Q4 2021 Orchid Island Capital Inc Earnings Call
[music].
Good morning, and welcome to the fourth quarter 2021 earnings conference call for Orchid Island capital.
This call is being recorded today February 25 2022.
At this time the company would like to remind our listeners that statements made during today's 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 1095.
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 all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one once again 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 sorry for the delayed start though we did have some technical difficulties, we have those cleared up so I apologize.
Going here.
Hopefully everybody had a chance to download the deck as usual.
That has not changed materially from quarter to quarter. So hopefully.
But on our call before you're familiar with being kind of agenda in the format so kicking off.
Slide three just kind of outline of what we're going to discuss as usual.
The financial highlights for the quarter ended December 31 2021.
We spent some time talking about market developments, which impacted the.
The results for the quarter and kind of talk about well what looks things.
Looks like going forward will go through our financial results in greater detail and then do the same with respect to portfolio characteristics, our credit counterparties and hedge positions.
This quarter given the magnitude of the market developments since Q and that will basically expand the discussion on each of those points to kind of bring you up to date for the current quarter.
Turning to slide four the.
The results for the quarter ended December 31, we got a okay recorded a net loss per share of <unk> 27.
This is comprised of net earnings per share of <unk> 22.
Excluding realized and unrealized gains or losses on our RMB S and derivative instruments, including net interest expense on our interest rate swaps.
Loss of 49 per share from net realized and unrealized losses, and R&D absent driven instruments, including again net interest expense on our interest rate swaps.
Book value per share was $4 34 at December 31 versus $4 77 at September 30.
Approximately 9% decline in Q4 2021, the company declared and subsequently paid $19.05 per share in dividends and since our initial public offering the company has declared 12 $545 in dividends per share.
Including the dividend declared in January and February of 2022.
The total.
Economic loss of 24.
Sure for the quarter equates to $4 nine 3% that's not annualized.
Turning to slide five and actually six given that theres quite a bit of information to cover on this call.
I will just leave these leaders to peruse at your leisure.
Going to spend any time talking about them that are actually somewhat backward looking some distant stock price performance through the end of the year.
With respect to book value since we don't have all of our peers book value numbers for Q4. This is only through the third quarter of last year. So I'll leave you to it.
Look at those at your leisure now we can talk about market developments and first of all I just want to.
Pause briefly just to kind of give you the high level developments during the quarter.
What happened both in Q4, and even to a larger extent in Q1 and three basic things first of all inflation well.
As accelerated materially if you go back to the second quarter of 2021.
Whether it's CPI, our PCE EBIT.
He didn't measure of inflation has been rising rapidly.
And characterized this acceleration as transitory they have since abandoned that characterization and change their outlook materially as well.
Inflation seem to kind of level off if you will with five or so percent annual increases year over year during the third quarter of it in the fourth quarter and into 2022, it's accelerated.
Depending on your measure, whether it's CPI headline, which is well over 7% or <unk>, which is a little under six on a headline basis. These numbers are clearly well above the fed's target range on the second development, which has been job growth and wage growth again, very very strong and this is all in spite of Covid and omnicom.
And then thirdly, the byproduct of those tools development by the fed which is pivoted meaningfully.
The dual mandate as we all know which is price stability and full employment, we clearly do not have price stability and if we're not at full employment, we're very close on the verge of being so starting really in November of last year and again in December and January of this year. The fed has meaningfully pivoted and their outlook for monetary policy is more mature.
Italy.
So that's basically what's happened all turning to slide eight.
As we typically show the yield curve both the.
Nominal treasuries and swaps just want to make three points.
First of all if you look at the left hand side or the right you basically see that in the fourth quarter, we had a flattening of the curve whereby shorter term rates rise in longer term rates.
Flattening that occurred in Q4 was just a repeat of what happened in Q3 and frankly in Q2. So throughout the last three quarters of 2021. The curve has flattened that's 0.1 0.2, the flattening in the magnitude of the flattening in the magnitude of the movement in rates year to date in 2022 exceeds all.
The movement, we saw over the last three quarters of 2021, and then the final point.
This is very true and with respect to Q4 is the longer in rates. The tenure did not move in pace of nominal treasuries and only move slightly with respect to swaps even year to date 2022.
If you look at the yield curve.
We've seen the 10 year rise by about 50 basis points.
Five years move by over 85.
That number for Wednesday, It was 86 basis points. So we've seen a meaningful flattening of the curve and this is all in response to expectations on the part of the market offer meaningful fed interest rate hikes.
Slide nine again, you see both the 10 year Treasury 10 year swap on a quarter.
Q4, only and then the last two years as you can see rates were fairly stable in Q4. Since then 10 year rates have moved higher.
Basically into a new range, but again it seems to have stabilized somewhere in the two.
The 2% range and ignite a significant let's talk about that a little more later in the call.
Slide 10, this is kind of our proxy for our earnings power of this just shows you the slope of the curve between the five year Treasury and the 30 year bond.
And you can see this goes back to our inception.
Most recently starting last year, we've seen a pronounced flattening and this is a trend that is not our friend this foretells earnings pressure so.
We got to about 40 basis points at the end.
Most recently this week was a little under 62 at the end of the year.
And frankly, if you look in the forward curve, even even out six months.
Basically flat or almost zero.
Now turning to the performance of the mortgage market.
Couple of things, we need to stress here and this is really relevant for orchid.
As you can see on the top left hand side, we're showing the performance of all of these 530 year fixed rate coupons and we normalize this data back to the beginning of the quarter. So we can show in our minds, just a clearer picture of relative performance.
With very notable remember we had the fed announced tapering in November and we have them accelerate tapering in December and the market has been expecting this but the fed is clearly responding to these economic developments and theyre going to rapidly slow their asset purchases you might have thought that the production coupons.
Coupons that were most purchased by the fed would have suffered especially late in Q4 and if you look at this line closely you can see that Fannie two fives.
The worst performing coupon that feeding tubes did better than Fannie fours. So our mindset is quite counterintuitive.
<unk> fairly poorly almost as bad as two and a half and the reason lies in what you see in the bottom left which is the growth.
Even though the fed has announced the tapering of their asset purchases.
Those have been persistently high even into 2022 and what's notable here at least in the fourth quarter and more so in the current quarter as you can see 202 and a half rollover remained strong the three role what's really didn't make much sense to us and the trial was one a premium mortgage the underlying cheapest to deliver.
<unk> paying very fast and the fed was not buying them that.
<unk> has been strong, but even more so the hedge.
A head scratcher so to speak is the three and a half full in the over the course of the fourth quarter improved and has continued to improve even more so in the first quarter of 2022.
Unfortunately, if you're an.
In one respect securities as we are with developments in the rural market tends to be inversely related to the pay ups for spectrum. If you look at the top right you can see that spec pay ups have been soft in the end of 2021 and on the bottom right. This is a very useful picture. So what's this basically shows is the pay up for what we would call a lower qual.
City collateral higher loan balance still outperforms cheapest to deliver but it's most sensitive to developments in the roll market. So the roll market is the Red line as you can see towards the end of the year. The role is trading. This is the Fannie three coupon around five ticks and the pay up.
On the left hand side was a little over 40.
So this.
Divergence against in favor of roles and against specs lives. Unfortunately, but the way we're positioned.
Year to date 2022 that Red line, which is the role for Fannie Threes is now like eight and a half ticks and the payout for $2 25, K threes as well under 26, so that divergence has increased materially.
Turning to slide 12. This is just a picture on ball two points I'll make here one really since the end of the first quarter vol traded in a fairly well defined range for most of 2021 ended the year around 80 basis or any normal balls. This is three months by 10 year.
Since year end and has increased certainly.
With higher than where it was but not meaningfully so it's really the only around 90.
Sitting here today in this week.
Slide 13.
A couple of charts, we like to use every quarter on the left hand side. These are just LIBOR OIS as for the 30 year coupon stack and as you can see the lowest two lines. There are 30 year chose in two and a half. So those have been the coupons most in favor by the fed and they've been very very tight and we're consistently tight even really through the end of the year, even though that tapering was.
As announced.
With respect to higher coupons, they were fairly stable as well, though at higher levels.
Not somewhat.
Beneficial for US was if you look on the right hand side, you can see that pay ups for various loan balanced threes were pretty stable even into the fourth quarter.
That has changed all of these numbers that you see on the right hand side are down between 30 and 40 tics. Obviously these are three so, whereas a 3% coupon traded with a $103 price at the end of the year now they're more or less the current coupons. So those have dropped significantly since year end.
Just a picture on.
The various components of the aggregate indices fixed rate indices in.
Equities as well.
Theme is pretty much the same for both Q4 and the year higher risk assets did better so the S&P emerging market high yield domestic high yield did well <unk> did very well with the increasing inflation not surprising and mortgages. Unfortunately were laggards and with respect to Q4. If you were to look at the <unk>.
One of the appendices, we have on page 33, we give you the results for just December and Unfortunately agency mortgages. We are on the bottom of the stack so rough quarter for mortgages.
Turning to kind of the refinancing outlook. These three charts, we like to use quite frequently again top left we show you the refi index and it's been trending down in the latter half of 2021.
Ended the year as you can see based on this somewhere around 2500 since year end that number. The most recent read this weeks about six 1666 or so so it's dropped even more the red line here as the mortgage rate well we ended the year under three four.
Today that number is appreciably higher than the <unk>.
The Freddie Mac survey rate about three nine in the case of <unk>.
The bank rate, it's about little over four.
So that's been a meaningful change.
It does appear that you might see some burnout and this slide just because of the way the refi index has been dropping but really that's not what's going on if you look at the bottom you can see this shaded area. This just represents the percentage of the mortgage universe. That's re financeable by at least 50 basis points ended the year North of 30 was around 40% at the end of the third quarter.
<unk> today, it's under 15%. So really what's happened is just that everybody that could refi pretty much has in most of the markets and lower coupons for the refi index is quite low and the percentage of the market. That's refinanced though is also very low.
Turning to our results of operations on Slide 17, just wanted to ask a couple of points here.
On the left hand side, we tend to just like we always do we disaggregate our earnings per share by <unk>.
Our proxy for core although it's not the same number that we get from our peers and then the realized and unrealized gains and losses and you can see rather large number there for unrealized gains and losses.
<unk> talked about this more in a few moments, but I want to point out on this page, but most of the losses that were incurred were unrealized securities we still own and so even though they took mark to market losses are realized gains were actually quite small so the portfolio that existed at the beginning of the quarter for the most part was still there at the end of it.
The quarter, and then with respect to the right side returns by sector, which as you all know.
Aggregate, our capital into either a passenger strategy, our structured securities, which are predominantly iOS until a lesser extent inverse iOS.
<unk> did quite poorly and iOS did okay, but given the fact that longer rates, especially in Q4 really didn't move.
<unk> tend to be sensitive to both longer rates mortgage rates and prepayment expectations and while they did okay. They weren't enough to overcome what we saw with respect to pass throughs.
Slide 18, we just kind of give you a picture of our NIM going back.
This juncture if you look at the Green line, that's kind of where we've been pretty.
Pretty stable pattern slight uptrend actually into the end of the year.
But the Blue line the yields on our assets, even though they were up slightly this quarter.
Based on where we sit today with the long end being fairly stable. We're just not so sure how much that's going to increase because we're pretty sure that red line is and so at this juncture from an earnings perspective.
All eyes are on the fed meeting in March it's going to be critical I think.
Earlier in this quarter, there was a high probability priced in by the market for a 50 basis point hike.
That's less so now, but I think that will be important for setting the trend of course also the chairman will speak at a press conference and have a lot more to say about their anticipated path and we'll get the dot plot. So march will be very critical for kind of setting expectations for the balance of the year for funding rates, but also we have to be watchful and mindful of.
Long term rates, which at the end of the day, that's what controls on NIM. So at this point there is quite a bit of uncertainty in terms of the outlook for monetary policy.
Will diminish over the course of the year Slide 19 is just basically more of the same which we just looked at.
Slide 20 is just kind of our dividend versus our peers. This is historical information I don't need to dwell on that now.
Now turning to slide 21, there is not much written on this page, but this is where I.
Basically take a chance to kind of pause and spend quite a few moments talking about our positioning.
The impact of our positioning on our results both for Q4, and Q1 and kind of our outlook going forward.
After that then will continue through the slide deck and I can give you a more deep granular detail on our portfolio of positioning our activity in Q4.
<unk> at the end of the year activity this year and kind of our outlook going forward so with that.
I want to state that I think that our outlook for the right markets and the fed was pretty much correct coming into the end of the year.
We are positioning.
Really since the end of Q1 has been what we would consider defensive in nature, we expected higher rates.
Not quite the way it played out in terms of the flattening of the curve.
But we did expect higher rates. So we did expect deferred to taper.
In response, we avoided production coupons in anticipation of that paper and we expected real softness and we overweighted higher coupon specs that was the way we can generate our income without exposing ourselves to the fed taper, we did increase our capital allocation to iOS and we kept our leverage ratio on the lower end of our.
Our typical range, however, in Q4 and especially in Q in 2022 spec performance has been poor.
Even with the taper and the acceleration of the taper announced in December and January Rolls have remained quite strong.
We've also seen an increase in rates. We also happen to have the seasonal we're at the point in the year wind speeds tend to be slower.
And fed buying even though it's diminished with production lower until at least the last few weeks fed purchases are still above production. So all of that.
Has combined to keep real strong as we've said before and I'll say it again rolled strength impacts pay ups for specs some of the other nuances, which are not as high profile, but still matter is that the dealer community, which are typically large players in the spec market.
Position them either to sell to customers or more often proposition him for a few months collect some very attractive carry and sell them into the market.
And they almost exclusively hedge those positions through the TBA market and with the roles as high as they are in effect, they're hedging costs are quite high and so they've been much much less of a participant in the market. So again.
It's been a negative for specs and then frankly, what's going on in the market and the extent of uncertainty that surrounds the mortgage market with tapering.
Balance sheet runoff and potential <unk> on the horizon, we're very much in a risk off market. So mortgages generally have done quite poorly.
So where does that leave us and how do we look at the world from this point forward.
And the answer from our perspective is we still prefer the specified pool market over the TBA market and I'm going to explain you why we view that way.
A few points to make one.
That the long end of the curve has remained fairly stable tells us that the market expects the fed to be successful in containing inflation. So we expect long end rates to probably remain pretty stable for the balance of the year.
Secondly, mortgages have widened a lot, especially in this year.
One index that we look at is the spread of a current coupon mortgage to the 10 year that was trading in the low to mid fifties last summer.
Even as late as January of this year was the only increased to 78 or 79 basis points and as of yesterday and the day before it was at 100 or a little higher so mortgages have widened quite a bit.
They may widen more and there's no question that theres still a lot going on in the market, that's slightly negative and we could see some widening in the short term long term, though I think the 100 over the curve is cheap and I think that mortgages will by the end of the year or next will come back in trade in their more historical range, which.
Kind of a low <unk> to mid <unk> spread so for that reason long term, we like mortgages short term, it's going to be challenged and then if you think about it in terms of where we sit in the market.
We're at a point of what I would call maximum uncertainty.
We have very high degree of <unk>.
Range of potential outcomes with respect to the fed over the course of the year.
How fast is the federal run their balance sheet off over what timeframe, how much they can allow us to strength.
Will they do quantitative tightening and then we have what happened this week with respect to the Ukraine. So we're at a point of very high uncertainty in the market, especially the mortgage market and when that's the case the market as it always does prices in a very heightened risk premium and I think that's reflected in the spread at which mortgages trade and in a sense you could say with respect.
Back to mortgages were kind of in that an absolute bottom in the sense that we have all of this uncertainty and really no sponsorship the fed buys but they are diminishing their purchases rapidly banks have not been buyers nor money manager. So really you have maximum uncertainty or risk premium price into the mortgage market with no sponsorship.
But we think this is going to abate and that's important we think that over time over the course of this year as the data comes in and the fed takes actions that overtime.
The range of outcomes for the fed will narrow and the market will focus in with higher degrees of comfort on what they view the terminal rate would be and at that point, we think the risk premium will be able to come off and we also think that roles will be hard pressed to maintain these levels went up the fed sponsorship and as rules come off.
That's a positive for specs.
And there are other factors that lead us to want to continue to on specs on the horizon kind of secondary factors, but one for instance is during the fourth quarter. This year. The indices will include spec so to the extent of our benchmark money managers out there.
They will be buyers of specs.
We will softness abate the dealer community can be re engaged in starts on them and then finally, just the fact that the conforming loan limit increase so much this year the convexity of the cheapest to deliver collateral TBA collateral was quite poor another reason to own spec, so where does that leave us well and you know it's been a rough quarter we've incurred some.
Mark to market losses, as you probably.
Probably can infer based on what Ive said, but we are not inclined to sell.
We have no compelling reason to lock in losses.
The carry on these assets is very excellent.
We have had to reduce our balance sheet. Some we will continue to remain prudent levels of leverage but we are very good at managing our liquidity and we've been able to do that throughout this period.
And we've been able to minimize the realized losses that we've incurred both in Q4 and in Q1 to date. So we basically have been able to retain a big.
A big chunk of this portfolio and we think one that it can provide excellent carry over the balance of the year and two longer term knee performance outlook is very favorable so with that.
I'm going to move through the balance of the slide deck.
Won't spend as much time on some of these slides.
Let's first slide into 'twenty, two and you can see that with respect to our Io book. It has moved fairly sizable percentage terms roughly from 20% to 30.
Some of that is purchases of iOS otherwise, it's just market just the fact that I also went up in price and passengers down.
Year to date that percentage is even higher towards.
Pat.
And for the same reason.
We show our activity for the quarter on the right hand side I'm going to dwell on that if this moment.
Let's just turn to slide 24, and I can talk about the portfolio a little more detail if.
If you look at the snapshot of the portfolio at December 31, lots and very similar to the way. It was at the end of the third quarter is just bigger we are raising a lot of capital last year and our total mortgage assets increased by about 16% over the quarter. However.
Composition of breakdown was very stable in fact, even wala only changed by one month.
And the hedge positions I'll talk about in a moment here since year end as I mentioned, we have half the market has been very very bad.
Reduced the portfolio by about 20%.
The way that we did that is a combination of change in two and a half some threes rush.
Roughly even a little more under our selling to in house versus threes.
We've reported realized losses quarter to date of about $35 million.
If you look at this just one final point just our interest rate shocks. We granted this was as of the end of the year and the profile is relatively flat.
<unk>.
That's typically what we strive for that 31 negative $1 million number even though thats.
Model based that.
That represents a fairly low percentage of both assets and equities.
Yes.
Just quickly going through the balance of the slide slide 25.
The refi index as I mentioned is much lower.
Well under 2000 are spec allocations, probably up slightly since year end.
Been declining through the second half of last year. Most of last year are up this year, just because of the relative allocation of sales more towards lower quality specs.
With respect to our speeds our portfolio continues to pay very very slow or pass throughs prepaid at nine CPR in the fourth quarter structured we're under 25%. So far in 2022 January was even lower than the 9% was a little higher in February but Q1 is basically on track to match Q4, it might be slight.
Lower.
Slide 27, just a couple of points here. So it's Orange line is the 10 year Treasury and I think what's notable here. We ended the year about 151 basis points from where we sit today. It's about 200, that's still well below levels observed in 14 to 17 and 18 and even early 19.
Yet refinancing activity is lower and neuro region is statistically basically got everybody into a lower coupon and theres very little of the index.
The mortgage universe, it's re financeable so in terms of our speeds, what we could observe over the year.
So sure if we can get to the low levels. We saw back in 13, and 14, but we would expect them to below be below that dotted line for this year.
Slide 28, just talks about our leverage.
We're targeting somewhere.
Seven five to eight.
That's where we are today.
It looked like we took a dip at the end of the second quarter. That's really misleading we were raising capital back then we raised a slug right before quarter end. So early in Q3 that number was back up around eight so it will be down slightly from there kind of going forward.
And then finally with respect to our hedges all kind of.
Talk about this two perspectives one what we did in Q4 than we've done in Q1, so starting on the top left with respect to our futures.
The future position grew quite a bit in Q4 more so on the five year point of the curve as I mentioned, we've seen a tremendous amount of flattening. When I said, we were positioned defensively coming into Q4 that was more of a bias towards the long end.
In terms of hedges that we've shifted that.
Added to the Fives and also ultras and then with respect to the TBA as well.
We did add some <unk> as of the end of the year that was zero at the end of Q3, and then that actually was basically gone now.
Respect to our swaps.
As you can see over the course of the quarter there was really nothing.
Nothing is done at all since the end of the quarter, though.
Move those some of the three to five year bucket. Those were just order five four and five year swaps that were rolling down the curve.
We extended those out to the seven year pointed occurred and then with respect to our swaption.
Not material changes, we did have a contingent occurred Florida was unwound, just because we've kind of gotten out of that trade that we could add.
We have put on one trade since year end to it so it's not really relevant for this discussion we can talk about that at the end of the quarter.
That's about it those are the extent of our prepared remarks and with that operator, we can turn the call over to questions and in field any questions anybody might have.
At this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster well take our first question from Jason Jason Stewart with Jones trading.
Your line is open.
Great. Thanks. Good morning, Thanks for taking the question how are you.
Wanted to start with just two quick things one if I missed year to date book value. If you could give me that and then two maybe a quick update on how youre thinking about share repurchase activity.
And in light of where the stock is relative to book yet.
Yes.
I did not say, it's down close to 20% owing to the fact, especially in February with the move in TBA and specs.
<unk>.
With respect to share activity, we have not been able to do that while our blackout period also given the.
The magnitude of developments in the market during the quarter. We've shown you would feel comfortable doing anything until that news was fully in the market. So now that it is.
We are in a position to continue to use our share repurchase plan. We did increase the size materially in December up to 10% of our outstanding.
And to the extent the stock is trading below book, we have every intention to use them.
Gotcha Okay.
And then going to thinking about the dividend based on our current book I mean that sort of has the current five and absent run rate is or is it fairly high ROE were implied ROE payout, how do you sort of put that with the current economics.
Do you feel like you get credit for it.
Thoughts on leaving at five and a half cents.
I would say that the outlook is not favorable for the dividend.
We really want to see what happens in March.
That's a pretty pivotal pivotal month.
Decision as I said.
Even two weeks ago, the market was pricing in a pretty high probability of 50, that's come off, especially with the developments in the Ukraine, but we really want to see what they do and what they say what the dot plot looks like.
And it's quite possible there may be an adjustment, but we just want to make sure we kind of have a better feel for what we're looking at before we do so but obviously.
I mentioned on the call that the forward curve out even six months is inverted so.
This is not a favorable environment for Levered bond investors are levered investors of any kind. So I hope that you can extract from that what you will.
Right got it Okay last one and then I'll jump out.
Take a bigger picture view of pay ups and sort of CPR is moving to a natural rate of turnover.
At some point Theres little risk left in owning.
Specified pools, how much risk do you think is left in the portfolio in terms of pay a premium or.
Or do you feel like we're already at.
At that point, where it's it's an even economic trade.
And there's only upside.
Yes, I think we're close I don't know if we're there.
I don't know if you can make much out of that happened late yesterday and today were mortgages have rebounded but.
It seems like near term, we've gone through a lot of widening and specs are really suffered with the roles, but we own three predominantly as you know in the third quarter fourth quarter those were $103 prices in other current coupon.
So depending on the story those pay ups are very low or do they get a little lower probably.
But the outlook going forward I think is very asymmetric in the fact that the long end and has stayed where it is and the market seems comparable with the feds ability to contain inflation I think because we go through the year and the fed does hike.
They often overshoe as we all know it could be that.
Long from now a year or so from now were looking at in the market started to pricing in the next recession and so we're very keen on trying to maintain that optionality.
That's why we're not going to sell all these specs even if there is a little near term pain, because we think long term, but for instance, if we're putting new money to work today, what would you buy it and I think they represent value.
Our earnings outlook isn't so great just because of the fed but from an asset only perspective, they look very attractive and we're trying to maintain that optionality. We're doing our best with respect to managing our liquidity trying to keep our leverage ratio a prudent but trying to maximize how many of these we can hold on to.
Because we think they have good carry in the near term and upside in the long term.
Got it thanks, Paul I appreciate it.
Okay and next we'll go to Christopher Nolan with Ladenburg Thalmann. Your line is open.
Hey, Bob.
Given that it's an election year do have you.
Historically how has the.
Mortgage market responded to them.
I don't know that they have.
Although there is much it's not a presidential year.
So the focus.
We'll only be on the congressional and Senate races, I don't expect that.
Again since <unk>.
I wanted to chime in and the only time, we've really seen elections effect.
Market is through the fed and maybe the perceived or reluctance on the part of the fed to do a lot to disturb the economy in the run up to an election, a presidential election, I don't I don't think I've ever seen that with respect to other races, and I wouldn't expect one this year.
I don't think I would add to that is just to the extent that.
It's either going to Stoke the fires of inflation or cooler cooled off a little bit.
A reversal of some of the energy policies, perhaps or.
Or if you cut it the other way or if you have a strong push at a.
And Congress to push through some sort of an infrastructure project on top of hyper inflation that we're seeing.
It would be bad for us, but all of them.
Right.
I wouldn't expect it to be.
Material.
Great and I guess, just a follow up in terms of the portfolio declines.
Are you anticipating any further reduction in the portfolio size in the rest of the quarter.
We could yes, if the market continues to move against us.
And everything we can to maximize our retention sub.
Subject to the constraint that we're not going to let our leverage ratio get out of control because we need to maintain lots of liquidity. So.
To the extent the market goes more against us in our book value would it come down our leverage will go up we would have to prune.
As needed.
A few.
A few months have been.
Sort of a <unk>.
Lower evolving version of the taper tantrum, we saw in 2013.
I think when the dust settles.
When the dust settled then as well as now.
Yeah, there were opportunities to be had and I think that continues to be the case. So for US. We're just taking day to day, making sure that we have ample liquidity to deal with.
Continued weakness in the mortgage market sort of weakening.
Our margin calls and maintain leverage thats reasonable.
So that's kind of how we're going about this when things start to come down a little bit I think we can reassess.
What's the longer term vision is going to be.
Got it thanks guys.
Okay.
And a reminder, its star one if you have a question next we'll go to Macau Gouvernement with JMP Securities. Your line is open.
Hi, Good morning, I, just have a quick follow up on that portfolio reduction question.
You said you reduced it by about 20% since year end, mostly in two and a half and threes.
If you reduce the I O portfolio at all or is it all just in the pass throughs.
Passengers.
So that percentage would be higher.
Alright.
Now a bigger percentage of the portfolio and.
I think I remember you, saying that the TBA shorts that you had on as of the end of the year are gone now is that right.
As of the end of the end of the Eric on Yeah.
What we will do sometimes when we sell assets.
Self TBA and then fill with polls. So that's really not a hedged trade so much as just the.
Means to facilitate a trade or sale or we buy the same way a lot of times, we bounce along as well.
Alright, thats it for me it sounds like a pretty stiff.
Difficult environment right now wishing you guys best of luck going forward, yes, it's been a brutal quarter to be a mortgage investor kind of abandoned by everybody nobody wants to own them. So.
Everybody wants to buy a few billion, let us know.
I'll keep my eyes.
Okay.
Alright, I shall we have no further questions I will now turn it back over to Bob Cauley for any additional or closing remarks.
Thank you operator, thank you everybody I appreciate your interest as always to the extent you have further calls or questions.
Want to contact us directly feel free to contact us at the office, our number $772 311400, otherwise we look forward to talking to you next quarter. Thank you.
That does conclude today's conference call you may now disconnect.
Okay.
[music].