Q1 2021 Orchid Island Capital Inc Earnings Call
Ladies and gentlemen, this is the operator your conferences scheduled to begin momentarily until that time your lines will once again be placed on hold thank you for your patience.
[music].
Okay.
Good morning, and welcome to the first quarter 2021 earnings conference call for Orchid Island capital. This call is being recorded today April 30th 2021.
At this time the company would like to remind the listeners that statements made during todays conference call relating to matters that are not historical facts are forward looking statements subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Listeners are cautioned that such forward looking statements are based on information currently available on the managements. Good faith belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward looking statements.
Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on form 10-K.
The company assumes no obligation to update such forward looking statements to reflect actual results changes in assumptions or changes in other factors affecting forward looking statements.
Now I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead Sir.
Thank you operator, and good morning, everyone I hope everybody as usual has had a chance to download our slide deck, which we put up on our website last night.
And I'll give you a second to get ready and then we will as always walk you through the slide deck.
As usual I'll start on page three just kind of go over the favorable comments on other words set the agenda for today's call on the first thing. We'll do is as usual is just go through a summary of our results for the quarter.
And I'll spend some time talking about market developments that occurred throughout the quarter.
Well then go through our financial results and then spend the bulk of the time talking about our portfolio characteristics hedge.
Hedge positions both with.
With respect to what happened during the quarter what has happened since quarter end, if anything which mis cases, we did do some things.
And then just give you some comments on how we see things going forward and just some more high level comments on the performance of the company for the quarter so with that.
Turning to page four.
For the quarter ended March 31, 2021 orchid reported a net loss per share of <unk> 34.
Net earnings per share of <unk>, 26 cents, excluding realized and unrealized gains gains and losses on our on.
RMB asks and derivative instruments, including net interest expense on our interest rate swaps.
A loss of <unk> 60 per share from net realized and unrealized losses on our MBS assets. The rhythm instruments again, including net interest expense on our interest rate swaps book value per share was $4 94 at March 31, a decrease of 52%.
52 cents or 952% from $5 46 at December 31, 2020.
In the first quarter of 2021, the company declared and subsequently paid $19.05 per share on dividends and since our initial public offering the company has declared $11 and $91.05 from dividends per share, including the dividend declared in April of 2021.
Economic loss for the quarter was $32.05 per share or 6% $23 eight 1% annualized.
On slides five and six we present our results versus our peer group. The peer group is to fight at the bottom of the page.
First pages as of March 31, which just using stock and dividends to calculate total rate of return.
As usual we present this both on a look back date as of $3 31.
So one year back from $3 31, two years et cetera, and then of course, each calendar year as well.
<unk> six is the same thing but for book value.
We as always the case, we do not know all of the book value numbers for our peers. So this data is presented with a one quarter lag. So it would be from the fourth quarter of 2020.
Now with respect to market developments I.
I think by this point some of this news is somewhat old so I am just going to summarize.
Most of this but I will make some comments with respect to anything Thats, Germany for purposes of Q2 and beyond.
With respect to slide eight as you can see the difference between the Blue line and the Red line on either.
Here is the change in rates that occurred during the quarter. So a very substantial move and a substantial steepening of the curve since quarter end rates have backed off.
On the screen you see there was as of last Friday actually today that line would be slightly closer to the Red line. So we have seen rates back up somewhat more.
But noteworthy in the magnitude of the Steepening of the curve here on in the case of the 10 year cash note, you're almost 80 basis points moving rates over the course of the quarter flow.
<unk> nine is presents the same kind of data only looking at certain points on the curve.
10 year Treasury and the 10 year swap rate, there's really nothing more to be said about that with respect to slide 10.
Note that even though the curve has flattened somewhat in Q2.
In the case of the $5 30 curves, it's only been a couple of basis points in the twos tens curve.
About 10, the curve still remains very very steep and well off the trough that we saw back in 2018.
With respect to the mortgage markets on slide 11.
So on the top left of the pages a slightly different approach than we've done in the past, we basically normalize the prices of all the security. So you can see the relative performance.
So in this case, what we're doing is we're taking the price at the beginning the core quarter in setting it at 100 not that they were priced at par. This is just a 100% of that be getting price and as you can see the red on the blue lines, there, which represent the lower coupons have declined the most in price in the case of twos down 117 ticks two five were down.
<unk> 94 in a quarter ticks, but as you can see a clear differentiation between those lower coupons and the higher coupons Cooper.
Coupons that are materially more on the money, but also not the ones that the fed purchases those were relatively unchanged in fact on the case of force, we're actually up in price almost 17 ticks.
With respect to the roll market.
This story remains the same the fed is aggressively buying lower coupon on production coupons on those roles do very well and all the rest are at or near negative levels with.
With respect to spec pay ups very meaningful developments this quarter as you can see on the top right.
In our case share we're showing representative calls these are 85 K low loan balance.
Three three and a house in force and as you can see those pay ups have dropped dramatically. They are actually back to the levels that we observed before the pandemic in some cases slightly lower.
What we've seen in the 10 year Treasury.
New coupons still command relatively substantial pay up.
Loss from Kelly is relevant with respect to orchid on.
On slide 13, or 12, rather you can see using this proxy for volatility in the market as is typically the case when we have a sudden substantial movement in rates fall increases.
Obviously very high levels here almost as high as it was back in March when the pandemic first hit the market since.
Since quarter end, while has come off some but still remains just at the bottom end of this range thats been established.
Since middle of the second quarter.
One final point here.
It is very very important.
With respect to the mortgage market on slide 13, we show here the only asked LIBOR OIS of the various TBA coupons.
Of note.
How tight they are these numbers or.
In many cases negative numbers and we see that in a lot of securities that trade in the market with negative LIBOR OAS numbers.
The mortgage market is very tight and for obvious reasons, we have the.
A very substantial support on the fed.
<unk> daily basis, and as we heard this week the fed has no intention of papering those purchases anytime soon.
As a result of market remains well bid and we also have large other investors non fit buyers.
Okay.
Banks, who were also very supportive of the market. So.
One takeaway from this slide is that the mortgage market is.
It's trading at very tight levels on on historical basis.
Slide 14, just kind of gives you a snapshot of what happened with respect to fixed income sectors. This is all of the.
Aggregate index components as you can see all fixed income components were down with the exception of high yield and high yield as always has kind of an equity component to it it's not purely a bond like instrument and of course equities did very very well.
Mortgages were on a relative basis is somewhat better than most other fixed income instruments, but still negative for the return on this is absolute by the way on an excess return versus either treasury or LIBOR.
Swaps.
It was negative as well a negative 30 basis points.
With respect to 15.
Mid 15, a few important points I want to make here first.
If you look at the bottom of the page the refi index, which is the blue line versus the percentage of the mortgage markets its in the money.
Very substantial move over the course of the quarter, we went from being in a situation where approximately 80% of the market was refinanced <unk> now we're down close to 40%.
Very substantial move.
One of the things Thats offsetting that though if you look at the top right. The primary secondary spread we've talked about this before on our earnings calls. It is very important this is basically the spread between our mortgage available to a borrower and.
Theoretical current coupon mortgage it had gotten a very wide level and it's been tightening for some time now as you can see it continued to tighten even in the first quarter. So the significance of this it tends to mute the impact of higher rates on prepayments and put differently as rates have moved higher.
Over the course of the first quarter rates available to borrowers increase but much less so as a result.
The rates available to borrowers are still not that unattractive.
Attracted in fact, the various proxies the Freddie Mac survey rate or the mortgage bankers rate are still on the very low threes. So on on historical basis still quite attractive.
As you can see on the top left.
The refi index of course has come off.
Versus mortgage rates, but it really only moved from the mid 4000 range to the low threes, it's still at a fairly high level. So refinancing activity has come off no question, but.
But not off a cliff for sure.
Turning now to our financial results Slide 17 on the left hand side, we disaggregate our results basically showing you the mark to market effect on our earnings as you. All know we use fair value accounting, so all fluctuations in market value of any instrument share.
Up in our earnings as you can see just looking at that center column, the realized and unrealized losses on the assets exceeded those of our hedges.
And that was because of the positioning of the hedges we had in place the beginning of the quarter, obviously and as you can see those are substantial underperformance is what gave rise to the quarterly loss absent. Those you can see that we still generated an income of 26 per share.
More to say about down to second.
With respect to the sector allocation of the portfolio between pass throughs, and iOS and inverse iOS as you can see on surprisingly the passenger portfolio on had a fairly meaningful negative return of nine 4% using average capital allocation.
And the iOS and inverse iOS had a very strong positive return nearly 30%.
And not surprising given the movements in rates now with respect to kind of historical perspective on page 18 at the top of the page. We show the same three lines that we've shown for many years now the Blue line is the yield on our assets as you can see it's at 266%.
Red line represents our economic cost of interest that's down to 62.
And then the difference between the two is the Green line, which was a 2.04%. It appears now given the events of the first quarter of 2021, and now moving to the second quarter that both the yield on the portfolio and the economic cost of interest are probably at or near a trough.
So we would expect those to level off and potentially rise in the future, but importantly, the net of the two has remained quite stable now for several quarters and it stayed at around that 2% range and that's of course, a meaningful from the perspective of our earnings and dividend.
That's also reflected on slide 19, you can see the Blue line, which is the actual reported earnings per share versus the earnings per share excluding those mark to market gains and losses, you can see it's been very stable.
And so.
And it was going into 'twenty six reported for this quarter, it's very much in line with <unk>.
We generated over the last several quarters.
Turning to slide 20.
The allocation of capital on the left hand side, there was a slight uptick in the allocation to structured securities from six 7% to $10. One we will get into this a little more detail on a moment, but since quarter end that number has continued to increase and in fact is close to double what it was at the end of the quarter.
So we are.
Increasing our allocation of capital towards iOS and away from pass throughs.
The right hand side, just kind of walk you through the changes to the respective portfolios that occurred over the course of the quarter. As you can see there was one and we did add one inverse io.
This represented the bulk of the increase in the allocation to that sector. Otherwise you can see our paydowns, which will speak to in a moment on.
With respect to pass throughs was a very subdued number.
Again, representing reflecting the asset allocation that we continue to employ.
Now I'm going to walk you through kind of what I generally considered a more meat on that conversation.
On the portfolio positioning on the FERC on I'm going to do is go over all the steps that were taken to changes that were made in the quarter.
Then we're going to talk a little bit about what transpired since quarter end and then as I said I'll make some more general comments about the.
The results for the quarter and then how we see things going forward. So first on the asset side here I'll get to the hedges in a moment, but just wanted to focus on the top of the page as you can see here.
The portfolio is still heavily concentrated in 30 year securities.
We did not make a meaningful change in that regard either during the quarter or since quarter end, we did add somewhat to our 15 year positions.
They increased fairly substantially in absolute terms, but still on represent less than 6% of the portfolio. We also increased our allocation to 20 year securities, but again.
Not meaningful enough to change the overall characterization of the portfolio. The one meaningful changes that occurred within the 30 year coupons.
One of your allocation increased slightly but recall at the end of last year, we had a fairly substantial long positions in TBA and those coupons that was taken off during the quarter. So now be exposure that coupon is strictly and pull form and as I was saying a few moments we've actually reduced debt since the biggest change was to the capital allocated to.
To the 30 year three coupon.
We did raise capital during the quarter on two occasions and most of that was deployed in that coupon. So the allocation to <unk> increased by approximately $1 billion.
We did sell some 30 year three and a half.
What we were doing there was just take reducing exposure to very high coupon spec pools on most of the New York got all three in a house with respect to higher coupons are more or less unchanged.
Change over the quarter just reflects run off and then as I mentioned, we did add to the Io portfolio and we did reduce the TBA long since quarter end we've.
Continued some of these same trends, we reduced our exposure to the 30 or two and a half coupon allocating most of the proceeds into threes, although on a net basis.
It was a reduction in outstandings by about $150 million and then we did add a few higher coupon low balance pools and more recent auctions. So now I'll just kind of walk you through the balance of the slides in this section then I'll come back and talk about the hedges.
Slide 23. This is a slide that we've been using quite a bit lately.
Very germane during 2020 with Prepays were such a high level. The Red line is on allocation to high quality spec pools and as you can see it's come down dramatically and the reason is simply the fact that we no longer need those assets because prepayments have come off suddenly different rate environment and thats reflected in the rate available.
Are the refi index has come down.
With respect to slide 34.
We are about generating income and earnings and therefore, we're very much focused on minimizing our premium amortization and that's reflected here.
Most of our efforts are in security selection, we tend to use more spec pools and TBA assets posted states some of our peers.
But we do focus on security selection and we had very good results as you can see just by the bar charts.
For each of the respective months and the quarters, but also with respect to the pass through portfolio in the second or the first quarter of <unk>.
Prepaid in the aggregate just under 10 CPR in the overall speeds of the portfolio were down a little over 40% for the quarter.
This is also reflected on slide 25 as you can.
Can see with rates backing up.
Contained our pay downs as a percentage of our outstanding principal balance within a very low range and again this is still lower than the levels. We were at in 2019.
Finally, before we get into our hedges our leverage is running at about $9. One at quarter end there may be some changes to that slightly on the horizon and I'll get into that in a moment, but I just want to point out. If you look at this slide you can see the last few quarters. The ranges from between say eight eight and $9 90 day, we remain near the low end.
End of that range.
With respect to our hedges this is where the more substantial changes occurred during the quarter.
With respect to our swap book was increased.
With the movement in rates and how we're positioning going forward.
What kind of drove our decision, making we had some older five year swaps that had been on the books for a while and bolt on the curve they were less than a four years. So we actually.
Terminate those swaps and added approximately $800 million of five year swaps and I'll get into the rationale for that in a moment and we also added about $200 million of 10 year Ultra swaps.
We've also changed the TBA position.
We're only short $328 million at the end of the last year. That's now one 3 billion. We've added over the course of the quarter a short in two and a half and then the rest of the increase was in threes.
Then with respect to swaption, there was one that rolled off and we've added or.
Refreshed.
The levels on several payer spreads that we have on these are designed to allow us to economically put on protection against movements in either the belly of along on that occur.
By using a combination of long and short positions and then from time to time, we refresh those levels as the market moves up just for <unk>.
Efficiency purposes, and then we've also added a curve floors you can see.
Since the quarter end, we have covered the two and a half short that's no longer on.
Some of these hedges that we put on.
Somewhat expensive and we're trying to reposition those to make them more economical.
Three short has been reduced by approximately half.
And we've actually added and replace that with some shorts in the futures market combination of five year on.
Future or ultras and then also we did put on another five year payer spreads.
So that's kind of the gist of what we've done in the portfolio and now as I said I wanted to make a few general comments just about are resolved and how we kind of see things going forward.
The first thing is safety obvious obviously, we had a very large book volume change that's not something we're happy with but at the same time.
Keep in mind that the way we run the portfolio have been very consistent since our inception.
There's not been any.
Meaningful deviation at all over that period, we tend to run certainly with respect to our peers at the high end at the highest end of the yield range and a higher leverage ratio than our peers.
And that's been applied very consistently and as a result, when we have episodes like we did in the first quarter. We have a huge move in rates, we tend to be exposed to that and that was the case in this quarter and it was also a vacation on the fourth quarter of 2016.
But outside of that the results are very good in fact, if you look at the slide deck beginning of the as I mentioned earlier, you can see our relative to results were very strong versus our peers. So while we occasionally have this quarter and it's unfortunate over long periods of time. The results of the strategy are very very good very positive on it.
As a result, we do not have any intention of changing those.
Now with respect to our positioning as I've mentioned, we did make some changes, especially on the hedge side.
Some of these hedges are somewhat possibly but we were able to do them very quickly and efficiently at the time.
Going forward, we did suffer some mark to market.
Negative mark to market on the portfolio, but most of those are unrealized very few realized as a result, what's left in the portfolio has been marked down which means that going forward for with respect to premium amortization.
Amortizing the lower premium amount.
And given that we expect speeds to remain below the levels. We observed last year. This means we should have slower premium amortization.
And the second thing we've been doing.
Mentioned alluded to earlier, we've continued to do so since the end of the quarter is replaced several of these are hedges with iOS.
<unk> that.
They have less desirable yields now, but in the event of a any kind of a sell off.
It would be very attractive and positive carry in some cases meaningfully so so on balance while the hedge costs are higher.
On our repositioning we think that they used to offset.
Substantially if not entirely by slowly amortization and the iOS that we've added to the portfolio and we will also be replacing some of the dollar roles that I mentioned that we took off.
Simply because those rules are very attractive and it should be supported by the fit going forward at least until they ultimately taper kind.
Some would say that the portfolio is positioned defensively positioned for higher rates.
Since rates have rallied rallied modestly since quarter end, our book value is down modestly probably a percent or two but.
But we as I said, we think going forward the path of rates is going to generally be higher so to the extent that rates surpassed the levels that we observed at the end of the quarter you would assume that we would recoup some of that book value.
And the implications of that for our leverage ratio, obviously that would be beneficial since it would be lowering our leverage ratio.
All else equal, but even if that doesn't occur we view our leverage ratio.
To acceptable levels I've mentioned before were around nine 1%.
Now with respect to the future how we see things going forward. Obviously, the economy is recovering at a very rapid rate and even though they insist theyre not going to do so anytime in the near future I think it's pretty safe to say that whatever your horizon is whether it's the balance of the year or next year or even into 'twenty three and eventually the fed is going to taper.
<unk> of quantitative easing and mortgages are going to widen.
It's hard to argue that that's priced into the mortgage market given where they trade today.
So we certainly see room for mortgages to widen over the course of the next year or two and that's.
Some of the rationale for adding to our iOS.
Because we think the iOS will be much less susceptible to that widening and Thats why in addition to replacing some of the hedges with iOS just because they are more cost effective but also because we wanted to try to avoid some of that widening. So you will probably see in the Q2 results in much greater allocation to iOS and <unk>.
That continues that will probably ultimately reflected in our leverage ratio since we apply leverage to the pass throughs that little to the iOS, just really monetize them for cash purposes. So you should probably see the leverage ratio remain on the low end of the range and then the second thing is the fact that we think that eventually even after the fed tapers they will raise rates.
And the consequence of that will be a flattening of the curve and I mentioned debt. We had put on a lot of hedges, especially in the five year part of the curve either whether with respect to swaps or futures and the reason Thats. The reason we expect the next major moving the curve to be in the valley of the Pfizer area and we wanted to be positioned for that we also put on it.
Some curve floors again to protect earnings.
When this occurs so.
We feel in some very well positioned going forward. Our income has our ability to generate income that's been preserved.
And we the iOS, we expect greater allocation of those to behave very well when and if we see widening in the pass through portfolio.
And that's pretty much it operator, that's the end of my prepared remarks, we can open the call up to questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
We'll pause for just a moment chicken Paul the Q&A roster.
Your first question comes from the line of Jason Stewart from Jones trading your line is open.
Hi, Thank you and thanks, Tom JV.
How are you thanks for the as always comprehensive overview.
Two questions with regard to net economic spread could you give us a sense of where that ended the quarter and just remind us how hedges like futures or sorry, <unk> would roll into that number that's being reported.
Yes, it was probably not meaningfully different than what I just discussed.
With respect to how those affected on obviously I'll just go through the laundry list and I'll turn it over to Hunter to have more to say on with respect to paying fixed on swaps, obviously, that's pretty straightforward.
You're just paying whatever that rate is.
On the case of the 10 year swap obviously, it's much higher than the five year point of the curve given how steep the curve was with respect to futures.
As you roll through time.
Futures are March June September and December as you would from contract to contract Theres, a drop and we use that component too.
As an expense.
With respect to TBA as it's the drop we have used the threes because of the drop was negative that's no longer the case and that's why we reduced those.
Swaption is basically.
On the premium you pay.
I would just add up we didn't add on a meaningful amount of what I would characterize is expensive.
Long end rate hedges. So it was a modest increase to 10 year part of the curve both through.
Paying fixed on swap.
10 year tenure.
So on your part of the curve as well as putting on.
A handful of ultra's, which do have a rather large negative carry component to them when you're when you're a shortage of them just because of the shape. The curve is so steep but we've subsequently.
As we've increased our allocation to iOS, we have pulled back some of that hedge.
And done so at levels, where we're not going to really.
Earn out that negative carry so to speak.
With respect to the.
Our TBA position most of what we rolled into.
April and May.
It's done on it.
Negative levels right. So the TBA performance of Fannie Threes has been so.
Pour over the last.
Several months.
Just because the cheaper.
Cheapest to deliver the quality of the cheapest to deliver collateral on that coupon bucket has been so bad debt you actually can short the coupon and clipped a little bit of carry.
On a positive manner. So we've taken advantage of that where we can it's justifiable to do so because we own a lot of 3% coupon specified pools and in fact, we own a lot of times, we own a fairly large position of what we would characterize as <unk>.
Low pay up pools, so to the extent that their performance.
Decreases over time, they've become more like the cheapest to deliver we can always just.
Those shorts by delivering pools into them and clipping the carry on the specified pools.
While there is still.
Our superior assets so.
I think for those reasons.
Grief with what Bob said about not being materially different.
At quarter end than it was in the presentation.
Got it. Thank you that's helpful.
And then on the capital raises during <unk> can you give us a sense for how much those were either accretive to book value or the approximate book at the time of the raises just trying to get a sense for how that impacted book value per share.
The first one was slightly.
Dilutive in the second one was right at book.
Okay great.
Thank you and then at the time, yes.
Got it.
Most of the deterioration in the.
Quarter came in the.
Last $3 three weeks of March.
So.
We did have a small decrease in book up to that point, but yeah. Yeah. I would just just to add I mean, I'm sure you're thinking about this.
Book value for the month of January was probably up very modestly.
February probably hung in until on a mid month, then we started to go negative maybe slightly negative by the end of <unk>.
February and I would say at least 75% of the decline in the quarter occurred in March and really after I forget what day. It was wherever the day non farm Payrolls was released on a same was around March 5th was really after that I mean, one of the big drivers of that was also as you may recall is when.
Powell made it clear that he was comfortable with higher rates that are kind of like green lighted the marketing for.
From a rate to go much higher and we kind of crested at right at the end of the quarter at $3 or $3 31. It just short of 175 one turns.
Yeah. Okay. That's helpful color last one from me and I'll jump out.
Could you just give US a reminder, on debt metrics Kpis you look at to set the dividend.
And remind us how that interplay is moving through with all the changes that were made in the portfolio towards.
Towards the end of <unk> and then as you continue.
Continuing to evolve in <unk>.
That would be helpful. Thanks, sure well we look at.
Well.
Just to start with dividends are obviously is artifact of taxable income we don't really look at taxable income, it's basically what we call economic income.
Which looks a lot like GAAP with two minor adjustments. So one we look at more of our economic cost of interest expense, which and therefore reflects hedge costs, because we didn't know won't use hedge accounting for purposes of.
GAAP so all of the changes in the market value of our hedges are reflected in our earnings but not all of that wouldn't necessarily be attributable to the current period. If we were using hedge accounting and then the second one is just to try to capture premium amortization.
Well the one thing that's unusual about the fair value option.
Contrast, sharply with available for sale of available for sale, you're buying assets at the time you you book a yield and you use that yield assumption to amortize premium every quarter you may refresh that level.
Call that a retrospective adjustment, but in contrast to what we do when we use fair value every quarter, we mark to Mark the portfolio to market and that resets. The level you used for premium amortization. So we reported on earnings release, something called premium loss due to pay downs, but remember that's reflective of the levels.
That existed at the beginning of the quarter. So if you have on year like 2020.
Asset prices are very elevated it is going to make it appear like you're amortizing a lot more premium that actually existed maybe at the time you bought the assets. So that is just one nuance of our accounting, but otherwise.
Those are the two adjustments that we make to look at.
Hum.
The adjustment now I will say that I mentioned, we took off some of our TBA longs. When you tend to put those back on there were some adjustments to the hedge book and then subsequent adjustments to that.
Through replacing iOS, so theres a lot of fluidity here and the net interest margin. If you will somehow calculate it on a daily basis, you would probably see fairly meaningful fluctuations as we go through this process.
But we expect when we come through the process when we're done and we're almost there that it should look pretty much as it did.
The after the quarter as I said.
Taking off some of these hedges putting on the iOS and so forth.
Still think the net of all this is going to be about a wash.
The unknown as it relates to you know.
The way, we look at dividend policy is really going to be how much speed slowdown over the next month two three.
We'll observe that we're pretty bullish about the outlook for higher coupon mortgages and the items that we on which are tend to be off of a slightly you know custody.
Assets or at least the ones, we've been adding are off with customer your coupons that we own.
Another slug of high negative duration in the money loans, which we also expect to slow down. So over we really are just positioned to I think the street is really just to the point, where it is expecting a slowdown in speeds, maybe next print, but certainly over the next cut.
And we'll see how we settle here and with respect to the slowdown in speeds.
To have higher rates.
Your next question comes from the line of Christopher Nolan from Ladenburg Thalmann. Your line is open.
Hey, Hunter on your comments just now on bullish on speeds is that for the market in general or for orchid Island specifically.
For orchid specifically.
I think you know all the models we use.
I look at it in all the Street research.
Shows significant slowdowns in speeds, especially for.
Higher coupon collateral.
Would be a big part of our portfolio. So three three and a half spores I mean, we have some loan balance for us they're paying in the mid Twenty's and I think the expectation is for those to slow down into the mid teens over the course of next few months.
That's not an enormous position for us, but I think it's a good example of what has developments that have not fully played out yet.
And.
I wanted to thank Tom could you share with us what the allocation of capital is to iOS from the second quarter so far.
We added about 46 million in market value.
So at quarter end, Chris It was 40, just over 40 million, which was 10%. So we've added 46. So its approach, it's probably 20%. So it's well 86 Cavalier whatever 86 divided by 460 years.
465, close to close to 20%, but it's probably going to go higher still.
Great and Bob on.
On your comments in terms of steeper curve.
Higher rates.
Do you mean by that is a steeper curve.
The curve Steepening now and the fed keeps doing a very effective job of talking to market down whenever it starts to price in any form of policy removal in the near term. They certainly did it this week.
But I think so the credible stay fairly steep.
Mentioned this quarter to date, we've kind of backed off the highs at rates and the flattening, but very modestly I think.
On the curve is going to stay steep for some time, but I'm in the camp that the fed is not going to be able to wait that long to start tightening.
And I'm sure you hear the same things I do anecdotally I mean does evidence of inflation, it's not obviously the baseline effect. So if you look at today's number PCE looking back at April of 2020, it's a very low bar. So the number looks high that's transitory I don't.
Agree with the fed 100% on that but when you hear Procter and gamble on other entities are raising prices and Amazon is going to give pay raises to 500000 employees.
Those arent transitory and then the President's speech on Wednesday night to the extent he successful with these programs.
On the systems already awash with liquidity.
I don't know if anybody follows the RP market.
Reverse repo the deferred runs.
So that's where people are trying to get rid of cash and taken assets.
That's at zero or very close to zero yesterday, the fed did or the treasury did a one month bill option at zero.
Maybe they eventually go negative, but we're just a wash with liquidity so the combination of.
Pent up demand substantial demand for goods and services.
COVID-19 induced supply shortages, whether it's labor because people aren't coming back to work or all the other things you hear about bottlenecks commodity prices chips for automobiles and everything else combination of huge demand constrained supply.
And then a fed slashed treasury that is flooding the market with liquidity.
I hope, they're right and it's transitory, but on beginning to think that.
That may not be the case and they are overly sanguine with respect to the concerns with inflation. So.
I think it'd be hard pressed for them to play out that way and the fed as much as they say that they're not going to tightened.
You know at what level could inflation run where they had to change their mind, you know, 4% I don't know.
But I would expect non farm payrolls to be very robust retail sales to remain robust everything is going to be very strong and over time I just think that they're going to have to move their timing forward and then you mentioned going to see the curve flattened and theyre going to start pricing in hikes and they are eventually going to have to yes.
Of course that is particularly germane as it relates to our first quarter results. We saw a steepening of the curve mortgages selling off and then really in March.
Full sort of convexity effect started hits portfolio, where you're starting to see a deterioration in <unk>.
Pay ups for specified pools.
On extension and mortgage assets and as you know we have for several years preferred to shorten the belly of the curve and we just didn't get as much satisfaction game on that point because it hasn't moved yet the two year still very much anchored near zero two year treasuries or you know near 15 to 17.
Basis points. So the market is not price against higher rates on that part of the curve, yet, which ultimately affects that.
But.
On the belly of the curve hedges that we have arms, which is a five year.
Moving to a lesser share seven year swaps we have on.
But that I think we'll we will sort of have our day at some point when the market feels like the fed can't stay on hold forever.
Okay. That's it from me thanks, guys.
Thanks, Chris.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
There are no further questions at this time I'll turn the call back to management for closing remarks. Thank.
Thank you operator, and thank everyone for joining us today to the extent you Werent able to do so live and you listen to the replay do you want to ask a question or if you have another follow up question from today than you did listen feel free to call us as usual number in the office is 770 22311400 again I. Thank you for list.
And I will look forward to speaking to you at the end of the second quarter. Thank you.
Thank you everybody for joining today that concludes today's conference call you may now disconnect.
Yeah.
Moving on.
Sure.
Sure.
Hi.
[music], Rhode Island.
Okay.
Yes.
[music].
Yes.
Yes.
Thanks.
Okay.
Yes.
Okay.
Yes.
[music] channel.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.
Yes.
Great.
Yes.
Okay.
Yes.
Okay.
Okay.
All right.
Yes.
On.
Inc.
On <unk>.
Great.
Okay.
[music].
Okay.
Okay.
[music] expense.
Okay.
Thanks.
Alright.
And Venezuela.
[music].