Q3 2022 AGNC Investment Corp Earnings Call
Good morning, and welcome to the E T N C investment car huh.
2022 shareholder call all participants will be in listen only mode. You do need assistance, Lisa Miller conference specialist by pressing the star key followed by Fiat.
After todays presentation, there will be an opportunity to ask questions.
A quick question you May Press Star then one on your Touchtone phone.
Your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.
Thank you all for joining Aegean Sea investment Corp's third 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 constitute 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 GNC.
All forward looking statements included in this presentation.
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 are included in agencies.
Periodic reports filed with the Securities and Exchange Commission.
Copies are available on the SEC's website at SEC Gov, we disclaim any obligation to update our forward looking statements unless required by law.
Participants on the call include.
Peter Federico Director, President and Chief Executive Officer, Bernie Bell Executive Vice President and Chief Financial Officer, Chris Kuehl, 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.
Okay.
Thank you Katie and thank you to everyone for joining our call today.
Financial markets experienced broad based weakness in the third quarter as macroeconomic and monetary policy uncertainty intensified both domestically and abroad.
This led to a sharp decline in investor sentiment and a significant repricing in both the equity and fixed income markets.
The S&P 500 index falling 17%.
And the Unlevered Bloomberg aggregate bond index, falling seven and a half per cent from their respective inter quarter highs.
In the early stages of market downturns. It is not uncommon for the U S Treasury and agency MBS markets underperformed other fixed income products. Because these securities are the most liquid and thus easiest for investors to convert to cash bond fund outflows.
An obvious example of this type of selling pressure.
Agency MBS are the most liquid spread product across the entire fixed income spectrum.
As such in certain environments, particularly when investors favor liquidity.
The selling pressure on agency MBS can be greater than other asset classes farther out the liquidity and credit spectrum.
This was indeed, the case in the third quarter.
On page seven of the Investor presentation, we show the spread or yield differential between the 30 year current coupon MBS and the 10 year Treasury since January of 2009.
This graph is helpful. Because it provides historical context for the recent spread widening.
As you can see the spread recently widened to the extreme of 190 basis points.
A significant portion of this widening occurred late in September following an unforeseen episode of instability in the UK bond market that led to a significant re pricing and risk off sentiment and our treasury and agency MBS markets.
As we have discussed wider spreads impact our business in two ways.
First as spreads widen the book value of our existing portfolio declines as has been the case this year on.
On the positive side, however, wider spreads also enhance the future value of our business by improving the go forward return on our portfolio.
The supply outlook for agency MBS has also continued to improve with primary mortgage rates now well above 7% origination volume over the remainder of the year will likely be very limited.
And the run off of the Feds portfolio.
We'll also be materially slower than previously anticipated.
Putting this all together agency MBS are undeniably attractive.
Spreads are at unprecedented levels. The supply outlook is very favorable and finally agency MBS are guaranteed by the U S government and thus do not have the credit exposure in a recession scenario, which adds to their attractiveness relative to other fixed income alternatives.
The recovery in valuation levels could happen rapidly.
So as difficult as this year has been given the spread widening that has already occurred it is important to understand the unique opportunity that we believe is on the other side of this historic repricing event with that I'll now turn the call over to Bernie Bell to discuss our financial results.
Greater detail.
Thank you Peter for the third quarter, a GNC had a comprehensive loss of $2.01 per share economic return on tangible common equity was negative 17.4% for the quarter comprised of the decline in tangible net book value of approximately 20% and dividends declared of <unk> 36 cents per <unk>.
Common share.
Given the very challenging market conditions during the third quarter, we continued to prioritize risk management.
Operating with a high interest rate hedge ratio lower leverage and a strong liquidity position.
In addition, we Opportunistically issued approximately 290 million of common equity through our aftermarket offering program at an average price of $10.10 per share.
And issued 150 million fixed rate reset preferred equity.
Our average leverage for the quarter increased moderately to $8 one times tangible equity from 7.8 times for the prior quarter.
Our leverage at the end of the quarter was higher at 8.7 times, primarily as a function of book value declines late in the quarter.
Yeah.
At quarter end, we had cash and unencumbered agency MBS totaling $3 6 billion or 54% of our tangible equity and.
And approximately 100 million of unencumbered credit securities.
Net spread and dollar roll income excluding catch up am was 84 cents per share for the quarter.
The slight increase from 83 cents per share for the second quarter was the result of higher asset yields and our large interest rate swap position.
Which more than offset higher funding costs and declining dollar roll income.
Lastly, our average projected life C. P ours as of the end of the quarter decreased modestly to 7%.
While actual C. P ours continue to slow meaningfully averaging 9% for the quarter.
I'll now turn the call over to Chris Cool to discuss the agency mortgage market.
Thanks, Bernie as Peter discussed agency MBS spreads continued to widen during the third quarter and in particular in the month of September as rates and volatility surge tire par coupon spreads to a blend of five and 10 year U S. Treasury debt ended the quarter at approximately 170 basis points to.
To put the degree of mortgage spread widening during the month of September into perspective, the Bloomberg mortgage index, which is an index of all Fannie Mae Freddie Mac and Ginnie Mae MBS experienced its worst excess return versus treasuries on record going back more than 30 years.
Agency spreads to treasuries and swaps and corporate debt are extraordinarily wide historically, a few times that par coupon spreads reached levels beyond the 150 basis points. It was short lived and importantly, the funding markets were in distress and prepayment risk was high <unk>.
Or is the case today.
On our last call, we discussed the increasingly hawkish fed sentiment and elevated interest rate volatility as being the primary headwinds to agency MBS performance and those headwinds remain today. However, even adjusting for the current level of rate volatility spreads on agency MBS are compelling and when rate volatility ultimately.
Settles agency MBS fall materially outperform Moreover, this recovery could be very rapid.
The only way to reconcile current agency spread levels as to infer a lack of sponsorship due to bond fund outflows. The large percentage of passive index based management and capital constrained banks.
As of September 30th our investment portfolio totaled 61.5 billion during the quarter, we continued to reposition our holdings across the coupon stack today.
Today's MBS market is particularly unique with more than 10 actively traded 30 year coupons, which speaks to the magnitude of recent interest rate moves.
Our hedge portfolio totaled approximately 69 billion at quarter end down about 3.5 billion from the previous quarter, our duration gap as of September 30th was 1.2 years. Despite the 40 basis point increase in 10 year interest rates since quarter end, we have proactively reduced our duration gap to inside of one year through rebalancing.
Actions in both assets and hedges.
Now I'll turn the call over to Aaron to discuss the non agency markets.
Thanks, Chris spreads across the structured product space in the third quarter remained volatile largely tracking the risk sentiment and broader markets.
The repricing of the terminal rate and shifting expectations of the fed's future path continue to drive the market's direction.
After gradually firming up across the capital structure in the first six weeks of the quarter. The second half of Q3, largely reverse that spread tightening.
At this juncture, while credit spreads have leaked wider trading has generally been quite orderly. However, some signs of stress are evident and liquidity is relatively low.
These factors have been part caused the credit curves and many products to be flatter than one would expect given the deteriorating economic outlook.
Housing activity has declined materially as significantly higher mortgage rates have stretched affordability to extreme levels, while reducing mobility.
As more homeowners are locked into their current residences with low fixed rate mortgages.
While the structural supply imbalance will remain supportive of housing in the longer run our expectation is that house prices will decline gradually and on relatively low transaction volume.
This could reverse most of the prior year's gains over the coming 12 to 18 months.
Importantly, due to the sharp run up in house prices from Q2, 2021 to Q2 2022 there's relatively little credit risk embedded in loans originated more than a year ago.
This coupled with the high percentage of fixed rate mortgage debt provide significant support for mortgage credit performance.
With respect to our holdings, the non agency portfolio declined over the quarter and in Q3 at 1.7 billion.
We reduced our AAA holdings and rotated out of fixed rate arm B S. AAA is in favor of floating rate commercial bactra plays. In addition, we repositioned some of our more credit focused holdings.
We believe our non agency portfolio is well positioned for the current environment as a result of the seasoning of the loans backing our CRT in our MBS holdings. The average LTV across the portfolio is in the low 50 is on a mark to market basis.
As such we would expect credit performance to be relatively insensitive to even moderate changes in house prices for the majority of our portfolio with that I'll turn the call back over to Peter.
Thank you Aaron and with that we'll now open the call up to your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your I touched on so if you are using a speakerphone. Please pick up your handset before pressing the key.
Is that any time. Your question has been answered and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Doug Parker way.
Please go ahead.
Thanks can you talk about how you are looking to balance.
Risk management and maintaining leverage with the you know the near term risk versus you know the opportunity for the snapback in agency MBS that you talked about.
Sure Doug Good morning. Thank you for the question, it's a good place good place to start.
We ended the quarter with leverage at 8.7, as you know and as we reported which was up from the prior quarter.
But as of last as of last Friday, our leverage was around 8.4, and we really think that that's a good place to be if you think about what leverage level that is sort of right in the middle of our normal operating range very comfortable position from a leverage perspective, but more importantly, I think it strikes.
The right balance, which I think is sort of at the heart of your question between the challenges that we face in terms of the overall bond market and the illiquidity and volatility and we have to respect that but at the same time. We also have to respect. The fact that we're looking at the best returns that we've ever seen in the agency MBS.
Okay.
So we've obviously gone through a really sharp repricing.
You know a lot of illiquidity late in September the market's been challenged since then.
But when you look at returns where they are today you have to say this as you know potentially a once in a lifetime return opportunities. So we like where we are right now it's a very comfortable leverage position our liquidity position is strong and we can talk about that in greater detail, but from just from an overall risk position, we're trying to balance.
Right now both offense and defense and we think that that's really important given how attractive returns I'll. So I'll pause there and let you ask a follow up.
And just on the you know the.
Once in a lifetime or the ability for them to get that back I mean, I guess is there enough buyers you know kind of you.
You mentioned kind of the supply demand.
The incremental buyer to kind of snap back yeah, It's a great point and what I would say when you're in the sort of really illiquid markets like the like global bond markets have entered you have the real risk of overshooting in both directions and unfortunately for agent.
C N b S. Because they are so liquid and because they are the most liquid spread product.
They tend to lead in the overshoot and we certainly saw that the flip side of that.
It is also that you can have a really sharp recovery as well.
One of the issues that the sort of macro bond market and this is supposed to treasuries and agency MBS is facing is that there's the preponderance of passive investors.
So what we've seen as the fed has tightened monetary policy is that the flows in both the Treasury and agency MBS market are dominated by bond fund managers and there's obviously been huge amounts of bond fund outflows as the fed has tightened and rates have risen as a bear market and the bond market and you would expect.
That.
And they are the source of selling pressure in the buying is relatively limited.
You can also look at that and say the opposite is undoubtedly going to be the case, because there are no natural sellers either of mortgages once that flow stops right and we've already begun to see I think some of that with returns where they are both on an absolute and relative basis in the agency.
The MBS market for example on an absolute basis investors could get a government guaranteed power price bond at a 6% yield 200 basis points over the treasury for the same credit.
In an environment, where you're looking at a recession that is a really attractive returns. So I think youre going to start to see inflows into the agency MBS market I noticed that last week and it was a Bloomberg story where EM.
The N B S E T F had its largest inflow in a single day ever so as the market stabilizes I think you'll see the opposite effect, which is there's going to be buyers emerging and there are no natural sellers because there's no natural supply of agency MBS at this level of rate. So that's the <unk>.
Technical <unk>.
That youre looking at that will be really favorable once the bond market stabilizes and I think ultimately as we all know it is going to stabilize and I think that there's a real opportunity ahead of us we've seen that in the past and you may look at spreads where they are today and say a 200 basis points over that's not the worst that they've ever been because you.
You can look back at the great financial crisis.
But if you look at the great financial crisis first to say it is nothing like the agency MBS market is not the problem here, there's no liquidity problems theres no selling problems Theres no.
Prepayment risk problems Theres no risk out of the fed.
And the great financial crisis, when spreads were wider you had the GSE is at the heart of the problem Theyre very credit of the agency MBS wasn't question Bank capital wasn't question huge funding problems. So you can justify potentially wider spreads in that environment. When you look at spreads today.
Close to 200 off I would say, they're the best risk adjusted returns at the agency MBS market has ever seen.
Yeah.
Great I appreciate that Peter.
Sure. Thank you for the question.
Our next question comes from Bose, George with <unk>.
Hey, everyone. Good morning.
Can I get your good things can I get your updated book value.
Sure Yeah as of last week, our our book value at the end of last week was down about 15% and let me just sort of put that in context, because I think this.
Our month to date update I think the market has been so volatile I think it's challenging for people to sort of get a good handle on that but if you look at like for example, our stock performance I think our stock performance is actually tracked our book value very very well. So now at about 15% I think you can break that down into really two components its.
First of all you got to look at mortgage performance, obviously, and how much spreads have widened and I would say sort of on average spreads have widened probably about 15%. So you look at our sensitivity, that's probably about 11% and book value but.
It's really challenging because if you look at it.
And most people do look at the performance of current coupon current coupon performance has actually been the best performance, but by the way the current coupon it at the at the end of September was a 5.5% coupons now it's a 6% coupons. So you have to look further down in the coupon stack and the performance is materially different across different.
Coupons, if you look at the 2.5% coupon for example that was down three and a half points.
The 4.5% coupon was down around two and a half points and you look at the five year Treasury that was only down one point so far so when you look at it from that perspective, if you hedged your portfolio across the curve with two years in five years and 10 years like we do in the curve.
Steepened as much as it did the 10 year part of the curve was the best performing part of the curve. It up 40 basis points from a hedge perspective, you could have very different results based on where your curve and your hedges were across the curve. If he had all 10 year hedges for example, which we wouldn't be uncomfortable with.
Given the size of our portfolio and our desire to hedge across the curve you would have a much different outcome. So from our perspective hedging across the curve and particularly in the belly of the curve. The underperformance of the five year really led to the overall underperformance and then.
You know based on our own disclosures that we put out.
We had at the beginning of the.
This quarter, our duration gap like we announced in our pre release of about a year.
Given the fact that rates moved 20 basis points on five years and 40 on 10. So on average maybe 30 basis points that would translate to about a 3%.
Hit to book value. So the combination of about 15 basis points wider in spreads, particularly in the belly of the coupons snack loaded in the belly of the coupon stack plus that gives you about 15% and that's why we're looking at returns today that are the best we've ever seen so that's the update as we sit right now.
Okay, great. Thanks, that's helpful and thank you for the question.
The current dividend above 44 on your implied book value, which is I guess the high sevens.
The dividend yield.
The against very high teens, I mean does your portfolio generate that to cover that dividend. Yeah. Well. This is really this is a really key point. Thank you for the question obviously, when we think about our dividend we are constantly evaluating.
All range of considerations to composition of the portfolio the volatility of interest rates now alternative uses of capital things like that general market conditions, the expected leverage, but what's really I think critical to understand and I think that's the heart of your question.
Is you have to understand what drove the decline in our book value.
If you look at if you look at the performance of mortgages. When you look at that graph that we show I think it's clear to everybody. When you look on page seven that mortgage spreads have gone in one direction only for better part of the last 18 months.
65 basis points wider if you will from.
August to now so the decline in our book value is driven primarily by wider spreads.
So while it hurts your book value.
Currently.
Because the decline in book value came from wider spreads. It's also enhances the go forward return on our portfolio. So said another way as our dividend yield has gone up with the decline in our book value. The return on our portfolio has gone up and a commensurate way so.
If you looked at our portfolio today, you sold it bought it all back our portfolio is mark to today's valuations.
So if you looked at that and you said what are the mortgages earn at this dollar price at this spread you would conclude that the go forward return on our portfolio actually matches very nicely. The current dividend yield. So that's that's one of the key things that we always look at we've talked about that a lot. So you know.
Going forward I still believe that those two things that are reasonably well aligned and obviously conditions change and markets are volatile we're going to continue to be diligent about monitoring that but the go forward return on our portfolio still is consistent with our dividend.
Okay, Great. That's very helpful. Thanks, a lot yeah. Thank you bill.
Okay.
Our next question will come from Trevor Cranston with JMP Securities. Please go ahead.
Hey, Thanks, Good morning, good morning Trevor.
A question on the historical spread chart you guys have on slide seven.
Generally I was just curious when you guys look at spreads versus historical levels.
Have you guys sort of adjust for the fact that you know the either the fed or the GSE has just been a.
Sort of a huge buyer and backstop for the market for much of the.
The last 20 years and.
How comparable do you think spreads are today versus levels, where those guys with the market.
Yeah, you're 100% right I mean, obviously the chart that we show.
Doesn't really have any impact of the GSE portfolios that was all prior to the great financial crisis in terms of any kind of meaningful impact, but certainly prior to that they did have an impact on the overall valuations and then post great financial crisis, There's no doubt starting with QE, one in 2008 or nine whenever it was.
Fed has basically participated in this market for you know 11 out of 14 years or something like that whether they're either buying mortgages or reinvesting the paydowns.
So they did have an impact and they are obviously exiting the market and the flip side of that you could also conclude that the agency MBS market is forever foundational to the fed's monetary policy.
They're not going to stay out of the market forever and they they clearly care.
The other one for one final point that I forgot to mention Trevor is that you have to also look at you know the ownership of the of the of the market.
But we are also can't lose sight of the fact that we're deep into the tightening process and sort of there's always a sort of darkest before dawn and deferred obviously wants to go a little higher the market last week and still today, you think about the fed funds futures is topped out at around 490 <unk>.
And in March or April of next year.
And.
The fed may or may not get there in fact, I think some of the comments out of the fed was maybe the market has even overshot.
They are certainly seem to be starting to indicate that.
It is at today.
It might ultimately get to that level, but they also seem to be recognizing that a more measured path to getting there may be something that is appropriate. So we have a fed meeting obviously at the beginning of November we have one in December it will be really important to to sort of hear what they have to say it.
About the pace going forward, one of the things that sort of destabilize the market so much.
Was you had a bad inflation print.
That was followed by really sort of a.
These stabilizing comments from the fed and sort of the market lost confidence.
Well I think the fed has done a lot to make monetary policy restrictive they will do a little bit more. This next meeting probably 75, maybe even 50 and maybe they'll say at that time that look at we're going to take a little bit more measured approach and allow the rate moves that we've already made.
Have the full effect on the economy.
So that's I think one of the key changes that will come over the next couple of months, which I think it'll be really positive for the market and then of course, we had a lot of international instability with what happened in the U K and that was really sort of tumultuous for our bond market for weeks now.
And maybe that has gained some footing with the new Prime Minister. This morning, the market seems to like that you know bonds.
Levels of rally and across the globe and so you can get stabilization from a number of different ways and I think while we're not there yet I'm hopeful that we're going to be there soon.
Okay I appreciate the comments, thank you guys sure.
Thank you for the question.
Our next question comes from the last April .
UBS. Please go ahead.
Hey, everyone.
You just wanted to start with the just the <unk>.
Duration gap you guys are up it looks like one two years, how are you thinking about that given where rates are now.
Are you looking at move that down.
Yeah, So you're right our duration gap was what was the realized today, it's really around three quarters of a year.
So we've reduced our exposure a little bit, but we still think you know the duration gap, where it is seems to be reasonable reasonable place to be.
Part of part of what goes into that is how do we think mortgages are going to perform.
And Chris can talk a little bit about this in a minute I'll turn it over to him to talk a little bit about the sort of convexity profile has improved.
So obviously that goes into our our duration gap you know position, but also where we are in the sort of rate repricing process and obviously with 10 years at four in a quarter or two years at two and a half.
Well certainly higher rates are possible, we feel like those rates are probably pretty fairly priced right. Now so maybe not maybe not quite as much upside risk as we were facing a few a few weeks ago, given where 10 years are today, so we've reduced our overall.
All sensitivity a little bit, but we kind of like where we are Chris you want to talk about the convexity Tamara Fischer So as Peter mentioned, given some of the actions that we took since quarter end on both the hedging side as well as on the asset side. Our duration gap is currently around three quarters of a year the motivation for shortening the duration gap.
In the current environment as you know that we expect mortgages to trade long for moderate moves in rates widening into higher rates outperforming into lower rates and this is just driven by overall sentiment around fed policy and bond fund flows the portfolio does still have more contraction risk then extension risk into very long.
<unk> rate moves and so for that reason, we're still likely to carry a positive duration gap just not as long as we were as of 930.
Okay.
And just back on the leverage it sounds like you're comfortable where you are now for now.
But.
When you know when we do the lessening of volatility and potential fed pause what do you think the cadence of it.
Essentially.
That leverage up would be.
Yeah.
Yeah, well I think it's I think I think the cadence is probably faster than I, you know I guess I would have expected one way or the other it does ask the thing with the market I think we've hit levels, where as I mentioned in my prepared remarks that I think that theres, a greater risk now of a sharp move.
Better than valuation you know if you if we talked about this on the second quarter call, where when mortgages for a 125 to 150 spread that you know there was a chance that mortgages, which stay wide for a meaningful period of time and just sort of stabilized at this sort of rate level I don't I don't know that.
We have that same sort of durability in the spreads. So there is certainly a risk that just as quickly as mortgage spreads widen they could they could tighten now clearly there is a risk that they could go wider as well. There's just no doubt about that so we have to be really mindful of the moves in both directions, and I think I think the mood.
Moves potentially could be a little bit sharper, which would mean that all other things equal.
Leverage could move faster, but one of the things that I think is also really important one is that.
From a leverage perspective, it's important to remember that the investor experience and for vessels to make money doesn't have to coincide with us taking more leverage right at the end of the day when you invest in a G. N. C. Today. For example, you are investing in a pool of agency MBS.
At current valuation levels at the widest spreads on a risk adjusted basis that I would say we've ever had.
The investment today stands on its own does that there are certainly risks the spreads could widen further and there are certainly risks to spreads could tighten a lot and the economic experience will be just as good whether we take more leverage or not.
So I don't think we can lose sight of that fact that the you know.
You're investing in today, our portfolio was mark to market and like the question, we had with dividends to go forward or return profile just from a carry perspective is really attractive and that doesn't take into account the potential upside that would follow a tightening scenario. If you look back in history for example, one and obviously.
<unk>.
Every environment is different but if you look back in history and you say following 'twenty 'twenty for example, what was our best period. It was following 2021, we had a significant tightening or if you look back when spreads were 250 basis points Aegean Sea generates its best returns as you would expect Theres nothing Theres no sign.
So that you would expect us to generate our best returns following huge widening events and this obviously is one of the most historic widening events into markets ever experienced.
And do you think they're going to the big catalyst of that kind of snapback would be the bid from.
From money managers and bond fund managers are coming back in quickly I think.
I think that's a really key one and I also think that I think that there's sort of a a rotation that's going to occur.
And you can just turn on CNBC and you hear people talk about 60 40 portfolios now going forward with bond prices, where they are I think real money investment back into bonds, whether it's insurance companies or money managers are pension funds.
We're getting returns that you just haven't had the opportunity to have for the kind of credit quality. So I think that there is real money investing unlevered money that will come into the bond market and a number of different forms that I think will really benefit agency MBS and that of course is against the outlook a very.
A little supply Chris you want to add to that I was just going to make that point I mean look it at 7% mortgage rates, there's been a ton of demand destruction on the housing markets and so from a supply perspective, we're about to enter a period of record low supply relative to the last two years we're in.
2021, we saw 850 billion of mortgage net supply organically in last year or this year around 550 billion next year, it's likely to be around 200 to 250 and importantly.
Reduced slower turnover weaker housing market means that run off from the feds portfolio is going to be much lower than where it's been running as well and so to Peter's point when bond fund flows do stabilize it's not gonna take much for mortgages to be incredibly well bid relative to the amount of.
Supply that's available.
Okay.
Got it thanks, everyone I'll hop back in the queue.
Thank you for the question.
Yeah.
Our next question comes from Thomas Lee with RBC capital markets. Please go ahead.
Hi, good morning, Thanks for taking my question.
Wondering if you could share your thoughts on your liquidity position.
And perhaps talk about how agents who handle the volatility that you saw in the quarter and are literally you know what gives you comfort that you can handle all the potential future volatility in the markets. Thanks, Yeah. Yeah. Thank you for the question.
When I expected today.
So as we sit sort of right now I would say our liquidity position. If you think about it on a percentage of equity basis is basically unchanged. So.
Our liquidity position disappointed at about $3.1 billion and if you think about that on a percentage basis of our tangible equity, it's probably 50 253 ish percent of our equity.
And if you look back at that over the last eight quarters.
You would see that that percent has ranged right around there somewhere between on average probably about 55% over that time period. So what's important is you have to think about that liquidity position said another way is our normal operating liquidity position now obviously a lot of change in the absolute dollar.
They've come down, but on a percentage of our equity basis, it's still really really strong and consistent with where we normally operate in and you have to think about that in the context of what's already occurred.
About the amount of of book value decline in amount of spread widening we've been able to maintain.
At the same amount of percentage of liquidity and that's really key what's so what that means is that obviously over time as the environment changes, we take actions to change the composition of our hedge portfolio and the asset portfolio.
And take steps to maintain a really strong liquidity position to give us strength continue to navigate through these difficult market conditions and that's what we'll continue to do but as we sit today, we have basically a normal liquidity position.
Gotcha very helpful. There.
And then in terms of the funding cost side and given the rapidly rising rate environments. What's your outlook for funding costs and perhaps you could just remind us again the <unk>.
Impact you have for lock in some rates using interest rate swaps. Thanks, Yeah, well you could see the benefit so of our hedge portfolio in <unk>.
Obviously from a from a cost of funds perspective, the type of hedges. We have has an impact on our overall cost of funds. If you looked at the amount of swaps that we have outstanding versus our repo, we actually have more than 100% swaps versus repo balance. So said another way all of our short term debt.
In the form of a repo is synthetically converted to a longer term debt through a swap portfolio. So as our repo costs have gone up and they will continue to rise as deferred.
You know it makes its last few moves the return leg on our swap which is also indexed off OIS.
OAS or fed funds rate is going to move up in the same range. So overall, you're seeing a relatively stable cost of funds.
And that relatively stable cost of funds. There is some timing differences in our cost of funds went up maybe 30 basis points from 18 to 50 last time, but what's important is you know.
Overall, that'll all sort of work out and the timing of those hedges.
That'll be a relatively stable funding cost and you layer that on to the repricing that's going on on the asset side and that's what's leading to our margin or net interest margin actually increasing and now up to 281 basis points. So I.
I would expect general stability in our cost of funds as we go as we go forward given the amount of swap hedges that we have.
Gotcha very helpful. There. Thanks again, yes sure. Thank you for the question Ken.
Our next question comes from Eric Hagen with BP.
Okay.
Hey, Thanks, Good morning, I think I just have a couple in the rebalancing.
Hey, good morning, guys and the rebalancing that you did in October have you raised any capital this month or how does the reduction in leverage has been a function of asset sales can you say how big of your portfolio is right now.
And then how are you guys thinking about using TBA as a substitute for repo in this environment like what kind of relative out what kind of relative value. Do you think investors are picking up from a heavier TBA position right now yeah, well I don't want to I don't want to talk about in a months activity with respect to capital markets, but you know that we're always looking for opportunities.
To use the capital markets in a way that we believe is enhancing to our shareholders. I think we've demonstrated that in the past and will continue to adhere to that that philosophy.
And you know when you think about from an asset portfolio perspective.
The book value and the leverage numbers. So I think you can conclude what.
What the asset balances now with respect to TBA, Chris can talk a little bit about the TBA because clearly there is an up and liquidity value there.
And generally speaking roll Specialness moderated early during the third quarter to levels that are more in line with long run historical norms during the third quarter, our position averaged around 10 basis points or so through repo.
You know and again as I've said, you know in the past I mean 10 basis points of our financing advantage relative to repo against the backdrop of a incredibly low prepayment risk environment. It was compelling and so it's likely we'll continue to to maintain a fairly large TBA position.
For the foreseeable future I think you know in the current environment five to 10 basis points of Specialness is a reasonable assumption.
With some potential upside to better levels, there's a.
A huge range of tradable coupons within floats and the current environment and so.
With active fed sales off the table for the foreseeable future and a large percentage of float in certain coupons tied up in held to maturity classified accounts at banks I think you know I think there's probably if anything upside to those levels relative to you know longer run historical averages. So it's likely.
We will continue to maintain a pretty sizeable TBA position.
Got it appreciate you guys. Thank you.
Yeah. Thank you for the question.
Oh, no question or the follow up from Bose George.
Please go ahead.
Oh.
Hey, guys.
Ask the series C preferred shares they switched to floating on the 15th historically, you've called converts when they switch but is the thought here just to hold on to that capital and then see what things look like when the market stabilizes.
Yeah. Thank you for the question that's exactly the way we did we sort of look at that is obviously it is effectively callable.
But you can also just like we would evaluate any new preferred you know you look at the returns effective as to your question you asked about sort of prevailing returns today.
A really attractive relative to that level, even though that just resetting at a higher rate. There is a huge spread differential between the return that we can get at the margin right now and that cost of capital. So from a from a common shareholder perspective that is significantly accretive.
Even though it's reset it at a higher rate, but as market conditions change then we'll of course continue to evaluate that but yes. Thank you for that question, but it's still you know from that perspective relative to return on agency MBS really beneficial to our common shareholders.
Okay, great. Thanks.
Okay.
Yeah.
This concludes our question and answer session I'd like to turn the call back over to Peter.
Uh huh.
Yes.
Thank you operator, and thank you for everybody for your participation on the call today I'll just leave you with one final thought which was what I said in my prepared remarks as well we know that has been a very challenging year from an investor perspective, given the spread widening that has already occurred I think it's important that we continue to.
Stan that we have we believe a very unique opportunity is still ahead of us given where agency MBS are today. So we appreciate your participation and we look forward to talking to you again after our fourth quarter.
Okay.
The conference has now concluded.
Today's presentation you may now disconnect.