Q1 2022 AGNC Investment Corp Earnings Call
[music].
Good morning, and welcome to the AGM seed investment Corp, first quarter 2022 shareholders call.
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Okay Wisecarver Investor Relations.
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Thank you all for joining E. G. M C investment Corp's first quarter 2022 earnings call before we begin I'd like to review the Safe Harbor statement.
This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical fact.
Institute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
All such forward looking statements are intended to be subject to the safe Harbor protection provided by the Reform Act.
Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of the G. M C.
All forward looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.
Certain factors that could cause actual results to differ materially from those contained in the forward looking statements.
Included in the risk factors section of E. G N see its periodic reports filed with the Securities and Exchange Commission.
Copies are available on the SEC's website at S E C Dot Gov.
We disclaim any obligation to update our forward looking statements unless required by law.
Participants on the call include Peter Federico Director, President and Chief Executive Officer.
Bernie Bell Executive Vice President and Chief Financial Officer, Chris.
Chris Kill Executive Vice President and Chief Investment Officer.
Aaron Pas senior Vice President non agency portfolio management.
And John Reed Executive Vice President strategy and corporate development.
With that I'll turn the call over to Peter Federico.
Thank you Katie and thanks to everyone for joining the call today.
The investment environment was very challenging in the first quarter as the market faced increased geopolitical risk growing inflation concerns and the expectation of significantly tighter monetary policy.
Interest rates ended the quarter materially higher with the yield on the two year treasury, increasing over 160 basis points.
<unk> move of that magnitude hasnt occurred in more than 30 years.
This challenging environment led to a risk off sentiment pressure.
Pressure to equity markets and caused fixed income prices to decline.
The Bloomberg aggregate bond index posted its worst quarterly performance in more than 40 years with a price decline of almost six points.
That index is now down nine points for the year.
These extreme moves highlight how difficult market conditions were for all fixed income instruments.
The agency MBS market was also adversely impacted by uncertainty associated with the fed's balance sheet.
As a result agency MBS significantly underperformed swap and treasury hedges.
The performance was weak across the coupon stack with higher coupon MBS experiencing the greatest underperformance had spread widening.
Over the last 12 months the agency MBS market has experienced a dramatic repricing as the fed abruptly shifted monetary policy.
We began the year with short term rates near zero and the fed growing its balance sheet.
In contrast today the market now expects a very aggressive series of short term rate increases.
And balance sheet runoff to begin later this month.
At the March meeting the fed indicated that the initial run off plan will include an agency MBS cap of 35 billion per month.
Importantly, however, with the primary mortgage rate now nearing 5.5% pay downs on the fed's portfolio will likely be well below the cap.
For the foreseeable future.
Major monetary policy transitions are always challenging for the fixed income market.
This is especially true for the agency MBS market given the unique role it plays in monetary policy and in the economy.
Agency MBS have remained under pressure in April with spreads widening about 10 basis points.
As the fed's balance sheet reduction phases in over the next several months and with the long term run off plans still not fully understood further spread widening as possible.
This difficult environment adversely impacted a GNC in the first quarter on average spreads on our portfolio widened about 25 basis points during the quarter, which was the primary driver of our negative economic return.
Based on our fourth quarter disclosures, a 25 basis point spread widening event was expected to generate a book value loss of 13.5%.
The remainder of our book value decline can be attributed to the increase in interest rates, which is the number show was a relatively small given the hedge position and intra quarter rebalancing.
As we discussed last quarter, we expected spreads between agency MBS and other benchmark rates too wide and given the uncertainty associated with the fed's monetary policy position.
But the spread widening that occurred in the first quarter was materially faster and larger than anticipated.
We started the quarter with a defensive position characterized by lower leverage and a high hedge ratio.
We also took meaningful steps during the quarter to further reduce our aggregate risk profile.
These steps included reducing our asset position adjusting our coupon profile and increasing our hedge portfolio.
As the fed aggressively raising short term rates and ramps up its balance sheet runoff, we will likely remain defensive in our portfolio positioning.
Despite this defensive positioning we believe today's valuation levels reasonably compensate investors for the risks associated with the current environment.
Levered returns on production coupon MBS are very attractive on both an absolute basis and relative to past cycles.
As such we believe further M. B S weakness if it occurs will likely be characterized as an overreaction and will likely represent a compelling investment opportunity for Aegean Sea.
The mortgage market also benefits from a self correcting mechanism in that higher mortgage rates will eventually lead to slower prepayment speeds.
Lower mortgage origination volume and less run off on the fed's portfolio.
In addition, structural changes to the repo markets. Since 2019 have meaningfully improved agency MBS funding conditions, which is particularly beneficial to levered investors like a G N C.
So in conclusion with asset valuations considerably more attractive now and funding conditions strong we remain very optimistic about the outlook for our business.
With that I'll now turn the call over to Bernie to discuss our financial results in greater detail.
Thank you Peter.
GNC had a comprehensive loss of $2.23 per share for the first quarter economic return on tangible common equity.
It's negative 14.4% for the quarter comprised of the decline in tangible net book value and dividends declared of <unk> 36 cents per common share.
Notably despite the decline in our tangible net book value our at risk leverage remained below our normal operating levels throughout the quarter.
Leverage as of the end of the first quarter was 7.5 times tangible equity slightly lower than the fourth quarter, while our unencumbered cash and agency MBS also remained strong at $3 $5 billion at quarter end, which excludes both unencumbered credit assets and assets held at our captive broker dealer subsidiary.
Our average projected life CPR decreased to seven 9% from 10, 9% as of Q4.
Actual CPR has also continued to trend lower averaging 14.5% for the quarter compared to 18.6% for the prior quarter.
Our net interest spread for the first quarter increased to 219 basis points from 215 basis points for the fourth quarter as the improvement in asset yields due to declining prepayment speeds and portfolio repositioning more than offset a modest increase in our cost of funds.
That's despite a smaller asset base, our net spread and dollar roll income remained very strong at 72 cents per share for the quarter down only three cents from the prior quarter. Additionally, given the size of our swap position relative to our repo funding our net spread and dollar roll income is well protected against the significant increase in short term rates that is expected to occur.
Over the remainder of the year.
As Peter mentioned agency spreads widened further in April as of last Friday, we estimate that our tangible net book value was down approximately 6% from quarter end, while our leverage remained largely unchanged looking.
Looking ahead, although our asset balances somewhat smaller higher rates and wider spreads improve both the earnings profile and our existing portfolio and the expected return on new investments that we add over time.
With that I'll now turn the call over to Chris to discuss the agency mortgage market.
Thanks, Bernie as Peter described the fixed income markets had an extraordinarily difficult start to the year two year and 10 year Treasury yields increased 161, and 83 basis points, respectively through March 31.
While agency MBS initially led them to move wider in spread most all fixed income sectors underperformed the move higher in treasury yields 30 year production coupon MBS spreads widened more than 40 basis points during the first quarter as the fed guided the markets to price in six additional 25 basis point rate hikes for 2022.
It accelerated timeline for tapering of net purchases and perhaps most surprisingly a materially accelerated timeline for balance sheet normalization.
Given the dramatic increase in mortgage rates supply shifted to higher coupons and led to substantial underperformance versus rate hedges lower coupon MBS on the other hand continued to benefit from fed purchases and a sharp decline in origination.
We took advantage of the relative outperformance in lower coupons by repositioning the agency portfolio into production coupon MBS at much wider spreads with improved role Carrie and improved liquidity.
Over time, we believe this repositioning will benefit our portfolio through favorable earnings.
During the quarter, we reduced holdings in 2.5% coupons and below by approximately 27 billion and increased our higher coupon position by 18 billion.
Dollar roll Specialness for production coupon MBS continued to trade extremely well as rates moved sharply higher and production shifted redefining the TBA deliverable currently production coupon rolls are trading very special however, we do anticipate that this will moderate in coming months to levels more in line with historical norms.
Since quarter end markets have continued to reprice spreads on 30 year current coupon MBS have widened an additional 10 basis points, bringing the cumulative year to date widening to just over 50 basis points.
Coupons stack performance, however has shifted over the last few weeks with lower coupon MBS underperforming higher coupons the opposite of what was observed during the first quarter.
30 year production coupon nominal spreads are now approximately 35 basis points wide of average levels observed when the fed was last reducing its balance sheet in 2018 in 2019.
Historically some of the best investing environments occur when interest rate volatility is high and nominal spreads are wide.
The technical headwinds for the MBS market, however are challenging with heavy anticipated organic supply at least in the short run combined with the incremental supply from fed balance sheet runoff as such we expect spreads to remain at historically wide levels for some time and as Peter mentioned, there is a risk of a temporary overshoot over the near term I want to stress, though that given.
Our relatively low leverage these dynamics will likely create an excellent long term investment environment for a GNC.
Our hedge portfolio totaled $77 5 billion at quarter end up 2 billion from the previous quarter, while the asset portfolio declined by just under 10 billion.
Given the volatility and uncertainty associated with the current environment, we continue to favor a hedge portfolio that is well diversified by hedge type and by maturity.
I'll now turn the call over to Aaron to discuss the non agency markets.
Thanks, Chris as Chris mentioned, the volatility in equity and fixed income markets was also felt in structured products.
While credit spreads were not immune they generally outperformed high grade and high quality assets.
Spreads on AAA rated assets move meaningfully wider in Q1.
To put the moves and perspective on the residential side the price spread between private label arm B S. In agency MBS widened about one point through March and further in April while non QM AAA spreads widened roughly 70 basis points.
AAA conduit spreads were about 30 basis points wider over the quarter and other commercial real estate backed triple A's cheapened up significantly as well.
Turning to residential credit the entire capital structure and on the run CRT saw significant repricing and very poor price action for most of the quarter.
Heavy supply macro weakness and structural changes put in place in the fourth quarter contributed to this underperformance.
Arm B S and C. M. B S issuance levels remained elevated with near record volume in many sectors.
Exacerbating this impact was the change in the prepayment landscape and.
In 2021 R. M. B S issuance was at a similar level. However, this issuance was coupled with faster prepayment rates and thus manageable net supply.
Today issuance has remained high while paydowns have declined.
Leading to a large increase in net supply and further pressure on spreads.
Consistent with the actions we took in our agency portfolio, we were generally defensive on the non agency side or.
Our non agency holdings declined from $2 3 billion at year end to 1.7 billion at 331.
This was driven primarily by reducing our AAA, our MBS exposure in January and February by about $400 million.
Additionally, we reduced our CRT position early in the quarter and subsequently added a portion of that risk back as spreads continued to widen.
Turning quickly to the housing landscape the strong underlying fundamentals, mainly this supply demand imbalance remains in place however, higher mortgage rates combined with goods and service inflation outpacing wage inflation will likely slow H P. A.
We expect affordability levels does continue to deteriorate somewhat but at this point, we don't expect this to cause a correction house prices at a national level.
Looking forward returns across the residential and commercial non agency opportunity set have continued to improve.
In the near term, we would like to see additional clarity with respect to the fed rate stabilization and the trajectory for bond fund redemptions to become more constructive on credit with that I'll turn the call back over to Peter.
Thank you Erin and with that we'll now open the call up to your questions.
Yeah.
Thank you Omar I'll begin the question and answer.
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First question comes from Bose, George with <unk>. Please.
Please go ahead.
Hey, everyone. Good morning.
Can you just talk about it.
Spreads in agencies versus credit like where do you would you see as the preferred place to deploy capital currently.
Sure. Thank you for the question Bose, so thinking back to the comments that we made in our prepared remarks, and I think it's clear that we've seen significant improvement in expected returns in the non agency space given the amount of spread widening that occurred in <unk>.
We like the valuation levels there generally speaking.
And as Aaron mentioned, there has been some spread movement and the non agencies, but not nearly to the extent that we've seen in the age in the agency market. So just generally speaking I would say that our from a capital allocation perspective, I would expect the marginal capital to be allocated more towards the agency space.
Okay. Great. Thanks, and then you noted you know the returns are attractive you didn't really sort of put a number in there is can you.
Give us kind of a range of returns.
Sure Yeah, let me start by sort of.
Maybe just giving you more of a sort of an outlook that will lead into that because I think it's important to sort of reiterate the messages. We were trying to communicate today, which is just generally speaking we're increasingly optimistic that a you know a significant portion of the repricing has already taken place and there's certainly a risk of an overshoot. These are the kinds.
[noise] of markets.
That overshoots tend to occur which is essentially why we took the actions that we did with respect to our portfolio in the first quarter.
All that said the returns in the agency space do look attractive both on an absolute and relative basis to your specifically to your question on an absolute basis.
And Chris mentioned, the production coupons being the most attractive part of the agency market right now those returns to US right now are sort of in the low to mid teen range.
Interest rate volatility is very high and there is a cost of hedging that is unusually high in this market that will eventually abate, but relative returns also look really attractive. If you look back at the historical periods returns in that area looking back for example, the 2019 period, which.
As I sort of a comparable period, where the fed was reducing its balance sheet spreads are meaningfully wider than they were in in 2019.
<unk> spreads for example to the 10 year today or like 125 basis points versus 80 basis points, and I think Chris mentioned oas's or about 35 basis points wider show. The relative returns are attractive we are entering a period, though as Chris mentioned were the technicals are.
Challenge in the seasonal supply of mortgages.
M will be high for the next few months and of course, we're going to find out tomorrow exactly that the the ramp that the fed's going to use to ramp up its run off of its balance sheet. So the technicals are will be a little challenged and we want to see how the market trades and if there was a time for an overshoot. It it's probably right around now in fact did.
The weakness that we saw in April may be part of that overshoot process, but but again, we're well positioned for this we took actions ahead of it and as Bernie mentioned, our leverage remains low at the as of as of the point that you mentioned, which was last week. So we're well positioned for it and spreads.
R and returns are starting to look very attractive to us I'll pause there.
Okay, Great. That's helpful. Thank you.
Okay.
Thank you. The next question comes from Rick Shane from J P. Morgan. Please go ahead.
Hey, guys I'm not sure. If you provided it how are you I'm not sure. If you provided it but can you give us a quick update on where you think book value is as of last week.
Yeah, Bernie mentioned it in her prepared remarks, and I mentioned that spreads were up 10 basis points wider than Bernie mentioned that as of last Friday, we estimated our book value down around 6%, which would be consistent with the spread widening event of about 10 basis points.
Got it and then and that's pretty consistent with how we're looking at it as well.
You talked a little bit about the return opportunity.
In response to Bose is question and if we think about it in order to sustain the dividend you probably you probably need a low double digit type ROE we are to maintain the dividend given the low leverage given the widening of spreads are and the opportunities that you see.
And how do you feel about that sustainability.
Well. Thank you for that question and I know that's a.
A lot of People's minds.
First point with respect to our dividend and dividend position is that I think it's important to put the right historical context around it which is that.
We are starting from a really strong position. If you think back to where we were for example, a year ago.
With our dollar 44.
The dividend versus our net spread and dollar income for example last year of $3.02. So we were in a really strong position to begin this period, but I think one of the really key messages.
Is that given the rate move that has occurred and given the spread moves that have occurred.
You also can think about not only the return opportunity on our future investments just being materially better which it is on the marginal investments that we'll make over time, but you also have to consider that the mark to market return. If you will on our portfolio is now materially better so.
Said another way our existing portfolio given the move in spreads and rates that has occurred in the last four months is now generating.
A higher rate of return consistent with the increase if you will and the dividend yield on our portfolio. So we are in a position right now where we continue to have a lot of flexibility. We don't feel any pressure to have to take leverage up in order to continue to generate earnings consist.
With our dividend given the improvement in our return on our portfolio and I think that's really the key point is that we are.
We are in a position, where we can be patient and disciplined and wait for the right opportunity that Chris described which we believe is going to be an opportunity that really hasn't occurred very often really since the great financial crisis. So we just need to be patient, but our portfolio today is generating.
So a much better rate of return than it was four or five months ago.
Oh for sure and look I think the dividend policy over the last.
Two years is basically a reflection of understanding that you were over earning given the opportunity the market presented and that you didn't want to get ahead of yourself because investors value the stability of the dividend.
I guess I guess I would say when you think about it.
And certainly understand that the euro is a function of the mark to market.
So that that is a really important consideration, but when you look at the opportunity ahead in the context of sort of what your concerns where it feels like it's still within those dimensions.
I definitely do think it's within those dimensions.
Again, you can just use a sort of simple back of the envelope calculation on the expected return on our portfolio. If you just sort of a mark to market return on our portfolio. If you sold it and bought it back today.
You take the asset yield, which would probably be close to 4% on a fully hedged basis youre going to get a number given our cost structure that is in the call it 12% to 14%.
Are we range, so very consistent with with the dividend that we're paying.
Peter that's very helpful and answered yes.
Okay.
Thank you guys I know I've taken a lot of time I appreciate the question and good questions.
Thank you next question comes from Kenneth Lee RBC capital markets. Please go ahead.
Hi, Good morning, Thanks for taking my question in terms of the investment position you talked about remaining defensive and looking for some additional clarity before you could pick up leverage and take advantage of the situation, but just wondering.
If you could just further flesh out any specific milestones or signs that that youre looking for before you can start taking advantage of the attractive investment opportunities. Thanks, Yeah, Yeah, Great question, Ken Thank you.
What I would say is that theres sort of some specific signals that would be beneficial. So I, obviously mortgages were weaker again in April and were right sort of at the edge now with deferred making its announcement on the balance sheet tomorrow, but I would say, there's probably four things that would benefit the market and I think we're.
To get clarity on these four elements over the next call. It one to three months. So its a relatively short term thing, but first I think we need to see greater interest rate stability and now with.
Interest rates from three years to 10 years, essentially at 3%, we're probably pretty close to the.
Sort of a full re pricing of the interest rate expectation of course, there's still some risk that the terminal fed funds rate is going to be higher than what the fed initially indicated.
So that's going to have to play out a little bit, but but I think we the market just generally speaking would benefit from greater interest rate stability and are in hopefully we're getting near that point.
The second in this sort of builds on Chris's point, we understand that in the market understands importantly, which is why we think valuations.
Should generally have reflected this the technicals for the mortgage market are sort of most challenging over the next call. It one to three months so while the market knows this we want to see the market start to trade stably during that time period, so that would be another signal that we would be look.
Four.
The third which I'm not sure.
When we will get this information, but I think the market would benefit from greater understanding of the fed's longterm run off plans.
If you think back to when the market sort of got pretty weak in April it was right around the time period, where the agency market that is when the chairman was talking about front loading.
Interest rate hikes in and sort of the market interpreted that as maybe a signal that they might frontload or be more aggressive on the balance sheet. We don't think that's going to be the case, we think the fed is going to be very measured on its balance sheet in order to facilitate a much more aggressive interest rate approach, but some additional information in thinking from the fed.
The long term run off plan will be helpful. And then lastly, this is a point that Aaron mentioned, which is really important.
Is we're gonna be looking at bond flows and in for the last several months of course, given all the pressure in the fixed income market broadly bond flow have been experiencing significant outflows that has started to slow in the last couple of weeks and eventually we expect it to stop and we.
<unk> actually bond inflows given the absolute level of returns that are available and in that repricing. So that will be a significant indicator of strength in the market and then of course, we know that there's lots of index investors as Chris just mentioned that are still underweight MBS. So those would be the signals.
If you will that we're looking for and we think we're going to get a lot of clarity on those points over the next few months.
Wonder if you just talk a little bit about that.
Move over the near term just given all the various dynamics there. Thanks.
Well I think what are the key points.
About the current environment. This is this is really important is that what we're experiencing is essentially.
Essentially a spread event right. It's the underperformance of agency MBS relative to hedges.
And if you look and this is why in my prepared remarks, I sort of identified the spread component as around 13.5% of the book value.
That we overall experienced and the point of that is that.
We have approached this environment.
From an interest rate perspective is having as little interest rate risk as is possible because of the volatility of the environment. So we did not want to have a significant long position or a significant short position from an interest rate risk position. We wanted to keep our duration, if you will as neutral as possible.
And you can see that in the fact that we started the quarter with a 0.1 year duration gap and we ended the quarter with a points three year duration gap and today, our duration gap is only about a half a year.
When we wanted to have that sort of as neutral of a position as possible because during the first quarter. One of the things that made the agency market. So difficult. What's there was tremendous two way rate risk that emerged in February when the the thought of the Ukraine War.
Came a reality and if you think back to what happened to the tenure of the 10 year went from $1 50 at the beginning of the quarter to 2%.
Two O five before the war.
And we actually had a significant rally at that point back down to 165 right. So there was significant two way rate risk, we were uncomfortable being meaningfully short or meaningfully long. We just wanted to keep our duration risk as neutral as possible and that's the way we are continuing to approach our hedging today.
We're operating with a really high hedge ratio because we want to have a lot of intermediate hedges because the three year to seven year part of the curve has underperformed, but we also want to keep our duration risk as neutral as possible over the short run them. So that we sort of have protected that.
Part of our book value and the biggest driver like what you experienced in April was really just a spread widening event.
Yes, the one thing I'd add is just you know a lot of our rebalancing was done on the asset side of the balance sheet and you know that that repositioning was motivated by a few factors.
Yeah, I'd say it was the fed.
Guided the markets to price in materially tighter policy rates, obviously sold off volatility spiked and yet lower coupon MBS performed very well relative to higher coupons and so given this strong relative performance. It made sense for us to do a lot of our delta hedging in these coupons rather than rates in order to sell both basis at <unk>.
<unk> tight spreads and duration.
You know I mentioned, you know the coupon swap trades as well we did route.
On a net basis, you know our portfolio declined by about 9 billion on the agency side and par value. We also did an incremental 18 billion in coupon swaps that were also motivated by relative value duration rebalancing, but also liquidity you know generally speaking very low dollar price mortgages with very little option cost in carry.
Have a less diverse investor base, and so that was another consideration and right sizing our coupon positioning.
Over the last few weeks as I mentioned, you know lower coupons have materially underperformed production coupons reversing a lot of that move that we saw in Q1 and so the relationships are you know a little more balanced now but.
You know I'd say, we're still biased towards towards up in coupon at.
At this point, but you know the the position you know is.
The one thing on Lora coupons I mean, they they can get tactical in a positive way as well and perform.
Well when I was on a total return basis in certain scenarios when fixed income outflows eventually turn and become inflows as Peter just discussed.
Index passive and active light index based fund flows will will certainly benefit these positions because they comprise still a large percentage of the float, but the position needs to be right sized for liquidity and the negative carry that they have versus higher coupons and we'll be we'll continue to be opportunistic with respect.
Or a coupon positioning as the environment changes, but still with a bias towards up in coupon.
Gotcha, Great that was very helpful. Thanks again, thank you.
Oh.
Thank you. Our next question comes from Doug Harter Credit Suisse.
Sure.
Thanks.
Given the large move we've already seen can you just update us kind of how you're thinking about the risk and the potential for tightening in agency spreads over you know kind of the coming months yeah, well. Thank you for the question. Doug I think this is one of the things that is going to make this.
Potential investment.
Opportunity really unique for Aegean seem why I think it's so compelling.
Is that if you think about the environment that we're in spreads have obviously cheapened up a lot and returns are better and further weakness is certainly possible as deferred.
Balance sheet runoff goes underway.
But I think what's gonna be perhaps more unique about the environment that we're going to be in is that.
There doesn't appear to be an obvious catalyst for spreads to tighten a lot in a really short period of time, which is really good from our perspective and from a overall business perspective is that we think we're going to be in a period.
It is going to offer durably very attractive return opportunities now there are some sets of investors who are underweight.
Specifically, the sort of money manager community is materially underweight.
The mortgage index and that could be a significant source of demand, but at the same time, we are going to have you know a meaningful.
Net supply of mortgages. So we think we're going to be an environment, where really attractive returns are going to be available to us for a reasonably long period of time and that's really good from a business perspective. So that's that's the way we're looking at the current environment.
I appreciate that thank you.
Thanks.
Thank you. Our final question comes from Eric Hagen D. T argue. Please go ahead.
Hey, Thanks, Good morning, I'm looking at the spec pool portfolio and a premium over TBA as well.
Would you expect some pay up tomorrow less always exist.
Or is there a floor if you will for where those securities might trade at a higher mortgage rate environment.
Yeah sure Chris Yeah, no. It's a good question I mean, they're generally you know it depends on the category, but you know there is there is a floor I mean, the quality of the TBA float is getting worse with less of a fed presence.
And given how much pay ups have come off year to date, there have been some great opportunities to add convexity cheaply through pool selection.
You know I'd call protection is a great example, where you know it's often thought of as the only adding value when prepayments are really fast, but it's really about the cash flow stability and knowing that you can count on a pool maintaining its duration into a rally allows you to more fully hedged the spot duration and so you know it really comes down to cash flow.
Stability and so for that reason you don't pay ups. You know there is a floor you know, it's typically above TBA the absolute floor as TBA, obviously for deliverable securities.
You know in and of course, I mean, they're also pool attributes to avoid in this environment and source for better turnover performance as well, which is equally impactful to the convexity profile of the mortgage portfolio.
That's helpful answer.
Second what are some of the variables you think that drive the amount of funding you source at Bethesda securities versus bilaterally and.
And how does that also factor into the amount of TBA, you carry and how much funding you do off balance sheet.
Well I wouldn't say that on the latter part of that I don't think that affects it directly I think just generally speaking for our on balance sheet portfolio, We typically fund that somewhere in the neighborhood of around 50% bilateral and 50% Bethesda.
And while we could take the Bethesda percent up.
We're comfortable operating in that sort of 40 to 50.
Cent range, because we do want to always maintain as diversified as possible.
Funding base. So we want to have really healthy active relationships with our bilateral counterparties as well they are important sources of liquidity for us.
So I don't expect any material change in the composition between bilateral in Bethesda, and and and I don't expect any material that to drive any material change in our TBA position, what you'll see drive our TBA position as our view on relative value.
The TBA Specialness, obviously is a very significant factor there. So those would be the sort of the fundamentals that drive the TBA position.
That's helpful and then as the funding at Bethesda, mostly overnight repo or is it terminate though oh no. We we we obviously do both it tends to be we obviously do run our overnight position through Bethesda Securities, which is a really valuable.
Source of funding for us. It's obviously the cheapest funding it's really in markets like this where the fed is raising short term rates, where the expectation of higher rates is really meaningful having the overnight balances really helpful. So we run our overnight position through there, but we also do a significant amount of funding it out too.
30, 60, and sometimes even 90 days to there, but most of the term funding is done through bilateral counterparties.
Gotcha. Thank you very much sure. Thank you Sir.
We've now completed the question answer session.
Turn the call back over to Peter Federico for concluding remarks.
Well. Thank you for your participation on the call today and for your interest in a G. N C and we look forward to speaking with you again at the end of next quarter. Thank you again for your participation.
Thank you.
Okay.
Okay.
Okay.