Q1 2023 Dynex Capital Inc. Earnings Call
[music].
Good morning.
My name is David and I'll be your conference operator today at this time I'd like to welcome everyone to the di next capital first quarter 'twenty twenty-three earnings Conference call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session if you'd like to ask a question.
During this time simply busty starchy, followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one once again, thank you Alison Griffin Vice President Investor Relations you May begin your conference.
Good morning, and thank you for joining us today for <unk> capital first quarter 2023 earnings call. The press release associated with todays call was issued and filed with the SEC. This morning April 24, 2023, you May view the press release on the homepage of the Dynegy website.
Our next capital Dotcom as well as on the SEC's website at SEC Dot Gov.
Before we begin we wish to remind you that this conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. The word believe expect forecast anticipate estimate project plan and similar expressions identify forward looking statements that are inherently.
Object to risks and uncertainties, some of which cannot be predicted or quantified the company's actual results and timing of certain events could differ considerably from those projected and are contemplated by those forward looking statements as a result of unforeseen external factors or risks.
For additional information on these factors or risks please refer to our disclosures filed with the SEC, which may be found on the <unk> website under Investor Center as well as on the SEC's website.
This conference call is being broadcast live over the Internet with a streaming slide presentation, which can be found through a webcast link on the homepage of our website. The slide presentation may also be referenced under quarterly reports on the Investor Center page joining me on the call as Byron, Boston, Chief Executive Officer, and co Chief investment.
Officer Murthy, popping out President and co Chief investment Officer, and Rob Collagen Executive Vice President Chief Financial Officer.
And with that it is now my pleasure to turn the call over to Byron.
Thank you Allison and good morning, everyone.
We start with a few key points as I mentioned in the past. This is an incredible moment in history global risks may have increased but most importantly, we're at a historical opportunity in the mortgage backed securities market.
Brian generational wide level with an opportunity for private investors to step in and make accretive long term investments.
This decade is a massive period of change the globe has been jolted by multiple crises that is creating changes for social political economic and geopolitical arrangements.
This amount could change mean higher volatility and unknown consequences. Nonetheless, our team is experienced and disciplined.
Proving the value we experienced in the past we have responded to other market events in a very thoughtful manner as shown in our long term results. We managed our business for the long term and just as we've done in the past where determinant guide you our shareholders in this disrupted market environment.
Third our strategy is built for this environment for some time now <unk> been preparing for a high probability of unanticipated events enterprises. In fact, you have even heard me say surprises are highly probable.
We've also characterize the environment is evolving and to us that means we must be very careful about drawing strong conclusions as many factors remain in a state of flux. We've now experienced two turbulent marketing events in the last six months first the ODI crises originating in U K and now.
The banking crisis in the U S. Both events represent exactly the kind of surprises that are liquid balance sheet flexible mindset and preparation is designed for and we continue to manage your capital with this disciplined approach as many of you know.
Started my career in the financial markets of 1981.
The current period has a lot of similarities to one that began in the business multiple financial crises range throughout the 19 eighties ultimately the.
The FDIC in RTC, we're past selling billions in assets and private investors stepped in to take advantage of generationally wide mortgage backed security spreads there were no GSE portfolios are fair to take down any of the risks while today, we're not witnessing the same scale of disruption as the 1980. However.
We are at Generationally wide mortgage backed security spreads and private investors now have the chance to step in and take on the risk just as they did in the 19 eighties.
With my long history in the market.
A compelling investment opportunity here, while spreads go wider.
We consider the bulk of the widen behind us.
In the medium term to long term, we see a very real possibility of tighter spreads that will eventually allow the recovery of book value.
We believe the capital we have invested and the dry powder, we retained to deploy will generate strong returns for our shareholders, creating value for years to come.
Samir <unk>, who will provide further details on all of this in her comments.
I want to emphasize our dynamics capital is uniquely situated to this opportunity.
Can you talk about experience and discipline in our management team.
<unk> duration and convexity of 30 year agency mortgage backed assets truly requires an exceptional set of skills to do it on a levered basis requires a complete understanding of the risks.
Thorough disciplined processes.
Every flexible mindset.
We have demonstrated our ability to do this well, particularly during the first three years of this volatile Jackie.
I'll turn now to Rob who will discuss our financial results and Smriti, who will take you through our strategy for the environment.
Thanks, Brian and good morning.
For the quarter the company reported book value of $13 80 per share and a comprehensive loss of 54 cents per share.
The book value performance, plus the dividend delivered an economic loss of three 7% for the quarter.
The portfolio is positioned for spread tightening which occurred for the first half of the quarter, resulting in a mid quarter book value of approximately $15 50.
Going into the end of the quarter spreads widened and the 10 year Treasury fell.
After the failure of several banks.
This combination resulted in an asset losses and hedge losses going into the quarter end.
We continue to believe that our portfolio will recover a significant amount of value.
Volatility lessons.
Investor demand for mortgage backed securities improve or simply as pay downs occur over time.
We added <unk> to our portfolio this quarter as spreads widened.
Which added one four turns of leverage and represents the majority of our leverage increased from six one turns to seven eight times during the quarter.
Earnings available for distribution or <unk> was negative this quarter.
Our EAA does not include the benefit of our hedging activities.
We continue to use features as their primary hedging instrument due to the depth and liquidity of the futures market as well as lower capital requirements compared to a comparable swap instrument.
In the first quarter, <unk> realized $89 million of hedge gains Springer unamortized hedge gains of $766 million at the end of the quarter.
This is a material number that insulate the company from rising rates that is clearly protected book value from a dramatic rise in rates over the last year.
As mentioned last quarter. These hedge gains are amortized into REIT taxable income over the hedge period of approximately 10 years.
The earnings release provides our estimate of hedge gains by quarter for 2023 for the full year at 24, and then years thereafter.
For the first quarter, we recognized $18 million or approximately 30 <unk> per share related to our hedge book.
The total amount of gain to amortize into REIT taxable income can go up or down depending on the companys hedge position and movement in rates in subsequent quarters.
We have experienced some value degradation in our hedge book since we rolled our futures in February as long term rates have dropped.
Although they are up in value since quarter end as rates have once again reverse direction.
Since our hedge gains are a component of REIT taxable income it'll be part of our distribution requirement along with other ordinary gains and losses.
As we discussed last quarter, we expect the hedge gains will be supportive of the dividends in 2023 and beyond.
Even if net interest income declined due to higher financing costs.
Page six in our earnings presentation highlights the components of the portfolio returns and recent trends in net interest income and hedge gains.
Finally, I wanted to mention that we eliminated the utilization of our ATM program. This quarter as we felt this is a period for capital deployment.
Pricing was less favorable.
With that I'll now turn the call over to smartly for comments on the quarter.
Thank you, Rob and good morning, everyone at.
At a high level I'm very excited about the opportunity we are seeing to invest in agency residential mortgage backed securities.
This excitement is tempered with a deep respect for the complexity of the global macroeconomic environment.
Let me explain from a macro perspective, we still frame the environment is evolving and we are seeing a series of transitions occurring in the global economy, specifically transitions from pandemic did post pandemic.
This inflation to inflation.
Time to war time globalization to de globalization dollarization to de Dollarization nonrenewable energy to renewable energy quantitative easing to quantitative tightening zero and negative interest rates to positive interest rates geopolitical unit polarity to multi polarity and lead.
<unk>.
Automation to artificial intelligence and many more.
This led us to characterize the investing landscape as having a flat.
That tailed distributions as we discussed during last quarters earnings call.
Our risk and investment strategies continue to be set in this context.
Against this backdrop, we are now seeing the evolution of our historic even generational investment opportunity in the agency MBS market. We already believe spreads were attractive last year when they widened in November and then tightened quite substantially in January but due to the banking turmoil in March we now have an even.
More extended opportunity to make investments.
As many of you know the FDIC has engaged blackrock to sell the assets held by SBB and signature bank.
These assets totaling $98 billion or in the control of Blackrock market Advisory group and will be sold over the next nine months.
I'll discuss this development alongside my other comments today.
So why are we calling this a generational opportunity. Please turn to page 10 of the earnings deck.
This slide shows the history going back to 1985.
Current coupon agency MBS nominal spread hedged assuming an equal mix of five and 10 year Treasury.
I wanted to highlight five periods.
Early 1980, $90 98 to 2003.
2007 2008.
2020, and then 2022 through today.
These periods represent a major deviation from the average level of MBS spreads and are usually followed by periods of much tighter spreads even if it takes two to three years in our view these are periods during which capital deployment and investment results in outsized forwardly.
Turned and we are right in the middle of one such great opportunity.
On the very left side of the chart you can see MBS spread spiking.
The liquidations rose from the savings and loan crisis in many ways. We are in a similar situation.
Our net sellers of mortgages home prices are falling moderately and private capital dominates the bid for agency MBS.
But we are different in two important aspects first we don't believe we are in the same scale of crisis atmosphere with continuous large scale liquidation of the same magnitude.
And second the stock effect of the Fed's MBS holdings, even with quantitative tightening is a powerful stabilizing agent for mortgage spreads.
You can see that in the post dfc spread spikes they are much lower than 2008, or the 19 eighties because of how big the fed's balance sheet.
On the very right hand side of the chart you can see the dramatic move wider since late 2021 and mortgage spreads representing a tripling from the levels at the loan.
We believe that most of the transition to wider spreads on agency MBS is now behind us and while spreads may fluctuate and gap wider on occasion.
Spreads today broadly reflect the risk premium that is demanded by private capital and net supply picture from quantitative tightening seasonal supply and some but not all of the risk premium for the sales from the FDIC takeover of the failed bank.
We expect spreads will remain at wider levels until the bulk of the sales are complete and hence we view. This period is extremely beneficial to remain invested and to continue investing.
This is not to say that we think no further bank failures can occur or that more sales are unlikely that's still possible.
It simply pointing out that a significant amount of repricing has already occurred.
We are of course always contemplating what can take spreads out to 2008 levels. We believe substantial stress in the banking system with forced asset sales could get us there.
But there are mitigating factors today with banks ability to tap the discount window and the Bts P Bank term funding program. These things with Cushing or slow any type of disruption, resulting from such stresses.
As I mentioned previously the stock effect of the Fed's balance sheet is also a stabilizing factor. So the irony of the current situation is that while there does seem to be an immediate opportunity. We're tempering that enthusiasm with a deep respect of the many ways in this situation can actually develop.
A final point to note on this slide is that we have preserved a significant portion of our book value through the bulk of the transition to wider spreads book.
Book value was $17 range in August of last year.
And as Rob mentioned as high of $15 50 in early February .
Look value can rise, even with a modest tightening in spreads.
Let me now turn to our positioning and outlook, we remain focused on liquidity and flexibility and the opportunistic deployment of capital.
On net we've been moving our position up in coupon, while also adding assets on weakness, we added a little over $1 $1 billion in assets for the quarter at wider spreads in February and March This took leverage to total uncommon capital about one four times.
From year end.
We've largely maintained our position in lower coupons tune in two and a half. They currently make up 20% of assets by fair value. These remain positively convex assets offering positive spreads to treasuries with prepayment upside relative to both market and model expectations and remain supported by the demand for housing.
We are managing our hedge position with a medium term outlook for rates and the curve.
Because of the medium to long term inflationary forces we describe on page seven.
We believe the fed is focused on inflation and in the absence of a significant economic downturn can continue to look pack any moderate economic weakness.
Maintain the restrictive financial conditions needed for inflation to decisively turn towards their 2% target.
These factors result in range bound yields at the long end of the yield curve, which also provides solid fundamental support for tightening of the mortgage basis. Once the supply shock of the FDIC sales go through the system.
At today's level of mortgage spreads were more focused on the mortgage basis as the major source of alpha generation as opposed to curve and rates positioning on hedges.
We see opportunity to add assets across the coupon stack and would favor, adding both current coupons and discounts based on relative value at the time preserving some flexibility with TBA and selectively investing in pools.
I'll briefly cover what we know about the FDIC sales and our expectations for how conditions may evolve.
The total amount of securities to be sold is 98 billion.
55 of which are agency and Ginnie Mae Securities and $43 billion CMO.
The first sales happened last week about $1 billion.
Mortgage spreads did widen in response and the sales are expected to ramp up to 152 billion per week. This should last about 25 weeks if they keep up the current pace can we expect this to end sometime in October we.
We also expect concurrent sales of the CMO to begin in about two weeks. These are expected to bring duration and hedging flows into the market that will further impact rates and spreads.
All told we estimate the duration equivalent of $69 billion Daniels will be sold over half of which is in the pass through bucket.
Over the course of these sales, we expect to find opportunities to deploy capital at attractive levels.
So what can shareholders expect from us as I've said this is a very accretive investment environment by which I mean, the return on capital exceeds our dividend yield we expect to be active and opportunistic investors.
We can reallocate existing capital raise and deploy capital as well as raise leverage all three remain very powerful options and comprise significant upside over the long term as we outline on slide 12.
In the medium term as Rob mentioned, we expect bullish support for agency MBS spreads to come from any decline in delivered volatility the relative attractiveness of the agency guaranteed cash flow offering significantly turns over treasuries as well as on a risk adjusted basis versus <unk>.
Credit sensitive investments.
We remain highly respectful of the global macro situation. We're looking ahead to the debt ceiling, which we believe can be a major risk flash points and we are planning accordingly.
A final point going back to the spread slide on page 10.
I wanted to highlight <unk> performance.
We began our existence in current form in January 2008 at the beginning of the great financial crisis.
In 2008, and 2019, we generated a cumulative total economic return of 106%.
From 2020 to 2022 this decade.
<unk> has delivered industry, leading performance outpacing our peer group of agency and hybrid leads by an average of 28 and 52% respectively on a cumulative basis.
We're excited about the prospect of a target rich investment landscape to put the power of the <unk> team to work our demonstrated performance in managing transitions is the direct result of having the experience skill set mindset and expertise to navigate exactly this type of environment.
With that I will turn it back to Byron.
Let me reiterate first we are seeing a compelling generational opportunity to invest in agency residential mortgage backed securities our stock trades at a discount to book, we pay an attractive and consistent monthly dividend that we believe is sustainable.
We have ample dry powder to take advantage of attractive investment opportunities as they develop.
We think the stock offer strong value at these levels and the <unk> team has personally invested alongside our existing shareholders and we will continue to invest as we see value.
Second it is important now more than ever to be able to rely on her team a clear strategy and deep experience in navigating complex environments.
Also important to have transparency in your investments.
<unk> balance sheet can be clearly and cleanly value, we use mark to market valuation is to calculate our book value daily.
All of our assets are marked or reflected in earnings and book value. We.
We do not have any held to maturity investments or other unrealized losses that are hidden from sight.
These are a central aspects and assess not only who manages your capital, but where your capital is invested.
We take responsibility as managers and stewards of your savings very seriously.
Thank you for your trust and look forward to updating you on our performance and the environment next quarter.
With that operator, we will now open the call for questions.
Thank you at this time I would 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.
Our first question from Trevor Cranston with JMP Securities. Your line is now open.
Alright, thanks, good morning.
Firstly, you mentioned that with the beginning of the portfolio sales last week you saw.
Some spread widening can.
Can you talk a little bit more about credit who you see as the marginal buyer of MBS in the market.
How confident you are that there wont be immaterial.
Additional spread widening.
Portfolios continue to be sold over the coming weeks. Thanks, yes.
Yes, Hi, Hi, Trevor Thank you for the question yes.
Yes, so one thing I want to say is.
There are different ways in which mortgage spreads can widen alright. So in 2000 22021, you had a transition in interest rates.
Same in 'twenty, one to 'twenty two.
Mortgage spreads widened at that time really because the underlying cash flows of the instruments themselves was affected you went from an interest rate regime of like one 5% 10 year notes or half a percent tenure announced a 4% 5% levels.
Levels of rates, so, that's where extension risk or the actual mortgages change their cash flow and Ken can therefore, widen if you will.
Those types of spread widening events are ones that we believe are controllable and you can think through the way the duration of an instrument changes and you can hedge for that okay.
What we're seeing what we saw in November of last year, and what we're seeing now in March of this year.
And even here going forward with the FDIC sales.
<unk> is different because the underlying cash flows the instruments aren't actually changing much at all you know interest rates have been super range bound right. So youre seeing an imbalance between the supply and demand.
Mortgages is very technical in nature.
And that gives us some confidence because you can actually hedge the instruments better and.
So to answer your question directly on the FDIC sales, we did see some mortgage spread widening.
It's not to say that we won't see more spread widening we actually expect to see a fair amount of spread wining. The marginal bid at this point really is money managers.
And Thats why youre seeing stepping in to take some of this product down from what I understand there is still relatively underweight.
Lower coupon securities.
Mortgages are starting to look attractive relative to corporate so those would be rationale for money managers to allocate money into the sector.
But we do expect.
As time goes on.
That we're going to see periodic bouts of widening from here is it going to be the 60, 70 80 basis point type widening that we've seen I don't think so.
We're already here at 170 basis points nominal spread to treasuries.
Look very cheap to corporate bonds here on a risk adjusted basis. So that's that's where we see the demand coming from.
Can I add one other thing.
Hey, Jeff.
Sure.
One question is how far will a government backed bonds widen versus other non gov.
Government backed asset and one is I've seen a couple of times in history, where they've widened suddenly a time and then capital accumulate and really chases after the asset spreads back in describing that situations, where spreads will move around but you've got to ask yourself, how far will it.
Government backed asset widening.
Other assets curious similar guarantee.
Sure. Thanks, John .
And I guess, so to the extent that there is.
Some incremental widening that occurs.
<unk> has happened.
And you know that.
Potentially have some impact on book value.
Can you talk about how high you'd be willing to let leverage drift in that scenario given that potentially be.
More attractive investment opportunity to take advantage of on the flip side of that yeah.
Yeah, I think I think look this is why we've emphasized.
Emphasized.
Cash and unencumbered assets.
A really high amount relative to our demand of repo that we hold.
I would say there are two major factors on leverage here.
You heard me say, we like big investment opportunity, but we're tempering it because we see.
The global macro environment evolving so the number one consideration for us always in terms of increasing leverage or adding assets.
Is going to be what is the macro environment.
If that happens to be something.
We expect to have a fair amount of degree of caution than I would say our appetite to increase leverage will be lower right.
In the large scheme of things. This period is actually a period in which you should be okay, taking leverage up.
Over and above sort of what you think your normal operating leverage numbers are because of the long term investment opportunity.
So in reality.
I feel like if we see that investment opportunity when spreads widen our willingness to do that while it will be tempered by the macro risks that that's in the environment is going to be higher than <unk>.
If spreads were say 30, or 40 basis points tighter. So on average our inclination would be to run higher levels of leverage.
Yes.
Okay I appreciate the color. Thank you.
Sure.
Okay next we'll go to Doug Harter with Credit Suisse. Your line is now open.
Thanks can you just talk about.
The repo market and how youre dealing with maturities around the time of its potential.
Sealing and just how that influences your last comment around <unk>.
As being an environment, where you should be comfortable taking higher levels of the corporate.
Yes, I think I think that's a great question, Doug it's great to hear from you.
Look we think this is a major risk flashpoint.
We believe our financing should be adjusted.
To reflect the risk of <unk>.
Potential issues, leading up to it and even including <unk>.
A potential default by the U S. Even if it's for a short period of time right, you're already seeing sort of some dislocations in the bill market, we have not actually seen a ton of.
Activity in the repo market that would suggest that the availability of financing is impaired right now, it's actually quite flushed with cash.
All the money that's moved into the money funds is out in the repo markets right. Now you can see that in bill rates short term bill rates are super low right now.
Below 4%. So some of that is starting to bleed through into into the agency repo market in terms of availability of funding okay.
No.
Just in terms of the way, we typically manage around quarter ends in events like this.
Our strategy has been to term things out past certain dates.
Continue to employ that strategy and we haven't had any issues with the ability to term finance.
Debt at all but we do think having this this upcoming risk is one of the other reasons that.
We're tempering our willingness if you will to to take leverage up without consideration of that very important factor.
So can I add one more thing.
Sure one other piece, yes, which is having the TBA is on our balance sheet.
Makes it really easy for us to take the leverage off.
So if you think about.
Our leverage ratio, Rob can you talk about the the difference between the repo leverage versus the total.
Sure, Yes, our repo leverage alone is only about three four turns.
Our leverage as TBA and other so.
Some of these points.
Give you some more color on that much faster for us.
To adjust if needed.
Got it and how would you think about it.
We've got a successful resolution of the debt ceiling.
Yes.
Our spreads remained attractive what would be kind of seed.
The higher end of our range you might be comfortable with in this type of wireless widespread environment.
So look in the past right.
You might think of different types of leverage levels. If you go back to that chart on page page 10.
When when spreads are wide.
We've thought of leverage levels in <unk>.
The low teens I would say right when spreads are wide you want to be able to run higher levels of leverage when.
When spreads are sort of in the middle of the range, maybe you bring that down.
So sort of like the eight to nine times level and when they are at the tighter end of the range you actually want to run lower leverage because you are taking advantage of tighter spreads.
So.
At the higher end of things Youre running and I'm going to say 10 to 12 don't hold me to that.
But that's kind of the idea right is just the higher levels of leverage all of this I would say yes.
You just can't sit there and believe that you can run it as sort of a rule of thumb without considering.
The risk environment right.
No.
If all else were equal we felt comfortable yes, the leverage can rise.
To the low to the low double digits and those will be massively accretive investments that we're going to be made over overtime.
Because we expect those spreads to come back in.
Great. Thank you.
Sure.
Next we'll go to Bose George with <unk>. Your line is now open.
Hi, everyone. Good morning.
Could we get an update on book value quarter to date.
Yes.
But right now I guess through Friday, I think were down between 1% and 2%.
Okay, great. Thanks, and then just wanted to switch of an accounting question can you remind me is there a way to disaggregate how much of the Treasury futures Mark.
Would have corresponded to like a periodic payment on the swap side.
Hey, good question Bose.
There is but you could get into nuances assumptions around cheapest to deliver in that.
So very few people do it.
Aggregation between.
Jerry and Mark to market.
So that's why we put the total amount out there so people can see what we burn.
Yes.
What's been supportive or what's buffered higher repo cost.
Okay.
I haven't seen many like solve that.
The answer very well.
And but the 34 cents is the amortization of previous marks right. So that is correct yes.
And I have to go into more of a technical answer but.
Put our total gain out there.
We've used the straight line approach being a REIT.
The tax impact is important so.
That's why we're putting out that disclosure if we were in swap form.
We have more gain upfront given the.
Move in rates and the shape of the curve.
In order to give a simple answer we're just giving the total gain and now will actually impact REIT taxable income.
Yes, Okay, no that makes sense. Thanks a lot.
Yeah.
And I'd like to remind everyone. Its star one if you have a question next we'll go to Eric Hagen with BT IAG. Your line is open.
Hey, Thanks, Good morning couple of questions here when you think about how the hedges are allocated and maybe masked with the asset side of the balance sheet how much hedging.
Current coupon TBA.
Versus the pools in the portfolio and how do you see that hedge ratio evolving for Tvs versus pools going forward.
Then following up on the question around leverage just how does the slow prepayment environment.
I was just factor in itself.
Five the amount of amount of leverage you're willing to tolerate.
How does that triangulate with the amount of liquidity you carry how much.
Liquidity do you envision carrying if youre, if youre leverage would even go up a little bit more.
Okay I'll take the second question first which is.
The prepay environment, which is <unk>, which is an interesting thing I think I think we've gone through probably the slowest period of Prepays.
And the last three to four months and from here on out I think prepays will start to rise.
Due to seasonal factors and just.
Existing home sales.
Wrapping up off the bottom.
So.
In terms of the slow Prepays. So yes, we do carry leverage we do carry liquidity right to be able to manage the the way the yield of an instrument changes over time as that pull to par comes back.
And that's an important factor in thinking through having cash on hand to pay the dividend and so on and so forth, but it's not a it's not a it's not a big material consideration Eric.
We're carrying sufficient amounts of cash and unencumbered assets to be able to cover all of that.
So on the margin it does not actually make a lot of difference in terms of our ability or willingness to take leverage up or down.
The main driver of whether or not we're going to make a marginal investment.
Is gonna be does the marginal investment make a return that exceeds two.
Cost of capital.
And in this environment.
That is also tempered with the macro question should we should we take that risk.
So leverage is more a function of that demands of levels of liquidity with Carrie are a function of the macro volatility we expect.
And the strategy is to carry enough liquidity and unencumbered assets to be able to make the margin calls when spreads widen. So that you have excess capacity to put that extra capital to work when the spreads have widened and book value has declined.
So we are anticipating book value to decline as spreads widened we wanted to be prepared for that with the extra liquidity.
And then we want to be able to deploy.
That dry powder at that time.
To make that that marginal investment and when spreads tightened and you'll get the benefit of that so that's the second second question. Your first question.
Remind me what that was again real quick yeah, we're looking at.
Hedge ratio between TBA pools, and how you guys think about that thank you yeah I would say you know look we.
The instruments that we hold many of them.
In fact, almost all of them trade at par or below par.
So these are instruments that in general that even at these level of interest rates are going to be longer duration securities.
Some of them the current coupons have sensitivity to the five year part of the curve.
Some of them have more sensitivity to the seven and 10 year part of the curve.
So in general.
We on a blended basis, we think our sensitivity is somewhere between that five and seven new part of the curve and that's how we're thinking about that hedge ratio when when the hedge ratio changes and I think youre right on that which is really when the underlying cash flows.
To start to shift.
For the cash flows to shift we think mortgage rates have to really start to fall much below 6%.
Approximately five 5% or so for cash flows has changed and then or go the other direction, 7% or above so youll now sitting sort of in the sweet spot, where you were range bound in treasuries.
Against durations on changing that much so we're not really feeling a great meeting.
To mess around with the hedge ratio.
But that's kind of how we think about it it's mostly on an aggregated basis.
The current coupons are more sensitive to the five year part of the curve and below.
But many.
Most of our assets are actually sitting much below par and thats why we have the longer duration hedges.
Yes.
Really helpful. Thank you guys very much sure.
There are no further questions at this time I'll now turn the call back over to Byron Boston CEO for any additional or closing remarks.
Thank you very much all and as I said earlier.
I just want to make sure I was muted thanks.
You again for joining our call this quarter and we look forward to chatting with you again next quarter. Thank you very much.
And this does conclude today's conference call you may now disconnect.
Okay.
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Okay.
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