Q2 2021 Dynex Capital Inc Earnings Call
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Good day and thank you for standing by welcome to the Guy next capital, Inc. Second quarter 2021, earning results conference call at the.
Based on all participants are in the listen only mode. After the speaker's presentation there will.
B of question and answer session to ask the question during the session you'll need the price for them from a near term.
Telephone is the require any further assistance please press star zero.
I would now like to hand, the conference over the your first speaker today with all of a sudden of girlfriend, the VP of Investor Relations.
Thank you. Please go ahead Madam.
Thank you spend lots of operator.
Good morning, and welcome to the Bank capital second quarter 2021 earnings Conference call. We appreciate you joining on the press release associated with todays call was issued and filed with the SEC. This morning July 28.
1 of 21, you May view the press release on the homepage of the dynamics of on site at <unk> capital Dot com as well as on the SEC's website at SEC Dot Gov.
As we began the wish to remind you that this conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 19.
The 5 the words will believe expect forecast assume anticipate estimate project plan continue and similar expressions identify forward looking statements.
These forward looking statements.
Reflect our current beliefs assumptions and expectations based on information currently.
<unk> available to us and are applicable only as of the date of the presentation. These forward looking statements are inherently subject to risks and uncertainties some of which cannot be predicted or quantified.
The company's actual results from timing of certain events could cause could differ considerably from those projected in account contemplated by.
These forward looking statements as.
The result of unforeseen external factors or risks for additional information on the factors or risks. Please the first of all the disclosures filed with the SEC, which may be found in the diner website under Investor Center as well as on the SEC's website.
This conference call is being broadcast live.
<unk> of Internet with the student inquiry presentation, which can be found through a webcast link on the homepage of our website the slide presentation.
It may also be referenced under quarterly reports on the Investor Center page.
Joining me on the call as Byron, Boston, Chief Executive Officer and Chief.
So it wasn't off of and co Chief investment Officer, Berthing pop in our President and co Chief Investment Officer, and Steve Benedetti Executive Vice President Chief Financial Officer, and Chief operating Officer.
And with that it is my pleasure to turn the call over to Byron Boston.
Good.
In Boston, Thank you Alison and thank you everyone for joining our call.
2021 continues to be a good environment for di next to deploy capital for financing costs remain peg at very low levels.
Has resulted.
And steady earnings and a wider net interest spread is shown on slide 25.
Good morning began the sheer believing we will get multiple opportunities to invest at attractive returns of the yield curve steepens or spreads widen.
So actually we have raised capital maintaining lower leverage and methodically deployed capital at attractive return levels as of May.
Midyear, we were sticking with our strategy Nonetheless.
Nonetheless, we.
We're evolving health and economic environment in the capital markets of reflected this uncertainty as such our book value has fluctuated this year from being up 5.2% of the first quarter to declining 6.6% in the second quarter.
Our year to day performance remains solid as our total economic return.
For the 2.4 per cent.
Our tactical deployment of capital at attractive levels, and our ability to out earn our dividend and so pushing on our book value. During this period of volatility.
Let me remind you that we manage the hynix capital for the long term.
Our goal is the generated cash return between 8.
As a party in percent, while maintaining book value at steady levels over time, we will continue to create value for our shareholders by using a very disciplined top down research driven approach to develop the strategies for multiple future scenarios in the short medium and long term.
This.
Congrats on the importance and for global market environment changed in January 2020.
Most importantly, since this new era in history began last year.
Outperformed our industry in the other income oriented vehicles of the 28% total shareholder return as noted on slide 5.
I will emphasize the fact.
We have an experienced team and experience will be a major factor for creating value through these transitional times in the global capital markets and economies.
We will continue to emphasize liquidity with the balance sheet of high quality assets.
Now I'll turn the call over to Steve and severity.
The wheel or they can give you more specific details regarding our results and our and the thought process.
Thank you Byron and good morning, everyone for the second quarter, we reported a comprehensive loss of 98 per common share kind of tone.
Economic return of -93.
The common share for of -4.6%.
We also reported core net operating income of 51 cents per common share an increase of 10% over last quarter's 46 cents per common share and well exceeding our 39 quarterly common stock dividend.
Book value per share declined $1.32.
For for -6.6% principally from economic losses on the investment portfolio of $48 million for $1.49 per common share.
Driven in part by mortgage spread widening and in part due to the lower rate environment during the quarter versus our hedge position.
In terms of specific performance TBA dollar roll.
Also on this continued to be important contributors to results for the quarter.
Adding an incremental 6 cents per common share to core net operating income, which was partially offset by lower earnings from the smaller pass through portfolio.
In addition, G&A expenses were lower by <unk> on a per share basis and preferred stock dividend.
The spec for EPS was lower by 4 cents per share both reflecting the benefit of our capital management activities year to date.
As Smriti will discuss later with the on <unk>.
Favorable conditions in the funding of TBA dollar roll market. We expect continued sequential core net operating income growth in the third quarter.
Average.
Interest, earning assets, including <unk> increased to $4.8 billion versus $4.3 billion as we deploy the capital raised over the first day and for the year at quarter end interest, earning assets, including TBA as were $5.4 billion versus $5.2 billion at the end of last quarter and leverage including TBA dollar rolls from 6.7 times.
On a course of 6.9 times last quarter.
The lower overall leverage quarter to quarter, primarily is due to the capital growth of the company and portfolio adjustments during the second quarter.
Adjusted net interest income was higher on an absolute dollar basis, given the growth in the investment portfolio during the quarter inclusive of T. B.
<unk> Securities, but was lower on a per share basis, however, reflecting the new shares issued in the first half of the year and the conservative leverage posture of the company the.
The increase in adjusted net interest income on an absolute dollar basis was due to the continued decline in repo borrowing cost and the increase in TBA dollar roll positions during the quarter.
As previously noted.
Adjusted net interest spread increased 8 basis points this quarter to 195 basis points, driven largely by the company's TBA position and a modest decline in repo borrowing cost the <unk>.
The as implied funding cost for its TBA dollar rolls of transactions was approximately 49 basis.
It's lower than its repurchase agreement financing rate during the second quarter of 2021, an increase of 10 basis points of the specialness relative to the prior quarter as a result, TBA dollar roll transactions contributed an 8 basis point increase to adjusted net interest spread during the quarter.
Regarding agency MBS.
Prepayment speeds they were essentially unchanged at 19, CPR for the quarter versus $18.6 CPR for quarter 1.
Overall total shareholders' capital grew approximately $25 million during the quarter.
This includes 68 million of new common equity raised through at the market offerings in the quarter.
Market conditions were favorable to issue equity and continue to unlock the operating leverage of the company of capital issuances added 7 cents per common share to book value for the quarter.
That concludes my remarks, and I will now turn the call over to Smriti.
Good morning, everyone and thank you Steve.
I want to start by building on Byron's comments by describing the principles that have been consistent throughout our portfolio management history here of dynamics.
The first is a sound macroeconomic process and framework to assess the environment.
The second is a flexible mindset.
To be able to pivot when the environment shifts and finally, the right amount of patience and decision making.
The environment, we've been in since January of 'twenty 'twenty is required of all 3 of these principles in real time.
Especially now as the markets are still seeking a direction and level.
Level. The most important principle for what we are in right now is patients while we continuously assess the environment because the passage of time is what is now needed for the data and the market direction to become clear.
Even so this remains a very favorable environment in which to generate long.
Long term returns.
As shown on slide 25, our repo financing costs declined 7 basis points over the quarter.
Financing in the TBA market has continued to be strong contributing 1% to 3% excess core Roe versus pools.
Since year end as Byron.
We have used bouts of volatility to invest capital and we did that late in the second quarter and have done so into the third.
As spreads tightened in late April we reduced our leverage by of Fulton.
And as returns are now in the 10% to 12% core ROE range, we have reinvested.
A portion of that capital growing the balance sheet from a low point of for in a half the land in the second quarter, the $5.6 billion, thus far in the third quarter.
We allocated out of tba's into specified pools as pay ups declined substantially in may.
And we added outright.
Marginal investments in Fannie 2 on a half of specified pools as well as Fannie to TBA is with wider spreads in June and July.
Our total economic return year to date is 2.4% with book value on June 30th and 18.75 relatively unchanged versus year end.
In the third quarter, thus far MBS spreads are wider and as the yield curve has flattened dramatically in July book value has fluctuated with yields in a range of flat to down about 5% versus quarter end.
To put the book value moving context about half of the book value decline in the second quarter.
Was due to MBS spread widening and the remaining half is attributable to our hedge position that is concentrated in the backend of the deal curve.
Post quarter end MBS spreads are modestly wider but the book value decline is directly attributable to our hedge exposure to the long into the yield curve.
We.
You have chosen to maintain a position with the portfolio structure of hedged with the long end of the yield curve, because we believe that the risk of a whipsaw in rates is substantial.
The catalyst for that whipsaw could be a turn in sentiment.
Realized fundamental data for an easing of the technical nature of the.
Recent move any of which can happen rapidly.
We expect the book value to recapture of much of the decline.
In these re steepening scenarios.
I will cover more on our thinking shortly when discussing the macroeconomic environment.
Leverage at the end of the quarters debt at $6.
Times, and we have the potential for 2 more turns from here.
At today's higher level of earning assets, which were added at wider spreads. We expect core earnings to continue to exceed the current level of the dividend.
We are on track for on 8% dividend yield on beginning book value for the year.
With the excess core earnings providing a cushion to capital.
Shifting now to recent market moves on macro opinion on outlook.
The global economy is still evolving for the health crisis, and corresponding economic situation from the pandemic and the recovery is proceeding and fits.
7 and starts.
It will take time for the economic picture to become clearer in.
In the absence of real data technical factors like short covering overseas demand and central bank activity have dominated recent market action.
This is leading many participants too.
Arrive at conclusions on long term fundamentals like inflation and growth for which the data has been difficult to parse out and even to predict but we expect that this will become clearer in the coming months Inc.
In such an environment.
Our discipline process and framework play a.
The key role in the management of our position.
We expect that front end rates will remain low close to zero through 2022, providing a solid base from which to generate returns.
The long end of the yield curve 10 year 30 year will move based on the evolving economic situation.
The feds.
The decision on tapering is of key event and our focus as is the fall reopening of schools as well as the debt ceiling.
In the short term, we expect choppy action in the markets to continue.
And our current thinking is that 10 year yields would trade in a range between 1 and 1 of the half per cent.
In the medium term.
There is room for 10 year yields to move to a higher range 1 on a half to 1 of 3 quarters per cent and this is as we transition globally to a more fully reopened economy, a higher percentage of vaccinated populations more effective and available medications to treat COVID-19.
Table of rising inflation.
Term of rising supply of global sovereign bonds, both from tapering as well as deficit spending and fiscal stimulus.
Once again, this picture will evolve and become clearer over the summer and into the fall.
We are very respectful of the near term scenario, resulting in yields remaining.
And at the lower end of the 1 to 1.5 per cent and the tenure rate as I mentioned earlier.
Agency MBS are of course very much impacted by these factors in the near term the fundamentals for agency MBS point to greater levels of refinancing.
Mortgage rates are below 3% originators are fully staffed.
And government policies favor of broader access to refinancing and modifications.
This leaves higher coupons vulnerable to increasing prepayments and lower coupon susceptible to supply.
In the near term.
The supply is balanced by powerful technicals.
Lower coupon MBS are still benefiting from strong demand from the fed and banks banks are investing in MBS because of the absence of loan demand.
And as MBS have widened money managers are finding value there relative to corporate.
Tapering is.
<unk> is also a key focus the of the MBS market. The recent spread widening we believe reflects some of this risk and spreads could widen further at the taper becomes more of a reality.
For dine ex the tighter spreads in April representing a chance to reduce leverage and wider MBS spreads from here.
We'll continue to represent an opportunity to add assets at attractive long term returns.
This is where the patient comes in and as we've shown we have managed our leverage and our capital actively.
Ultimately, though we believe the fed's balance sheet will create a powerful stock effect the limits.
But the widening dimmed.
Demand from money managers as mortgages become a high quality alternative to corporate bonds and lower net supply from potentially higher rates will also provide a buffer against much wider spreads.
By holding a flexible liquid high credit quality position even.
<unk> spreads widen we can manage both sides of our balance sheet to position for solid long term return generation.
Let me summarize.
As the markets are still seeking of direction and level of the most important principle for what we're in right now is patients while we continuously assess the environment.
As it will take time for the economic picture the become clearer.
Our macroeconomic view supports our current positioning and we remain flexible and open to adjusting it as we see the facts change.
While book value is lower due to spread widening and the current positioning of our hedges it is cushioned.
With our ability to continue to out on the dividend at current levels of the balance sheet.
The investment environment is favorable financing costs are fixed at low levels, providing us a strong foundation for returns in the TBA market continues to offer attractive returns.
We're entering.
<unk> the period, where we anticipate having more opportunities to invest capital at wider spreads.
We're well positioned for this we have relatively low starting leverage over $400 million on liquidity and dry powder of 2 turns of leverage to drive future earnings power and total economic return.
Current generation well in excess of our cost of capital.
I'll now turn it over to Byron.
Thanks for Murphy.
I want to leave you with 3 words opportunities.
And trust first we continue to be in an evolving global environment that will give us opportunity.
Truing up of bad debt capital at attractive long term returns.
The portfolio continues to be structured for steeper curve of wider spreads.
We continue to operate with lower leverage on higher levels of liquidity with the will allow us to take advantage of these opportunities as they develop second our decades of experience of the business leads us to be very patient.
1 of these the world on the capital markets continues to adjusted this evolving global environment. Since this new era in history began in January of 2020, we have maintained patients and managing our balance sheet effectively increasing our capital base and methodically investing money into the wider mortgage spreads and higher yields will be.
Continuing.
With this mindset.
The <unk> capital we offer you 2 products the gain access to above average dividend yield.
Common stock offers a great monthly dividend yield with a book value that will fluctuate as the market environment continues to evolve on the other hand of preferred stock all of us less price fluctuations with the lower dividend yield than the common.
Finally, we want you to continue to trust us with your money and the <unk> scaffold of our number 1 on purpose is to make lives better by being good stewards of individuals' savings over the past 14 years since I joined IMAX. We have earned your trust and we have managed our business with an ethical focus remain patient and looking.
The right opportunities to invest your savings at attractive long term returns we are consistent and we will remain patient as we let the global environment evolve and we will we will.
Continue to make wise decisions on behalf of our shareholders.
Please.
Looking for below the look at the long term for on Slide 13, I Love This chart on the.
<unk> continues to offer a great alternative for many larger financial institutions and with that.
Operator, we can open up the lines for.
The questions.
Thank you Sir as a reminder to ask the question.
Please stay for you will need the press star 1 on your telephone till they try a question press the pound or hash key please standby or we compile the Q&A roster.
Our first question is from Doug Harter from Credit Suisse. Your line is open.
Got it thanks.
Hum.
You mentioned that you would I guess the comfortable with up to 2 additional terms of leverage.
I guess, just can you help us think of barrel.
From what the pacing of adding of leverage could be.
Our current returns attractive.
<unk> of enough to want to to continue or I guess what are the what.
What are you looking for too.
To to look to continue to add to the portfolio like you kind of began to do on the last couple of months.
Right good.
Doug Thanks, Thanks for the question.
So yes, I think you know we we we've sort of brought the leverage back to to levels that we feel comfortable holding for the moment.
You know from where we sit right now we are still generating returns well in excess of.
Of the dividend and we feel like we can be more opportunistic over the coming quarters.
So to really take that leverage up I think we would need to see additional spread widening from here, which we anticipate.
Can happen as the market you know the it gets more clarity on the paper.
And the timing of that so in the next 2 quarters. You know, we expect to be able to to add to that you know we're not in any specific Russia at the moment.
Just given how strong the.
Current balance sheet in terms of returns of what it's throwing off.
And then kind of as you're adding assets.
Can you just talk about you know kind of what the what type of hedges you would be adding against that many changes the kind of the hedge.
The portfolio construction.
Yes, I think I think as we've started to look at.
Marginal hedges.
Our thought process is to use more of the yield curve at this point and then you know implied vol. On options have come down a significant amount in the second quarter. They pop back a little bit now, but options continue to remain.
On a very good strategy in.
In terms of.
Really protecting against.
Some of longer term loans. So I think maybe from here on out really protecting more of the yield curve. The front end of the yield curve in particular.
Then options constructed on that part of the curve as well.
Is how we're thinking about hedging going forward.
Great. Thank you.
And our next question, we have Eric Hagen from the <unk>. Your line is open.
Hey, thanks.
Thanks. Good morning, I think you guys mentioned some of the the technical factors that are underpinning the market of the potential for volatility I'm. Just curious how you think the dollar of specifically evolve in light of the potential fed policy on how strong you think demand will be.
If the fed is pulling back.
Hi, Eric Thank you for the question.
So this is this is we it it's a it's an interesting conversation to have because a year ago. You know win in June of last year. We were we were kind of getting the same questions about dollar rolls.
And house, how Specialness could last law, you know how long it could.
<unk>.
Expense et cetera, et cetera on 14 months later.
We're still seeing very.
Very very strong financing rates in the dollar on market and just to give you some some numbers on that.
In the first quarter I would say the average financing levels that.
The latter of level in the market.
In the negative 50 to 70 basis points.
You know that came down a little bit in the in the second quarter to say negative 50 basis points on.
These are still massively massively accretive levels here.
And as the as the year evolves we.
Or of that to soften.
And again with net net new supply into the market that will come down.
But again, we expect that to be.
Phil offering some level of advantage relative to the pools for some time of the technicals persist bank demand is.
Expect it would be a driver of that.
And bank demand is directly related to 2 things..1 is you can see the level of the RFP in the market in the marketplace right now over 800 billion, that's a big indicator of potential bank demand secondly, just the demand for C&I loans.
Going on that day, the economy is still coming out of this pandemic and.
When does the lack of C&I loan demand Bank center in Boston MBS on we think that picks up here into the into the into the third and fourth quarters. So that will provide additional technical support and then last but not least we've actually seen a really.
Interesting.
<unk> economic with with M. B S now offering.
Potentially compelling returns versus <unk>.
Investment grade corporates.
And at some point you know when the tapering happens that that is going to be another dynamic that will support mortgage spreads as money managers, you know get out of.
Sting dive riskier assets and enter into higher quality assets like mortgages. So those are all pretty strong near term technicals for for the role as well as MBS spreads.
Got it great. Thank you very much.
A follow up on the hedging is whether your appetite the hedge at the short end of the curve will be.
We're moving TVA is back on the balance sheet and hold on pools or is the plan to start layering in swaps regardless of the mix on the other side.
I think you know, we're very cautious on swaps for a couple of reasons..1 is just the transition out of LIBOR and obviously, there's a huge amount of noise right now on.
On on so for swaps et cetera.
So we think of it more in terms of you know using the front end like euro dollars or or or or futures.
So and its independent of whether the the assets are on balance sheet or off balance sheet.
So in general you know we are thinking.
Thinking about the entire curve.
And our hedges in the future will incorporate a bigger mix of our front end hedges as well as options.
Great. Thank you very much.
Yeah.
And for the next question.
We have Trevor Cranston from JMP Securities. Your line is open.
Hi, Thanks, good morning.
Yeah.
Follow up question on your.
The interviews of.
MBS spreads and risks of additional widening.
I guess looking at spreads.
The second quarter it.
It seems like higher coupons generally performed the worst from lower coupons.
When you think about risks within the coupon stack and risks of spreads maybe widening further as <unk>.
K per evolves.
Do you view the risk with spread widening is more concentrated in.
In lower coupons or.
How are you guys thinking about that with regards to the coupon check thanks.
Hi, Trevor.
Thank you for the question.
I think the answer is yes to all of that because you really got 2 dynamics the upper part of the coupon stack Fannie threes 3.
Through the lines and for us and anything above that.
The the spread winding is more driven by fundamentals, which is really that refinancing option is getting more efficient not just because.
Mortgage rates are lower but because of the debt yeah for HSA and GSE and government policy.
And of has now starting to open that box up for more people to refinance right. So so that the upper part of the coupon stack is going to be challenged simply from the fundamentals being worse until the.
That will have a difficult time.
Now in terms of spreads the lower.
The part of the coupon stack is really going to be more technical.
Cuz whatever gets refinanced from the upper part of the coupon stack is going to show up of supply in the lower part of the coupon stack and then you also combine that with tapering.
From the fed which has been buying the lower coupons. So you know we think.
About that as sort of an even even mix and.
And the the only reason I'm, saying even is because the technical demand still will remain in the lower part of the coupon stack, giving that a bit of support relative to the higher the higher coupons. So in general you know I think everything is gonna be wider the.
The reasons for widening will be different there's a lot of people out there wishing or hoping for born out in the higher coupons, you know people that may or may not come on.
On <unk>.
And if it does you might see the higher coupons perform better relative to the lower coupons, but in general you know you should see these returns.
Turns start to get better.
Over over the next couple of quarters.
Okay, that's very helpful.
And then a question on the hedging and repositioning.
I know you guys mentioned the possibility of the.
Whipsaw on rates scenario.
And why are you continuing to use hedges.
And is that the 10 year part of the curve.
Could you maybe.
On some further discussion around the kind of why you think the platform.
Likely the grades continued to drop and kind of what the big risks or the.
Mike.
Cause the tenure.
To continue pushing lower ex.
Yeah, I mean, we don't think it's less likely that the the tenure of rate won't come down I mean, we were actually very respectful of.
On a scenario, where the tenure rates could come down I think I think our view coming into this quarter.
Or was that we'd have a range bound market and that you could see surprises in both directions and literally we have the range bond market for the you know for some part of the second quarter and then we got this the surprise.
In this direction right.
So we are prepared for that what what isn't clear so.
Again, it's like the.
The markets are trying to find the level.
And they're trying to find the level in the absence of data that is yet to come which it needs. The passage of time for that data to become clear. So as we've done that which we felt like most of this move coming down here has been technical.
On nature, and that's what's giving us some confidence of hold hold that position and and prepare for a whipsaw backup in rates. There's a lot of market psychology that has driven rates down here as well.
That can quickly change you know with the advent of of vaccine or.
Covid pill or whatever it is right. So we're we're just cognizant of of that potential whipsaw of risk in the market.
And at the same time, you know we were thinking through the scenarios that might lead us to lower lower rates, we haven't seen the impetus for us to reposition the hedges to make that decision.
Decision, yet, but we are remaining open to do that right.
So I don't want to give the impression that.
That we believe it's less likely.
Even if it is less likely or on it's not about likelihood of likelihood it's about how persistent that scenario could be relative to that whipsaw of risk.
And right now it looks like that whipsaw of risk in our in our assessment.
Is a little bit of greater than how persistent the downgrade scenario you could really be from.
From here I, let Byron chime in as well because I know that comes on.
On them.
A couple of high level of bulk of that first off since January of 2020, there's been enormous.
Thanks for that.
That'd be 1 defining factor, while the current environment in which we're operating.
When you're managing the leverage portfolio like of mortgage REIT.
And 1 thing you don't want to do is get caught try in the trade every flip in turn in the market it can be extreme.
Remove costly to do that so we have had a philosophy from the first day ever got here actually for you first day I started funds the financial in 2000 of for understanding of the cycle of environment and whats your operating structure of your portfolio of accordingly and be patient.
So and I can give you of many.
<unk>.
The <unk>.
For the past where in fact, we've done that and.
The Delaney about sunset financial when doing the Greenspan's conundrum that went on for probably of the year or so we were very patient and that of Brian the ready to go on with the bring examples of that.
At <unk> capital.
Capital.
Here's another interesting fact the.
10 year yield is below 1%.
Has to come with some really ugly.
<unk>.
The factors.
Think about it below 1%.
Really of different.
For the World. So we're holding our position in the bidding we structured our portfolio in this manner.
Mercury when starting back when the big ratio of 50 to 65 basis points over the tenure.
We manage our book of business Accordingly, part of the factors. We know that has led to the violent move.
Income from 175 has been the amount of shorts in the market and short covering.
Is there both with the we're not we don't take the major positions on the market in the major calls we adjust our portfolio on a risk position.
For the long term.
And based on our very disciplined assessment.
Moved out of the factors.
Better really of play at any point in time in any cycle.
Got you. Okay. That's helpful. I appreciate all comments. Thank you. Thank.
Thanks Catherine.
Okay.
Our next question from Bose George from K B W.
<unk> is open.
Sure.
Sure.
Once again those charge for your line is now open.
Hey, guys. Good morning, sorry menu design.
Just wanted to start with the question on spreads again.
Guys.
So a lot of.
The potential for some more widening just curious bunch of thoughts on how much of the spread widening has already happened sort of ahead of of tapering.
Yeah, Hi Bose.
Thank you for the question.
I would say so.
Bob.
In our models 15.
Talk to 10.20 basis points of wider versus the tights.
I would say anywhere between.
We're expecting another 10 to 15 basis points potentially anything above that would just be a.
Massive buying opportunity.
So I think I think really.
Some of this tapering risk has been price then you're also seeing some of the risks that's being price and it's just lower rates.
And higher supply here, so it's hard to tell which is which but.
You could you could continue to see.
Widening here somewhere in and 10 to 15.
Additional OIS from here on I wouldn't be surprised to see the market.
React poorly to supply and pushed things even wider but that's about what we're thinking from here on out.
Okay, Great. That's helpful. Thanks, and then actually I just wanted to go back to the Doug's question earlier on leverage but did you say that leverage.
<unk> is still around the current.
And level.
Just given the strong returns for your business.
I'll, probably take it up in the future, but at the moment, it's still around current levels of just wanted to clear yeah.
Yes, I think right now we're maintaining the size.
Our earning asset size is about $5.
And what kind of keep that size.
And as you know as we see new opportunities develop again, we want to see more widening from here before adding adding to the balance sheet, we're very comfortable with this level of the balance sheet supporting.
And not only of the dividend but.
It also cushioning and access the earnings cushioning any kind of book value.
You know fluctuations between now and year end. So we like where we are today. It gives us a lot of flexibility to either take it down if we feel like we need to or or or add to it.
As we see spreads.
They come more attractive.
Okay, great. Thanks, and then just 1 more clarification on the book value you said it fluctuated between zero and 5 but right now is down around 5%.
It's been between zero on 5% and it really it really moves with the level of yields.
So at the lower levels of yields it's at the lower end of that range at the highest.
Higher levels of yields is at the upper end of that range from.
Great. Thanks.
Our next question is from Christopher Nolan from Ladenburg Thalmann. Your line is open.
Hey, guys from Steve for the $58.3 million from.
From the offerings that the net or growth.
That's net Chris.
Great and then.
I guess.
All of the moving pieces, where youre, having strong core earnings, but the and this quarter of at least the.
The loss of GAAP loss, what's the prospect of.
Possible dividend supplement.
So right now Chris our dividend policy, we feel very very comfortable with it and I think I may have spoken in the past year.
We're pretty adamant.
Of our dividend policy for this macro economic environment.
There's a few quarters ago.
You talked about surprises of highly probable.
We talked about being a very evolving environment.
And billing very comfortable holding the dividend, where we are today.
I'm in about as we manage through this environment.
We continue to generate earnings it gives us a lot of flexibility.
Christians in book value other options in other situations.
But kind.
And the global macro environment like this diet ex capital has always prioritized risk management.
On the dividend policy.
As part of that process.
So we're looking to generate an attractive total economic return.
Which includes the dividend.
But when you think about the are you got to think about the risk management.
That's the overall return for your shareholders.
<unk> continues to be attractive over time.
So when we talk about also of 1% tenure 125, 150% 10 year, our dividend level of substantially higher.
And those levels trying to achieve.
But the the 10.11 12.13.
<unk> 5 per cent dividend yields in the world where yields have consistently fallen.
That's not the type of risk that we'd like to take we try to take the higher returns, where we can generate them.
But our long term goal remains the same.
8% to 10% over the long term.
Holding book value of steady over the long term or in other way to say that.
Slide 10 per cent T on over the long term in an environment of 1% 10 year yields.
Okay that makes sense for the answer your question on that.
Right.
And I guess the final question is.
The.
Earning asset volumes of $5.6 billion in July.
Of that as you heard that correctly I presume that includes T. P F.
Does the crash.
I mean back of the envelope. It seems like your leverage ratio of gone up I know you. When you were talking of George Bose.
Instead of it was flat.
Yeah, no it depends on on the book value obviously.
So it's kind of it's kind of fluctuate with that.
It's kind of fluctuate with that when we think about just the earnings power of the balance sheet. The earnings power of the balance sheet sits at $5.6 billion, so and the leverage.
All else being equal if at book value is down obviously, it will tick tick up right.
Right. Okay. That's it from me guys. Thank you.
Once again, if either 1 of them would like to ask a question. Please press star 1 on your telephone.
Our next question as from the changed at all from Mr. Mitchell of.
The partners your line is open.
Thank you.
Good morning folks.
Good morning, Jim.
Thank you.
And you've talked about your rate expectations, an implicit yield curve expectations the kind of.
On the derivatives debt on all of that.
Kind.
Got it and we haven't heard about it on and off of the previous calls from other people on the space as well as the non call ones so to speak of.
A lot of people seem to be betting heavily on burn out from what I've heard from you for you folks burnout is doesn't seem to be as much of an expectation.
As I am hearing from other people, but I don't hear you with more Io.
Certain kinds of season pools that are more burnt on I'd love you guys to have a couple of level conversation about what you think in terms of burn out and where we in the marketplace, maybe making false expectations by expecting it.
Okay. So.
Couple of Lau from Big picture too for a little picture.
You know burn out is is it something.
Of that we have been very cautious about.
Adding to our portfolio.
Buying something because we believe.
There is burn out the number 1 reason for that has been just the fundamental shift in the structure of the way the mortgage market operates.
You now have an environment, which is massively dominated by non bank originators and non bank originators, many of whom went public.
Tier with the equity market.
No not really.
You know from facts on other things like that so now the these non bank originators have a public market mandate.
To produce earnings you know on a quarterly basis and show growth on a quarterly basis.
Of that creates an environment.
Click the wear.
You now have a group of companies that is heavily incentivized to refinance every mortgage that's out there within you know within the rules of the games that are being laid out. So that's that's thing number 1 so that that says to US you know.
Any any mortgage that's out there.
Can be re financeable look out because it's gonna be it's gonna be on the target.
And so that's the thing number 1 of the second thing we've noticed and we track. This very closely is the levels of staffing at these at these organizations. There's reports that are available and tell you whether they are fully staffed on not fully staff. These people.
That organization for fully staffed and they're ready to go and just the last move down on rates. It's just been on it's going to be an earnings Bonanza for those companies right. So so then the third thing we look at is.
Is the GSE policy on government policy in general that is.
Also pointing in the direction of.
Of.
On broadening the envelope of.
Borrowers, who can who can refinance at this point you know cash out refinancing is more prevalent you've got home prices that have gone up.
That's going to help people that were originally burnt out or didn't have that incentive.
The refinance.
And then you have just the actual box the credit box.
You know the the 50 basis point adverse market refinancing for you that got waived so all of these things are pointing in the direction of of reducing the protection that you get from.
From burn out so that's just a very fundamental thing to begin with.
The second thing. So then that's just the big picture.
From where we sit today.
Do we think there's individual of little pockets of things that you can purchase that might have borne out sure. You know you find some 120 <unk> single, it's not <unk>.
You can scale up as the strategy.
And and make a core part of how you would how youre running your portfolio.
So you know I think if you're hearing that people have some ways of adding to it as of 10% of your assets or whatever it is that's not improbable, but you know it is.
Something is it is it is something we don't expect that burn out is a core part of an investment strategy on our side simply because you know the facts and the market are really pointing very much against that being.
On an investment strategy that.
That is going to survive.
In this type of environment.
Thank you very much from the answer.
Youre welcome.
I am showing no further questions at this time I will now turn the call back over to Mr. Byron Boston. Thank you.
Thank you operator, and thank you all for joining us today stay calm.
They should be prepared and we look forward to chatting with you next quarter. Thank you.
Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you for your participation.
For patients and have a wonderful day you may all disconnect.