shareholders here.
Got it makes capital is not just one of many funds that we manage dynamics is the only fund that we manage so please join US on this journey, we remain committed to our long term vision and being good stewards of your capital.
Operator, we'll open the lines for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to dry or question press the pound or hash key please stand by only compiled the given a roster.
And your first question here comes from the line of Eric Hagen with KBW. Please go ahead. Your line is now open.
Thanks for taking my question good morning, and it's good to hear from you guys I'm a couple of questions on the T.V.A.. How do you. How do you think you hedged T.D.A. differently than if you hedged pools on balance sheet.
Words would the strategy around hedging necessarily change me too if you held specified pools in place of the current.
TV a position and then.
What was the average job average drop that you guys captured on the TV in July and how does that compared to.
The drop that you're seeing in TV today.
But yeah, Hi, Eric.
So to answer your first question the hedge ratio on T.D. is different than it is than it is on specified pools I will say in the lower coupons right now it's it's really a primary it's not going to be.
Much different so so in terms of you know whether we're choosing a different instrument on the on the part of the curve. It's it's really a question of what percentage of that tenure features or whatever it is that you using its not materially different in higher coupons.
Like two and a have they say high coupon.
That is it makes more of a difference because the prepayment characteristics really do impact the duration of the cash flow. So those will typically have a longer.
A longer traded hedge against them.
In terms of the role.
I would say on the 2% coupon the average drop has been somewhere between six and a happens seven fix a and we're still seeing that persist oh for at least another month or two and into the future and that's it that's about.
I would say that's at least 70 basis points through your own negative 70 basis point.
Effective cost of funds.
And Eric.
Hi, Eric I'll add one other piece here, which is also remember there were very disciplined in our top down approach. So our hedge way. She goes do fluctuate based on our macro economic outlook and do you.
Thank you.
One on the on the one more on the hedging on the the the options and futures contracts. If you guys rolled that position.
At the beginning or I guess today, how would the cost compare relative to what you paid.
Last quarter.
Yeah. That's a good question I think the implied vol and options is actually stayed relatively low. So you are paying that carry costs and that carry cost comes out of out of book value. It's been relatively stable the last two quarters.
Relatively stable the last two quarters on in terms of ours of our role cost if you will.
Got it. Thank you guys so much.
Your next question comes from the line of Trevor Cranston JMP Securities. Please go ahead. Your line is now open.
Hey, Thanks, good morning.
You know in light of the shift in the portfolio too heavily favor agency RMBS could you got to share your thoughts sort of generally on on the prepayment environment.
And maybe more specifically talk about how you think some of the lower coupons would perform like particularly the two points or in the event the primary mortgage rates.
Our two declines constantly <unk> right.
Hey, I'm sure I'm going to give you a high level respond to them Oleds murtha get more specific.
When you noticed that back at the beginning of March yourself into figure began in March we literally so most of our passes and we'd definitively so our premium a lot of our premium position, we kept some and we sold in little though.
When primary rates dropped and has the potential to decline.
You know is my opinion of just in general from a high level and from where I said to be concerned overall about debt prepayment. So I'll, let smirking good Oh, a more specific on that and the thing I like the most about the investment process.
Here are dynamics is the discipline in thinking about those scenarios that you just talked about which is what if the curve steepens in rates move higher.
Which is a.
It is it did have some probability attached to it and we have a very disciplined process since birth and her team really spend a lot of time or thinking about a variety of scenarios and developing plans of actions to implement if those scenarios start to all the that's high level Smriti I'll, let you.
Sure take over it actually answered already too I mean, it all starts with with mortgage rates and mortgage rates are now.
Being driven primarily with the demand for mortgage securities coming from a number of players the fed being the biggest but also banks had been a large in purchasing more so that's really bringing mortgage rates down you can see that also in terms of primary secondary mortgage.
Good spreads, which had come down to about a I want to say 175 basis points are so they are creeping back up right now, but there's just been a massive decline in primary secondary rates and that that really is what drives a prepayment so with primary secondary rates at.
So.
You are seeing a substantial portion of the mortgage universe, including two and a hubs in the money.
And at this point you know the competition of four.
Or volume from mortgage bankers is is going to start to drive that spread a tighter from here could it go tighter from here, Yes, I think it could you also have to have a view on mortgage rates and again here I think mortgage rates are probably around 3% right now.
We think that they have the probability of going as low as two and three quarters percents. That's that's very much in the foreseeable future what limits the amount of decline in mortgage rates versus treasury. So there's there's a there's a few things.
Number one just simply the cost or the guarantee fees the operational costs all of those have an impact in terms of how low the mortgage rate can go versus the risk free rate and then secondly, just if you think about them a mortgage as being a 30 year bond callable immediately authority non called zero.
That options cost you know has to be.
Have you factored in when you think about how investors price price for that risk. So those two things together really keep that mortgage rate you know at least a minimum amount above a the tenure the tenure treasury. So if you think that mortgage rates can go down another 25 basis points and primary secondary spreads.
Another 15, or so then you're really looking at the entire universe other than a 2% coupon being in the money.
And so for that reason.
We are concentrating on the 2% coupon.
We have more more investments in that coupon then then others. The other story and in in terms of prepayments.
Really becomes you know the the amount of unamortized premium that.
Allocated across all your investment portfolio. So at higher premiums you have the more at risk your future return is.
And so that's something we are very very cognizant of a in the book and if you look at the way the book instructor today.
Our unamortized premium as of June Thirtyth is actually exactly the same as it was.
On December 31st or very close within a couple million Bucks.
But the distribution of that is now primarily in the two and the two and a half coupon versus.
Fours in Florida has indeed number I'm, so you've basically taking that risk and and and put it in a in a lower and a lower coupon.
So from a prepayment standpoint, you know we expect that there will be higher prepayments coming you know with structure the book.
Be able to be flexible within between TBS and pools, and we're focused on the lower coupons to be able to manage that risk.
Okay got it that's helpful.
<unk> as you guys you're thinking about Reinvestments.
Investing the marginal dollar.
Is it fair to say that you guys are more focused on TV is at the moment given the roll Specialness and can you maybe sort of quantify how different you think the returns are and then pools versus previous today that's.
Yes. It is fair to say that we would be more focused on TB age I think in in the lower coupons I mean, the differential is it is multiple early I mean, it's it's it's like 7% or are we better in the short term a you know versus a long term. So the interesting thing on that on that trade off.
As in a TV a trade you really counting on the financing costs to be a certain level for you to earn your returns in the pool, you're you're counting on a pre payment experience took to earn your returns and what's interesting is in the last pre pay cycle that we just went through a lot of prepayment protected stories.
Didn't perform as you know as expected many many stories actually.
Page faster a than people expected. So it's really up it's really not as clear cut a trade off as it was before where you know.
You're able to rely on spec pools as a as as every turn generator versus <unk>. So.
I would I would say right now the economics definitely favor the TB versus the pools and then we're gonna have to see another couple of months worth of prepayment experienced a really figure out, which which stories pulled up over overtime, especially when you're in this kind of waterfall scenario, where she was a massive deluge of.
Of Prepays coming down the Pike, given how low these rates are.
Sure.
Appreciate the comments thank you.
Sure.
Your next question comes from the line of Christopher Nolan with Ladenburg. Please go ahead. Your line is now open.
Hey, guys I'm SMERF your comments in terms of you expect the portfolio <unk>.
Turns to exceed the dividends in the second half of the year did I hear you correctly, yes.
Okay, and then all for all saw that you're targeting now a core ari of 8% to 16%, which is up from 7% to 8% from last quarter or is that also correct.
That that is actually just the <unk> the marginal returns that we see on not on investments. So so that's slide is intended to say you know if we had to put the marginal dollar to work.
Oh, what types of returns are we seeing across the capital stack.
Okay, and but lower end of that that's seven or 8% is more like 15 years.
You know.
Pass throughs that kinda set the higher end includes.
The return from dollar rolls and in the TV market.
Okay, but.
From my from your earlier comments that you expect to.
I knew the current dividends the second half of the year.
The current dividend requires a core or are we have roughly 10%.
Correct.
Chris This is Steve good morning, I think the way for you to think about it and what we're trying to communicate as is sort of you know we've taken the it's the earning asset balances. So we've got an investor capital and you can see on slide 12 sort of the net interest spread and how that's expanded right answer.
You know 196 basis points at the for for this past quarter in this summer than simple finance mirth.
Got it answers.
Funding costs are for LOE and <unk>.
Reasonably anchored here's a.
Perspective, very strong net interest spread so.
If you think about you know [laughter] eight eight ish leverage on 200 basis points.
Net interest spread that's where it sounds like back at the envoy kind of the earnings power of the.
Portfolio I'm on a gross basis as we sit here today.
Okay, then Ah that leverage range has increased from four since last quarter, you were targeting six or seven times for now.
Closer to 70 times would you would say.
Yes, and I think that's actually an excellent one of the things that.
Drove us to actually take the leverage up higher than what we had mentioned before was simply be environment and the opportunity that we saw in the TV anymore.
So I agree with that were fairly comfortable sitting at this to the advantage of that just let me.
Just one more thing on that is that if you're sitting in the T.V.'s, It's just superflux flexible.
And in terms of get in and out.
Okay. So it looks like the leverage was going up the smell returns appear to be going up as well.
You take away from that fair to say I.
I agree.
Yeah, let me just throw into you're absolutely right look linzess increase the dam leveraged to to chase after a dividend of self insured.
We made a very disciplined capital allocation decision here, we think it it is absolutely our responsibility to try to capture that return for our shareholders. So you do that I. Appreciate your freezing in in that manner. That's absolutely correct. We're very concerned about not trying to take too much.
Its risk in an environment like this so when we talk about disciplined.
Capital allocation it means that as you see us making these decisions you can go holding back in 2008, we move yeah. It's due during 2008 marginal dollar went into the agency sector by the end of 2009. The marginal dollar went into the CMBS SEC CMBS sector for multiple years after that and we're making it.
Decision today to go into this this specific sector based on a very disciplined capital allocation process that takes into account that we are stewards of our shareholders' capital now we want to protect them as much as possible.
Hey, good Port Barnett and I'm looking at the stock and everything 12% dividend yield.
Yes, you know your target or are we you know, it's gonna be somewhere around 10% or so you ever pretty liquid balance sheet I mean, I guess, the big variable here is gonna be.
Where is your portfolio returns, which I think.
Goes to the question of Prepays if.
Not mistaken.
I think so I mean, I think even even in the Prepays, you've got some cushion from being in the lower part of the capital Sac and a little part of the coupons that also I think that the dip yield is 10%.
At this point.
Got it.
Yeah, but yeah it either quickly.
The dam delivered pricing on New Sox here, Yeah, I mean, you're cutting back in the sell side all over the course.
[laughter] yeah.
You're right I mean, it's it's gonna be it's gonna be prepayments and book value and I think I think again, we talk about the volatility in interest rates being dampened by the central banks and then you've got at this point just realize prepayments and how much we haven't risk and we think that's a manageable risk. This is this is this is.
We what we do understand though you know even factoring that in I think I mentioned and my comments that we feel pretty good about out earnings.
Pasadena.
Great. Thanks, guys.
Your next question comes from a line of Jason Stewart with Jones trading. Please go ahead your line open.
Thanks. Good morning, Thanks for the comments on agency CMBS premiums given that Weve, a little bit more data I was wondering if your view on bio risk and agency CMBS is changed at all.
I'm going along the same line, how do you think that developed and agency RMBS.
Hi, Jason Yes, so I think again fundamentally we love agency CMBS as a product.
It's a great product. It's it's positively can backs. It has an agency guarantee you can earn roll down its financeable. Its liquid it's it's it's in alignment with government policy as the fed is got it and its basket of assets that its purchasing so all of those things are in the positive category.
For agency CMBS, what's interesting right now and specifically with our portfolio was that we just we we bought a lot of these bonds when the tenure.
<unk> was up at 3%, So we had high yielding bonds with high dollar price premiums on our balance sheet.
That was a risk we chose just to take off the table simply because we didnt know hobbies. These cash flows were going up we're going to work themselves out and you know due to the due to the just the a disruption in cash flows. So that risk is still present for any bonds that that you see that are premium dollar price out.
In the marketplace that has not gone away.
That leads us to say the type of risk that you know at some point, we'd be we'd be we would prefer to take any agency CMBS market is closer to the par dollar price bonds and the returns are just not there are in that sector, but typically can become a bank bond or back just come in.
And by the HEKA that that paper. So you know you can see on that sheet.
The spreads on on par price bonds or in the in the high Fortys and and at this point, we think the risk return on agency RMBS is just a substantially higher in terms of our ability to make that incrementally turn up at some point I would say as those spreads.
Maybe widen we would consider putting more par price securities back on our balance sheet, but.
But at this point the agency RMBS is is better on the agency RMBS side.
The.
Well you concerned <unk> did you want to hear about a comment on the credit it being an issue or <unk>.
I wouldn't right now, although right now delinquency performance would translate it right prepays on biopsy.
Sam Wow, you know that's a that's it that's one of the things that <unk> that leads us to sort of continue to want to stay down and coupon. It's not clear how that works. So forbearance is is is good in the sense that you know you use your you're still getting European I payments, while the phones on forbearance. It's it's just.
Much bigger risk for premium coupons like the 3% coupons, we had a half percent coupon, 4% coupon, 4.5% coupon all of those coupons are at risk from from this buyout issue.
So again over time, what we'd expect to see is that the forbearance actually eventually turns into into actual cash by off and then you'd have.
Unexpected prepayment increases and in those coupons as well right. So that's leading you could stay down a coupon away from started pools.
[noise] burn out younger and then what's your what's your view and then I'll jump off what's your view on the credit when you look at credit availability in the space. There's obviously, some positives and negatives how that impacts prepays in support of that marginal coupon, okay, maybe like a three three and a half instead of <unk>.
Really low coupon.
So I think you know in general credit availability is being tried to be expanded as much as possible so that the agencies.
I know a fad everybody really the the answer they have with tremendous incentive to increase credit availability in general where you're seeing the shrinking of credit availability is really going to be and things like the jumbo market, where Oh, you know investors really don't want to take that incremental rig.
So.
Come to me you know in and the way, we think about it the credit availability is really starting to be expanded and and the GRC market that also has implications for things like first time homebuyers turnover, you know they've tightened up the limits on cash out refinancing a little bit but.
On on balance you know our bias is that these prepay speeds on our bias to the faster side not the slower side.
Understood. Thanks for the questions appreciate it sure.
Once again it seems like that's good question. Please press star one on the telephone.
Next question comes from Jim Jim <unk> private Investor. Please go ahead. Your line is open.
Good morning.
Andrew morning, Jim Congratulations everyone else is congratulating you another good quarter, but I want to go a little bit further congratulate you on a great year. Most must know that total economic return is really the only way to geology or yobs structure, a management team in a business model.
And by my Dad. The Unblocking you guys kind of went through the last four quarters somewhere around 5% total economic return.
Which relative to any hybrid agree.
It's usually a usually an access all and relative even to the agency only guys any because at the top of the list.
So congratulations on that.
Thank you Jim Bakken.
The second level Byron in particular, thank you for clarifying something for me I've been doing isn't one one flavor. Another 40 years first week on the job I was called you don't quite accretive until last 40 years I've been re learning that Oh my own peril.
Ah to paraphrase, what you said earlier about went all the central banks are doing.
And I'm, putting that side by side with the how you guys have done over the last several quarters in several years.
It seems am I wrong, if I say that your core business model is don't like okay.
It is it is a win the point I was trying to also make was about 10 years ago.
It's really 2000 late 2009, we said we decided don't fight the fed.
And at that point, the fed at that point with supporting this for example, we were trying to decide to go in a non agency RMBS or CMBS fitting supporting CMBS. They weren't subordinate agency RMBS. We were in the CMBS. We started to develop a thought process. The government policy will drive returns that were kind of held hostage and this don't fight the pet.
My point earlier was Wow.
This is even bigger than we even imagined and yeah. We think it wouldn't be dangerous to try to go and yet.
Oh.
The dangers, it's just that one.
We're putting our shareholders and better position.
Well the long term, if we align ourselves with the government policies because at this point Jim.
Holy Mackerel, there they are the kingpins all over the globe.
Would you agree.
Yeah, well philosophically, what I would say is part of not breaking the said taking it to another level is help help do what they want you to do and they will pay you well to do that.
So you buy agency credit.
And you basically apply some leverage to what you're putting money in the system and you're doing their work and they will let me make they will let you may go yeoman's work, so I would agree with it thanks again.
Thanks, Jim I appreciate it.
And I'm showing no further questions at this time I will now turn the call back over to Byron Boston for closing comments.
As always we thank you so much for Ah Ah joining our call today and we look forward to speaking to you again at the end of our Ah at the end of the third quarter. Thank you very much.
And ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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