Q1 2021 AGNC Investment Corp Earnings Call
[music].
Good morning, everyone and welcome to the Aegean Sea investment Corp, first quarter 2021 shareholder call.
All participants will be in a listen only mode.
If you need assistance, we seen on conference specialist by pressing the star key followed by zero.
After todays presentation there will.
An opportunity to ask questions.
I ask a question you May press Star and then one on your Touchtone telephone.
All your questions you May press star two.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Katie Wisecarver in Investor Relations Ma'am. Please go ahead.
Thank you all for joining <unk> investment Corp, first quarter 2021 earnings call before we begin I'd like to review the Safe Harbor statement.
This conference call and corresponding slide presentation contains statements that to the extent they are not restitution of historical fact.
Forward looking statements.
Within the meaning of the private Securities Litigation Reform Act of 1995.
All such forward looking statements are intended to be subject to the safe Harbor protection provided by the Reform Act.
Actual outcomes and results could differ materially from.
From those forecasts due to the impact of many factors beyond the control of agency.
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.
On the forward looking statements on.
Put it in the risk factors section of E. G. M. Six periodic reports filed with the Securities and Exchange Commission pop.
Copies are available on the SEC's website at SEC Gov, we disclaim any obligation to update our forward looking statements unless required by law.
Participants on the call include Gary Kain Director, Chief Executive Officer, and Chief Investment Officer.
Bernie Bell Senior Vice President and Chief Financial Officer.
Chris Cool Executive Vice President of agency portfolio investment.
Aaron Pas senior Vice President non agency portfolio management.
And Peter Federico President and Chief operating Officer.
With that I'll turn the call over to Gary Kain.
Thanks, Katie and thanks to all of you for your interest in a GNC on portfolio continued to perform extremely well in the first quarter. Despite the significant rise in intermediate and longer term interest rates.
Economic return for the quarter totaled eight 2%, bringing our trailing 12 month economic return to a 47%.
Optimism surrounding vaccines and the potential for a very strong economic recovery in the second half of 2021 pushed most risk asset prices higher.
While broad equity indices advance during the quarter cyclical and recovery oriented stocks significantly outperformed other sectors.
Credit spreads were mixed during Q1 and housing markets in most regions maintained very strong positive momentum.
Consistent with this stronger economic outlook and in response to more fiscal stimulus. We saw a substantial increase in longer term interest rates and a material steepening of the yield curve.
To this point the yield on the 10 year Treasury, which closed the quarter at 174% essentially erased almost all of the decline experienced in 2020.
Unlike other periods of rapidly rising interest rates agency MBS performance was strong across the board during the quarter with higher coupons being the best performers.
Despite the 80 basis point selloff in 10 year rates higher coupon TBA has actually increased in price during Q1, while corresponding specified pools in aggregate were only modestly lower.
Furthermore, despite material price declines lower coupon TBA still outperformed our hedges and provided a positive contribution to both economic return and earnings.
This is a very different result from what happened back in late 2016 or in mid 2013, the last two periods when interest rates increased rapidly.
Looking ahead, we continue to feel good about the composition of our portfolio, especially in light of the somewhat different risk return characteristics of our lower coupon TBA position and higher coupon specified pools.
Benefits of this barbell portfolio can be seen clearly in the prior two quarters return profile.
With lower coupon TBA as being the strongest performer in Q4 and higher coupon specified pools, leading the charge in Q1.
Despite the spread tightening that has already occurred in the agency MBS space.
The sector is still looks attractive on a relative value basis for levered investors given the elevated valuations that exists across the entire fixed income and equity spectrum.
Key positive Differentiators for agency MBS include repo rates at all time lows favorable dollar roll financing levels and the likelihood of moderating prepayment speeds given the uptick in rates.
Against this backdrop and given our confidence in our portfolio. We continue to believe a GNC is well positioned for the remainder of 2021.
Lastly, I would like to mention that we published our first annual ESG report last month and it is available on our corporate responsibility section of our website.
Hopefully this helps our stakeholders better understand our commitment to corporate responsibility and our approach to ESG.
At this point I will turn the call over to Bernie to review our financial results for the quarter.
Thank you Gary turning to slide four we had total comprehensive income of $1 33 per share for the first quarter.
Net spread and dollar roll income excluding catch up am was <unk> 76 per share the marginal improvement over the fourth quarter was due to the combination of lower funding costs, a sharp decline in CPR projections and earnings accretion due to share repurchases, which more than offset our lower operating leverage and an overall decline in asset.
Yeah.
Tangible net book value increased 6% for the quarter led by the strong performance of our higher coupon specified pools, and notably at $17 72 per share now exceeds the pre COVID-19 level of $17.60 per share as of December 31, 2019.
Including dividends of 36 cents per share our economic return on tangible common equity was eight 2% for the fourth for the first quarter.
As of last Friday, we estimate that our tangible net book value is down about 1% so far this month.
Turning to slide five our investment portfolio at quarter end totaled $98 3 billion compared to $97 9 billion at the end of the fourth quarter. Our leverage ended the quarter at seven seven times tangible equity down from $8 five times as of last quarter end.
We had $5 2 billion of unencumbered cash in agency MBS at quarter end were approximately 48% of our tangible equity, which excludes both unencumbered credit assets and assets held on our broker dealer subsidiary Bethesda Securities.
Actual prepayment speeds on our agency portfolio declined three CPR for the first quarter to 24, 6%.
Given the significant increase in primary mortgage rates of approximately 50 basis points over the first quarter, our forecasted life CPR decreased to 11, 3% as of quarter end from 17, 6% from prior quarter.
Lastly, during the first quarter, we completed an additional $215 million on accretive common stock repurchases at an average repurchase price of $16 <unk> per share.
Over the past 12 months, we have repurchased over $615 million or approximately seven 5% of our outstanding common stock of compelling discount to tangible net book value.
As we seek to optimize shareholder returns through a combination of share buybacks dividends and net book value accretion.
I'll now turn the call over to Chris to discuss the agency mortgage market.
Thanks, Bernie, let's turn to slide six the sell off in interest rates accelerated during the first quarter and with it the trend of lower interest rate volatility also reversed the yield curve steepened with five and 10 year Treasury note selling off 58, and <unk> 82 basis points respectively.
Despite the sharp move higher in rates agency MBS performed extraordinarily well during the quarter with spreads tightening, 5% to 20 basis points, depending on the coupon and coal type with higher coupon MBS meaningfully outperforming lower coupons TBA roll financing also improved midway through the quarter with dollar roll levels on.
30 year production coupons trading in a wide range of around zero to negative 70 basis points.
Today, 30, or twos in two and a half are currently trading what's implied financing rates around negative 15, and negative 40 basis points, respectively, which compares favorably versus one month repo rates of around 10 basis points, let's turn to slide seven.
As you can see on the top left chart the investment portfolio totaled 93 billion as of March 31st given.
Given the spread tightening during the quarter, we opportunistically reduced holdings in 15 year MBS as well as in certain specified pool categories and within our TBA position, we moved higher in coupon given the relative underperformance of two and a half versus one on a haps in twos as a result of a shift in production and the higher coupons.
As you can see on slide seven.
We maintained a large average TBA net roll position during the first quarter at 32 billion and while difficult to predict it's likely that we will continue to carry a sizeable net long roll position, because we anticipate that roll implied financing will remain attractive relative to repo.
Looking ahead the themes that we discussed last quarter are still largely in place and while agency MBS spreads are tighter other risk assets have also performed very well, leaving the favorable relative value backdrop for MBS intact, especially in light of the tremendous ongoing direct support from the fed.
And while the risk of a taper tantrum is on investors' minds. There are many differences today that should help MBS better whether it's paper if and when the feds requisite conditions are met Additionally, given the large rate move that we have already experienced a good portion of the mortgage market extension that occurred in 2013 has already taken place.
Without disruption to market liquidity or evaluations I'll now turn the call over to Aaron to discuss the non agency market.
Thanks, Chris I'll quickly recap the quarter and provide a brief update on our current positioning.
The equity markets generally marched higher throughout the first quarter structured products were a bit more muted.
For the most part the market range from little change to somewhat tighter by the end of the quarter after posting strong returns in Q4.
The credit risk transfer market saw relatively heavy new issue supply coupled with extending spread durations due to lower note rates on new production in mortgages.
The selloff in rates further added to these pressures.
Significant shift to longer spread duration bond led to weakness in the new issue market and subsequently into season bonds on the secondary market.
Jumbo private label issuance volume was elevated with a total of about 9 billion issued in the first quarter relative to full year issuance of 21% and 22 billion in 2019 and 2020, respectively.
Demand for credit in these deals remains strong and credit spreads were firm throughout <unk>.
AAA spreads did not fare as well and began to come under some pressure.
The fundamental side for both housing and residential credit remained favorable housing landscape looks good and the trends for the consumer on the labor market front continue to improve.
Additionally, by the metrics, we use internally to more recent CRT and prime jumbo deals look to be some of the cleanest cleanest from a collateral attribute and risk perspective in many years.
Please turn to slide eight.
Turning to our holdings as you can see on the chart in the top right.
The non agency portfolio increased over the quarter the.
The roughly 650 million dollar increase was driven by incremental investment in credit risk transfer securities and AAA RMB S.
On the CRT front early in the quarter, we added some higher credit support M twos.
Later in the quarter, we shifted to focus on b ones as spreads widened, but the fundamental backdrop sound it made sense to add into the weakness.
On the RMB S side in light of the supply pressure and widening spreads we opportunistically added some AAA as at the end of the quarter.
Finally, our see MBS position increased slightly with the composition shift due to sales of double a and AAA conduit. It tightened early in Q1.
In favor of adding exposure to several down on credit single borrower deals with that I'll turn the call over to Peter to discuss funding and risk management.
Thanks, Aaron I'll start with our financing summary on slide nine.
As expected our average repo funding cost in the fourth quarter fell to 21 basis points, an improvement of 17 basis points from the prior quarter on.
Our funding cost at quarter end was even lower at 15 basis points.
Attractive funding opportunities for agency collateral were available across the short term funding curve and regardless of where the source through our captive broker dealer or direct with Counterparties.
I expect these favorable funding conditions to continue and for our repo cost to remain relatively stable at the current level over the next several quarters.
Our aggregate cost of funds, which includes the cost associated with our TBA position and our swap hedges averaged two basis points down from five basis points the prior quarter.
This improvement was due to the combination of lower repo cost and attractive TBA dollar roll funding offset somewhat by slightly higher swap costs.
Our net interest margin, which represents the spread between our asset yield and our cost of funds remained very strong at 200 basis points in the first quarter.
On slide 10, we provide a summary of our hedge portfolio.
In aggregate, our hedge portfolio totaled 79 billion.
<unk> fleet from 67 billion in the prior quarter as we proactively added swap and swaption and Treasury hedges.
As a result, our hedge ratio at quarter end increased to 98% of our funding liabilities.
With the yield curve steepening significantly during the quarter the maturity profile of our hedge portfolio was an important driver of our book value performance.
At quarter end, 72% of our hedges had a maturity of four years or more.
This was particularly important in the first quarter.
With 10 year swap rates, increasing 81 basis points, while three year swap rates increased just 22 basis points.
Lastly, on slide 11, we show our duration gap and duration gap sensitivity.
Duration gap at the end of the quarter was long about a half a year the movement in our duration gap from negative to positive was consistent with the increase in interest rates and the corresponding extension and mortgage durations.
Given the cumulative rate move over the last several quarters the duration on our mortgage portfolio has extended from a low of two eight years to 5.1 years This last quarter.
And with that we will now open the call up to your questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question you May press Star and then one using a touch tone telephone.
Withdraw your question you May press Star two.
If you are using a speaker phone we do ask you. Please pickup your handset before pressing the numbers to ensure the best sound quality.
Once again that is star and then one day joined the question queue.
We will pause momentarily to assemble the roster.
And our first question today comes from Bose George from <unk>. Please go ahead with your question.
Hey, everyone. Good morning, and congratulations on an impressive 12 month period here.
First just wanted to ask about incremental returns.
Do you see given where death, how tight spreads have gotten here.
Yeah. Thanks, Chris.
Go ahead Gary.
Yes first off thanks for the comments and.
Look I'll, let Chris go into the details on incremental returns I think the key thing is yes spreads spreads have tightened, but there has been an offset in particular on a two and a half coupon where dollar roll levels have definitely rebounded from kind of the lows or the <unk>.
Weakest levels.
Maybe towards the end of last quarter.
So that's a significant offset so with respect to.
Two and a half some to some degree twos, you can still get low double digits.
Given the.
Given the improvement on the rolls side.
Chris I don't know if you want to add anything to that.
Yeah sure so I.
I guess I'll start I mean within the 30 year production coupon mix, So I would say.
You know I mentioned earlier, one on or have some twos tightened quite a bit more than two on apps and as Gary mentioned.
Rovs on two and a half.
You know it can be low double digits, even without roll specialness. The gross ROE on two and a half before convexity cost is very high single digits.
And as I mentioned earlier, the two and a half roles currently trading around negative 40 basis points, so roughly 50 basis points through repo and wild.
There is no certainty how long this degree of Specialness will persist at these levels have been and could continue to be material contributors to returns with each 25 basis points of advantage versus repo worth roughly 2% on an annualized basis at eight times leverage.
Higher coupons backs.
Generally high single digits area.
Fifteens or mid single digits, and we've been reducing some exposure there as I mentioned earlier.
Okay. Great. That's helpful. Thanks, and then can you just talk about how you view leverage just again, given where spreads are your leverages kind of at the lower end of your range now is that kind of where you want to keep it or just yet just your thoughts there.
Sure look.
Our leverage has declined modestly over the past several quarters and this is just on natural reaction to the market conditions that we're seeing it's a combination of as you've said.
<unk> spreads. So also that volatility interest rate volatility has ticked up from kind of the lows.
You know that we saw post crisis.
So at this point, we have the luxury of being able to produce very strong.
Economic return.
And to be able to do so with lower leverage or we have lots of dry powder.
Two to reinvest so.
The extent that there is some kind of shock to the system. So this is a very very comfortable position for us.
To be on and.
We will continue to just react to the market conditions again this.
This is our risk management process kind.
Kind of just working normally and.
That's leading to this kind of positioning.
Okay, great. Thanks, a lot.
Thanks Bose.
Our next question comes from Doug Harter from Credit Suisse. Please go ahead with your question.
Thanks.
Sorry can you talk about how youre viewing the dividend.
Yeah.
Drifted a little bit longer.
Sure.
At relatively attractive.
Hugh.
Setting the dividend.
The ability to.
Great.
Thanks.
Yeah.
I think I got your question, Doug you were breaking up a little bit but.
What I understood. It was just how we view the dividend.
In today's environment in light of the current earnings.
The earnings environment, and so forth.
And look we've gotten this question.
Multiple times over the past few quarters.
And I view this as a significant positive that we keep.
Getting asked about this I think investors and analysts.
Continue to see our net spread on dollar roll income well above the dividend.
And also demonstrating significant resilience.
That area.
And we've also been able to.
<unk> produce very strong book value and total economic returns during this period over the past four quarters with every quarter being north of seven.
Seven five.
Percent per share.
So.
And Additionally, we've bought back.
Fair amount of stock over the past year to over $600 million as Bernie mentioned so.
Our minds things are really working well right now.
We're paying a great dividend, we're growing book value, we're seeing our share price and our price to book.
Improve.
On what matters in the end for investors is the total stock return and by extension total economic return. So our most important objective is to maximize the assets to make money for shareholders rather than to obsess about.
On a cents which pocket.
Our return goes to.
So.
We're going to continue to evaluate the dividend level, but our bias continues to be offering an attractive dividend.
But one that is not expected to be a headwind to book value.
So hopefully that addressed your question.
Gary Thank you.
Your next question comes from.
Our next question comes from Brock Vandervliet from UBS. Please go ahead with your question.
Thank you. Good morning, I was wondering what your latest thoughts are with respect to reading on reading the tea leaves and timing of the at the beginning of the taper.
Good good question and obviously.
Important from a timing perspective, I think there are two things I want to say with respect to taper. The first data. So I'll answer your question and the second is really to talk about what the taper might look like or feel like.
Let me start with timing.
Look I don't think this is any rocket science, but we see.
On the economy, performing very well in the second half of the year and including the second the remainder of this this quarter. We think the economy accelerates. We do think there are going to be price pressures. We do generally agree with the fed that there'll be shorter term in nature.
We don't think that they're necessarily going on.
Appear shorter term in nature in other words, we do feel like the fed may start to feel pressure.
The summer with respect to just growth strength.
In the economy, and and inflationary pressures, which theyre going to hope are temporary but theres going to be concerned both on the market.
And when economic circles that may be the inflationary pressures will be.
More lasting.
Against that backdrop, we think the fed is going to have to start talking even though right now they don't want to talk about talking about tapering theyre going to have to start talking about it and I think an eventual taper probably begin either at the very end of this year or very early next year. So.
That's what that's what we see in terms of timing a couple of things I just want to reiterate and people I think for GAAP. This when.
When they taper theyre going to reduce on a monthly basis most likely.
The amount of.
Of mortgages, they're adding to their balance sheet. Okay. So, let's say they did 5 million a $5 billion a month that would take them eight months two to then to.
Could not be adding anything to their balance sheet, but what I think people forget is there still going to be replacing the run off in their portfolio and they did that for years. After they stop tapering last time around.
And they usually will coincide shrinking their balance sheet, maybe with the rate increase on an as they've communicated and I think everyone believes that's a ways. After the tapering so they will still be buying a lot of mortgages and they own 30% on the mortgage market right.
Now and so that's not going to change for a long time and remember in a taper environment.
Or in a environment, where they're raising rates prepayments are going to be very very slow on this outstanding universe of mortgages, which is very low coupon. So the feds portfolio again, even when they're not replacing runoff is not going to be running off very quickly at all so big picture that.
Should give investors a lot of comfort around.
It kind of this exit and I want to add a couple other points related to kind of the whole taper equation, which is and I think you can see it.
What we just went through and this is very very different than 2013.
We already got on 80 basis point and really if you count the end of the prior quarter over 100 basis point increase.
And interest rates and against that backdrop mortgages have performed very very well as evidenced by our economic returns, but importantly.
We've essentially absorbed a lot of the extension in the mortgage universe in People's portfolios like ours.
Sure.
Well pre taper right and the separation of this extension component of mortgages with a taper component, which may affect spreads is a big benefit both to an individual portfolio, but also to the market and that's a major reason why an eventual taper should feel very very diff.
Rent from what we saw on P&L in 2013, there are a host of other reasons why this is.
It should be a lot easier to manage.
Then back back then and I.
And then I could list a few but I think what I'll do is just say one of the there is one other issue, which is back then mortgages where agency mortgages were extremely tight.
And they are tight now, but other products in particular, both equities and credit based fixed income were actually pretty wide. So mortgages stood on their own.
<unk>.
On a fully valued product or more than fully valued in this environment mortgages don't stand out okay. Yes. They are fully valued we've talked about that but everything is and so.
This should be a very different landscape. So said another way on a relative basis mortgages are absolutely fine right now last time around.
They were very tight on a relative basis host of other things, but I think that gives you an idea why.
<unk> should not panic about an eventual taper.
Got it okay. Thank you very much for the color that's very helpful.
Thank you for the question.
Our next question comes from Eric Hagen from <unk>. Please go ahead with your question.
Hey, Thanks, good morning, guys.
You guys have done a good job preserving a relatively healthy balance between owning higher premiums spec pools and sort of one half of the portfolio and then TBA as a color generic securities and in call. It the other half.
What do you think investors are picking up from owning that current construct which they might not.
Be getting it.
If you were more concentrated in either one of those buckets.
That's an excellent.
A question and.
I do I'll repeat one thing that I said in the prepared remarks, which is I think youre getting.
Stronger overall performance.
Performance, but youre also getting.
Smoother performance right. So in Q4, I mean, clearly both from an earnings perspective, Q3, and Q4 from an earnings perspective.
Yes.
Lower coupon TBA as were.
We're really pushing our returns and driving kind of the.
Again, what we focus most on total economic return and obviously this quarter.
Both performed both.
Performed well, but higher coupon specs clearly where the.
The better performer.
In terms of total economic return so I think it's too so it's they have very different risk characteristics.
Lower coupons, we can go through a few right. So lower coupons are going to returns are going to be sensitive to.
Spread booths.
Origination versus the fed and bank demand, so there's more spread noise there because there's lots of production.
There's lots of trading volume when it comes to return the dollar roll.
Levels, which they they hit their lows, maybe three months ago.
The dollar roll levels hurt the investment return in the case of higher coupons, you're obviously dealing with the number one variable there is not supply and demand technicals, because they're just not being produced the universe of spec shrinks every month with prepayments Youre number one kind of moving part.
On the spec position is prepayments right and so higher rates and wider mortgage spreads will actually improve your prepayment dynamic, whereas they they hurt the lower coupons. So we're very comfortable and we really like having this balance between the two because youre not.
Solely concerned about prepayments in the case of the higher coupons and on the case of a lower coupon portfolio by itself.
Do you have a lot more interest rate sensitivity and more sensitivity to technical factors. So hopefully that answers your question.
That's great color. Thank you.
Wanted to also just get your thoughts around how much hedging or volatility risk do you guys expect to incorporate in the portfolio going forward and how does that plug into the way you guys think about spread risk overall right now.
Hi, Eric.
Good question. Thank you.
Well first of all if you saw the increase in our hedge portfolio.
So we're operating right now close to a 100% hedge ratio our duration gap has moved from negative to positive.
And overall, we did add hedges and also all components of our portfolio.
We added some swaps and in fact this last quarter, we added some shorter dated swaps predominantly in the three year sector, just as an incremental hedge to lock in more short term funding. If you will we were able to lock in three year funding at essentially 25 basis points. So I don't really look at debt.
As the market value hedge to hedge of our liabilities.
We did add more options to our portfolio and in particular, we've added some further out of the money options, which really on a hedge against volatility and we will continue to look at that.
We will continue to manage our duration fairly carefully I would not expect us though to operate with a negative duration GAAP like we have in the past and one of the key reasons for that is that in the current yield curve environment with the yield curve Steepens for example from two years.
10 years to 140 basis points.
There is an incremental cost now of operating with a negative duration GAAP and Conversely, the incremental positive from an IR perspective of operating with a positive duration gap, we are still biased towards rates going higher. So we will continue to operate with a defensive position.
But ultimately we think will reset at a slightly higher rate and once we stabilize there you can expect us to operate with more of a positive duration gap, which would as you point out give us some incremental protection against obviously to rate risk.
Seeing even see in this quarter.
But also the fact that in a down rate scenario. Once we once we establish a higher rate level mortgages are more likely to widen into a into a rally scenario. So we'll use a positive duration gap has been incremental hedge.
For that risk.
Thank you guys. So much appreciate it alright. Thank you.
Yeah.
Our next question comes from Rick Shane from Jpmorgan. Please go ahead with your question.
Hey, Good morning, guys. This is Charlie on for Rick actually.
For taking the questions I have a follow up to the leverage question that came up earlier.
You see overnight repo at basically zero and short term rates, so low which has really been a great funding tailwind for Aegean Sea.
I mean, given that context, you've got an environment. It seems where the market is for the moment essentially giving you.
Almost free leverage so I'm wondering how you balance really the the opportunity cost of not getting more aggressive on the borrowing.
Weighed against the risk of additional leverage.
Sure and I mean, you you brought up a really important point.
<unk>, which is something I think we mentioned which is look.
One of them the negatives of this environment for investors in any product is the fact that assets are financial assets are fully valued.
The mortgage market as you correctly.
Correctly point out.
Is unique in that yes rates are low everywhere, but the financing abilities in the agency MBS.
Market are uniquely favorable and low both between repo rates.
At the lowest ever levels, essentially around zero and dollar roll levels, even better than that right. So yes, that's a there's a balancing between.
Fully valued assets.
A list of Glee.
And.
An incredible funding and so that I think what youre seeing is that reflected both in our earnings picture, Okay and results.
Coupled with the fact that we're.
We're going to.
We're not letting leverage plummeted.
One thing I want to mention is a lot of the reduction in leverage has just come from book value going up and it's just not reinvesting our aggressively reinvesting that book value.
So I think we're going to continue to be opportunistic with respect to leverage leverage isn't on a one way trend lower if we see you know.
If we feel like the debt.
Mortgages widened and we we feel like it makes sense to add to leverage we're obviously in a very very strong position to do that.
So I think we will continue to be responsive to market conditions, but you bring up a good point about on offset and it's something that we certainly <unk>.
<unk> factor into the equation.
Thanks, Gary I appreciate the color there.
Youre welcome Thanks for the question.
Our next question comes from Trevor Cranston from JMP Securities. Please go ahead with your question.
Alright. Thanks.
Most of my questions have been answered.
Right.
As mentioned the change in your.
Lifetime prepayment expectations, which obviously makes sense.
But I guess over the near term like over the next few months can you maybe give some context for exactly how much you think speeds are likely to drop and how much total kind of change your monthly reinvestment needs.
Hey, Trevor this is Chris so.
The most recent factor reported for April likely represented sort of a local peak speeds given large uptick in collection days, which accounted for most of the increase driving rates were only slightly higher.
For that period.
To date, only a small portion of the rate move.
That we saw late in the first quarter has been reflected in actual prepayment speeds given how sharp selloff was and we should see the impact from the majority of the rate move show up over the next couple of months for the May factory lease, which we will get.
Next week.
The primary driving the driving primary rate was around 30 basis points higher than the prior reported so speeds in aggregate.
For the market will likely be around 15% to 20% lower.
For for that release.
Month over month.
Importantly in addition to the higher.
Current mortgage rates the much steeper yield curve implies that mortgage rates will continue to increase and against this backdrop, it's logical and.
Realistically necessary to assume higher mortgage rates and slower prepayments over time and this is a big piece of what youre seeing with our projections coming down versus.
The most recent current actual speeds.
<unk>.
Said another way.
It's periods like today when rates have recently and sharply moved higher and when the yield curve is steep where you would expect to see the biggest GAAP between actual speeds and projections and over time these should converge.
Alright that makes sense, okay I appreciate the comments thank you.
Yeah, what's the one thing that debt I just want to add on.
That was that was an excellent answer the.
Two things first off just keep in mind, even if we had to speed our long lifetime projections didn't change.
That would have been worth maybe <unk>.
And our net spread and dollar roll income so our net spread and dollar roll income with our old prepayment speeds, which it would be a logical given on 80 basis point increase in 10 year notes.
And on a yield curve steepening to have your prepayment speeds on change, but even with that that's worth maybe <unk>.
So that's like kind of at the highest level of big picture issue.
To keep in mind and just to reiterate like when you look at our lifetime speeds.
There is a.
If you looked at the shorter term projections clear materially higher than the lifetime speeds again, the lifetime speeds assume interest rates are low mortgage rates are going up and so it's very misleading and it's apples to apples to compare our line speed to short term speeds.
Yes that makes sense, okay. Thanks, Kurt.
Thanks.
Thanks for the question.
And our final question. This morning comes from Ryan Carr from Jefferies. Please go ahead with your question.
Hi, Good morning, guys. Thanks for taking my question congratulations on the great quarter.
Just a quick question on capital allocation moving forward and I'm curious to hear your thoughts from the balance of the year on your allocation between TBA spec pools and opportunities in non agency as well.
Thanks.
Sure.
First off.
The spec pools will continue to pay down.
And just within the agency space Youre going to likely see and.
The additions.
To the portfolio will likely be in new production in TV and largely in TBA as our other new production bonds. So I mean that straightforward is there a situation where higher coupon spec pools.
Become attractive enough for us to add them.
In material size and become available enough I doubt it so realistically you're supposed to assume that that portfolio is running off and even within the agency space, it's going to be replaced with.
TBA as in other lower coupons, which probably won't be specs.
Then.
With respect to the non agency opportunities.
I think look we don't expect any weakness in mortgage credit.
Anytime soon I mean, the fundamentals are incredibly strong for the housing market, that's a clear tailwind but.
We also think that spreads have.
Sort of have are beginning to plateau and you saw that in the last quarter and we've definitely been adding.
More in the non agency space and I think incrementally we will continue to do so.
Sumit.
Spreads and returns stay on the current stay where we.
Were they appear to be currently.
So I think you can look for incremental additions.
You'd have to see something change for for us to significantly increase our capital allocated to credit at this point again incremental additions not wholesale changes is kind of our baseline forecast there one thing to note on the credit side debt.
Given it's a small portfolio for us and with leverage on the agency side down.
We get a unique benefit that other hybrid rates really don't get which is that we can.
We can borrow basically funding from the agency side.
Which essentially improves our ROE on non agencies are levered ROE is on non agencies by a couple percent or more.
Because of the fact that it's not that big of a position now that is not scalable, but it's something that certainly helps.
On the levels that we're talking about so hopefully that answered your question.
Yeah. Thank you very much for the answers.
Thank you.
And ladies and gentlemen, we have now completed the question and answer session I would like to turn the floor back over to Peter Federico for any closing remarks.
Thank you operator, and most importantly, thank you to everybody who participated on the call today, we very much appreciate it.
This concludes our first quarter 2021 earnings call, we wish everybody well and we look forward to talking to you all again at the end of the next quarter. Thank you.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.