Q4 2023 Dynex Capital Inc Earnings Call
Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the di next capital fourth quarter and full year 2023 earnings results Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question.
<unk> and answer session. If you would.
Like to ask a question. During this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question Press Star one again.
I'd now like to turn the conference over to Alison Griffin Vice President of Investor Relations. Please go ahead.
Alison G. Griffin: Good morning, Thank you for joining us for <unk> capital fourth quarter and full year 2023 earnings call. The press release associated with todays call was issued and filed with the SEC. This morning January 29, 2024, you May view the press release on the homepage of the <unk> website at <unk> capital Dot Com.
Alison Griffin: As well as on the Sec's website at SEC Dot Gov.
Alison Griffin: 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 words believe expect forecast anticipate estimate project plan and similar expressions identify forward looking statements that are inherently subject to risks and.
Alison Griffin: Some of which cannot be predicted or quantified the companys actual results and timing of certain events could differ considerably from those projected <unk> 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.
Alison Griffin: SEC, which may be found on the <unk> website under Investor Center as well as on the Sec's website.
Alison Griffin: 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 joined.
Joining me on the call is Byron, Boston, Chairman and Chief Executive Officer, Smriti, Pappano, President and Chief Investment Officer, and Rob Colligan Executive Vice President Chief Financial Officer.
Alison Griffin: It is now my pleasure to turn the call over to Byron.
Thank you Allison.
Byron: Let me start by saying a few words about our board member.
Byron: Brand and great teammate days Stevens, who we lost this model.
Byron: Dave will be true champion at the United States housing Finance system and also the American homeowner for.
Byron: For me personally we worked together for over 20 years reorganization.
Byron: Always locking arms to achieve a common goal.
Speaker Change: Feels good to see a friend exit the role of lines.
Speaker Change: We will Miss Dave Great teammate brand and most importantly, an absolutely wonderful human being.
Well that was tough moves to contend with the earlier this year I am proud of the remarkable work that team <unk> continues to achieve.
Speaker Change: As an active manager our team navigated historic volatility would scale.
Speaker Change: We came into the year with excess capital and deploy the capital in a disciplined manner throughout the year to position us to generate solid long term economic returns.
As a result.
Speaker Change: <unk> shareholders have enjoyed industry, leading returns in the current decade.
Speaker Change: One full of surprises and immense volatility.
Speaker Change: Our total shareholder return was 12% last year.
Speaker Change: Since the start of 2020 to the fourth quarter of 2023, our total shareholder return has been over 10%.
Speaker Change: This compares to the aggregate bond index, ETF, which experienced losses of over 3%.
We believe our ethical stewardship of shareholder capital continues to meet investors' needs and produce differentiated results versus peers and other income alternatives.
Speaker Change: I studied history.
Speaker Change: And I can tell you that today's market presents a historic and persistent opportunity in agency mortgage backed securities.
Speaker Change: Noneconomic buyers like the fed and the Gse's have stepped away from the asset class.
Speaker Change: Vivek capital light <unk> now has the ability to earn more returns in this government guaranteed assets.
Speaker Change: I'm confident in our team's ability to navigate today's dynamic macroeconomic conditions.
Speaker Change: These compelling shareholder returns.
Speaker Change: Coaching them to incorporate the evolving landscape in 2024.
Speaker Change: We have major elections throughout the world, including here in the U S.
Speaker Change: Chairman and CEO I am focused on navigating our company through gyrations and government policies.
Speaker Change: The outcome of elections will change the power structure and political dynamics in Washington.
Speaker Change: I've been pounding the table.
Speaker Change: Prices are highly probable.
Speaker Change: We have seen that very clearly each year since the pandemic.
Speaker Change: The team factors this into their scenario preparation and thought process. This is why we believe investing in agency MBS is the most compelling risk reward.
Speaker Change: Liquidity and quality and agency MBS are needed to navigate this environment.
Speaker Change: As Smriti will describe in detail the sector fundamental and technical backdrop is improving.
Speaker Change: While we have the capability to invest across sectors and our balance sheet has been diversified in the past we have a strong global risk opinion that keeps the bulk of our capital in agency MBS.
Speaker Change: <unk> has a unique value proposition.
Speaker Change: We have a seasoned team.
Speaker Change: Our strong track record in extracting long term returns on the mortgage market.
Speaker Change: And our liquid and tradable vehicle with a tax advantage structure.
Speaker Change: We plan to continue to grow our business to offer our value proposition to more shareholders as demographics drive more investors to seek income.
Speaker Change: More of the global population will need an ethical management team to deliver the returns they need.
Speaker Change: I'll now turn it over to Rob <unk> to give you the details.
Rob: Thank you Byron and good morning.
Rob: <unk> delivered a solid quarter with an economic return of 11, 8%.
1% for the entire year.
Rob: And total shareholder return was 12% for 2023.
Rob: Over the year, we added to our portfolio manage our hedge book and raise new capital.
Last year was another historic year for bond markets.
Rob: Experienced the highest yield since 2007.
Rob: Our major banking crisis.
Rob: And continued geopolitical unrest with a major new war in the Middle East.
Rob: Against this backdrop, we started the year with leverage of six one turns and assets of $5 9 billion as well as excess capital from our capital raising activities in 2022.
Rob: We have an explicit strategy of holding higher levels of liquidity versus capital and borrowings.
Rob: Spreads widened dramatically several times during the year driven by the failure of Silicon Valley Bank.
Other financial institutions in the first quarter.
Rob: Debt ceiling crisis in the second quarter.
Rob: Portfolio sales of agency RMB ads by the FDIC, which lasted through the third quarter.
Rob: And macro volatility in October and November.
As volatility increased and spreads widened we opportunistically added to our portfolio methodically, increasing our portfolio from $5 9 billion.
Rob: Seven 4 billion.
Rob: In addition, as pricing between TBA mortgage pools collapsed from the FDIC sales.
We took the opportunity to rotate our portfolio from about 50% pools, and 50% TBA to 80% pools and 20% PVA is going into year end.
Rob: This improves our convexity profile.
Rob: And it helps us lock in attractive yield on higher coupons specified pools.
Rob: Last year, we increased our marketing and Investor relations outreach and selectively raise capital throughout the year at a modestly accretive price to book ratio, which we also deployed during periods of wider spreads.
We expect to continue our marketing and investor outreach efforts in 2024.
Rob: Okay.
Rob: Our decision to Opportunistically add to the portfolio throughout 2023.
Rob: Maintain our investment position in the fourth quarter was a very clear benefit to book value, which increased over 20% from the lows we discussed.
Rob: Last quarterly earnings call.
Rob: Given the volatility experienced throughout the year and especially in the fourth quarter.
Rob: Maintained our hedge portfolio and positioned for a steeper yield curve environment.
Rob: The portfolio hedge cost was recognized immediately in book value, Although we expect to receive a benefit of lower financing costs.
Rob: The feature as it is currently priced into the market.
Rob: As I've mentioned on previous earnings calls on the topic of hedging.
Rob: Hedge gains and losses are a component of REIT taxable income.
Rob: Part of our distribution requirement with other ordinary gains and losses.
This quarter, we added to our realized hedge gain and will carry a benefit into 2024 in future years.
Rob: As we move into 2024, we expect to hedge hedge gains will support earnings.
Rob: The table on page six in the earnings release for a more detail.
Rob: Finally, as you'll notice we reduced our G&A expenses this year by actively focusing on expense management.
Rob: I'll now turn the call over to Smriti.
Smriti: Thank you, Rob and good morning, everyone I'll begin with a brief discussion of the critical decisions made in 2023, therefore, providing thoughts on the investment environment and outlook.
Smriti: As Rob mentioned, we executed our strategy of adding to our portfolio at wider spreads throughout 2023.
Most of the F&B crisis during the debt ceiling crisis over the summer as the FDIC executed pool sales and most importantly, we held our position through the volatility in late October.
Smriti: Overall, we grew our exposure to agency MBS over the year by 30%.
Smriti: Increasing our leverage to common by the same proportion.
Smriti: Our investment team exercise, a great deal of patience and discipline.
Smriti: During the October volatility, we leaned into our liquidity and risk management to pull us through instead of selling assets at losses as many others, we're compelled to do.
Smriti: These decisions position shareholders to capture significant upside returned from tightening agency MBS spread to treasuries.
Smriti: Yes.
Turning to the macro environment, we continue to construct our strategy for an environment with widely distributed outcomes.
Smriti: The markets are focused on the fed's monetary policies and the potential for substantially lower policy rates as realized inflation falls towards that that 2% target.
Smriti: Currently the markets are pricing in 150 basis points of rate cuts in 2024.
Smriti: These would have a direct.
Smriti: A very positive impact on our future financing costs as we carry about $7 billion in financing relative to about $4 billion in long term hedges.
Smriti: For every 25 basis points realized lower financing costs, our total economic return improved by 2% all else being equal.
Smriti: In addition to substantial benefits financing costs, we believe the eventual lowering rates would result in nominal agency MBS spread tightening to longer term equilibrium levels between 100, and 140 basis points over the seven year Treasury yields.
Smriti: <unk> already seen the reentry of banks into the sector in the fourth quarter.
And we expect their participation to increase as regulatory uncertainty from the Basel Committee endgame rules and the path of fed policy rates are qualified.
Smriti: To the extent that scenario materializes, we believe any decline in realized volatility, which we are already experiencing in 2024.
Smriti: But also provide the impetus for tighter MBS spreads.
Smriti: While we believe these factors position us to capture significant upside in the medium term, we remain very respectful of the significantly different global environment that we operate in.
Smriti: We base, our long term economic view on the interaction between rising human conflict change in demographics.
Smriti: Rapid Lee evolving technological landscape, including the deployment of AI.
Smriti: Rising global debt levels, and unsustainable fiscal dynamics in the U S and major developed economies.
In our view the.
Smriti: The geopolitical world order has permanently shifted to alter the structural economic setup for the coming decade.
Smriti: Nationalism protectionism and regional conflicts contribute the rising production costs.
Smriti: Conflict driven supply shocks can translate the higher volatility impact on inflation and interest rates.
Smriti: Agent population demand more health care and retirement support costs to provide those services are rising.
Smriti: This is manifesting as a massive budget gap in the U S.
Smriti: We view the widening of U S physical gas as a significant factor in driving the level of yield and value of the U S. Dollar over the next two to five years.
Smriti: The U S economy also remains exposed to significant policy risks can be upcoming election year and beyond.
Smriti: So watching for known unknowns in China, Japan, and Europe as these economies evolve and their government policy response.
Smriti: As always we plan for alternative scenarios and have gotten the shock and remain open to adjusting our strategy.
Smriti: The broader factors I've just described continue to support the majority of our capital being invested in agency MBS, which offer a historically accretive investment opportunity.
Smriti: We believe MBS will perform well in a soft landing outperform risky assets in a heartbeat.
Smriti: We expect equilibrium spreads to be in a tighter lower range further supporting return.
Smriti: Finally.
Speaker Change: I want to acknowledge the loss of an avid supporter of <unk> and fellow board member Dave Staples.
Speaker Change: I will miss him and he will be missed by all of us at the company.
I will now turn it over to violence for his final comments.
Thank you <unk>.
Violence: I'd like to leave you with the following thoughts.
Violence: The investment opportunity in agency MBS is historic and <unk> is uniquely positioned to take advantage of it with that experience and focus on risk management, our investments last year put us in excellent position to generate solid returns in the coming years.
Violence: I'm also excited to promote greater collaboration between our executive leadership team and the board and my New role as Board Chairman alongside Dr. Julia Coronado, our lead independent director and other board members will work closely together to strategically manage our business and shareholders capital with <unk>.
Violence: Iteration of the evolving macroeconomic environment.
Violence: While visibility is limited to the very near term, we consider multiple exaggerated factors that can widen the distribution of outcomes.
Value preservation is a focus of how the team will generate total economic return.
Violence: Accordingly.
Violence: Ethical stewardship remains at the core of everything we do.
Thank you for your support and we look forward to discussing our results with you next quarter.
Speaker Change: Now ill turn the call over to you operator for questions.
Operator: At this time I would like to remind everyone to ask a question press star one on your telephone keypad. Our first question will come from the line of Trevor Cranston with JMP Securities. Please go ahead.
Trevor Cranston: Hey, Thanks, good morning.
Trevor Cranston: Looking at the.
Trevor Cranston: The great positioning slide.
Trevor Cranston: As of 12 31, it looks like you guys are set up to generally do better if rates moved higher particularly.
Trevor Cranston: At the longer end of the yield curve.
Trevor Cranston: And that's obviously come to pass so far.
Sit in January today, So I was wondering if you could maybe.
Trevor Cranston: Update us.
Trevor Cranston: As we sit today kind of on your rate positioning and your view on the.
Trevor Cranston: Great risk versus downgrade risk, where we sit today.
Speaker Change: Hi, Trevor and good morning.
Speaker Change: For the question.
So yes, you're right.
Speaker Change: The hedges are contemplated in the back end of the yield curve and we are.
Speaker Change: Positioned to benefit from a steepening yield curve.
Last front end rates go down and back end weight either remain the same or go higher.
Speaker Change: So a lot of isn't driven by the macroeconomic view that we described during the prepared remarks.
Speaker Change: And and really recognizing that while we may have some level of market pricing and the front end as I mentioned is the 150 basis points of cuts already priced in.
Speaker Change: And the yield curve, which will really benefit our financing costs in the long term, we feel like it makes more sense.
Given a number of other factors to have hedges concentrated in the back end of the curve.
Speaker Change: <unk>.
Speaker Change: In general we're positioned actually to benefit from a steeper yield curve.
And that's what's reflected in the hedge position.
Speaker Change: And then just yes.
In terms of just an update from.
Speaker Change: Year end I believe the book value is up about <unk>.
Speaker Change: Percent or so to $13 50 area.
Speaker Change: Got it okay, that's very helpful.
Speaker Change: And then.
Speaker Change: As you look across the portfolio, particularly in the higher coupon exposures.
Speaker Change: If we were to get a rally in rates from here, so down another 50 basis points or something.
Speaker Change: Can you talk about what kind of prepay response, you would expect like for example in $5, perhaps and what kind of protection you have on those pools.
Speaker Change: Yeah, absolutely yeah, one of the big things, we did last year.
Speaker Change: Rotate into.
Speaker Change: Higher coupons specified pools, and there was a pretty significant collapse in those pay ups over the summer.
Speaker Change: So we have gone into prepayment protected pools in those in those coupons having.
Speaker Change: Having said that right if you get a serious rally back down to where mortgage rates are down two 4% or lower.
Speaker Change: A lot of that protection will be compromised of simply because.
These will be there'll be new lows in mortgage rates and it would be we would expect to see pretty fast speeds.
Speaker Change: Given.
Speaker Change: Sure.
Speaker Change: The primary.
Speaker Change: Right that would really create a lot of.
Speaker Change: Prepayment risk in the five Manhattan is anything below six and a half or something.
Speaker Change: So thats, what you'd have to go through in order to really create a big prepayment response, we still think that the convexity protection that we have is is real and we'd have a benefit from it.
Speaker Change: The reason we've stayed in the low pay up specified pool is that.
Speaker Change: To the extent that you don't see it right.
Speaker Change: We would not have lost a significant amount of pay up and in general.
Speaker Change: And diversified coupon positioning and you can see that we actually have less of that five 5% fixed coupon than we do off of.
Speaker Change: The lower coupons.
Speaker Change: Because we are respecting the fact that a quick drop down in rates could create a pretty significant response in those coupons.
Speaker Change: Got it okay that makes sense. Thank you.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Doug Harter with UBS. Please go ahead.
Speaker Change: Thanks.
Doug Harter: Talked about the kind of the ongoing attractiveness of the agency market.
Doug Harter: Do you envision yourselves raising additional capital.
Doug Harter: Try to take advantage of it could leverage move higher.
Speaker Change: Just how are you thinking about possibly expanding the portfolio in this environment.
Speaker Change: Hi, Doug.
For the question.
Doug Harter: Look I think.
Doug Harter: Byron mentioned that this is a historic opportunity and it is a persistent opportunity.
Doug Harter: We remain in that environment and so.
Doug Harter: To benefit our shareholders in this kind of investing environment. It makes a lot of sense for us to raise and deploy capital.
Doug Harter: That was our strategy at the end of 'twenty two week.
We had I think in 'twenty, two we raised over $250 million in capital that capital got invested in 'twenty, three we raised a little bit more in 'twenty three.
That continues the raising and deploying when you have accretive investment opportunities.
Doug Harter: This is a good strategy in the long term for our shareholders, we're going to continue to do that.
Doug Harter: I think.
Doug Harter: To the extent that that continues we will keep doing the returns are still in the mid teens Roe. So.
Doug Harter: We feel we feel really really good about that right now.
Speaker Change: Can you just remind us how you think about when you say accretive how you think about that is that.
Speaker Change: Accretive to book is that accretive to returns.
Speaker Change: And.
Speaker Change: Kind of the thought process you go through before deciding to raise capital.
Yes.
Speaker Change: We think about everything you described one is what has been the immediate price the book impact of any green.
Capital raising we think about mostly.
Speaker Change: The long term return potential.
Speaker Change: In the capital investment relative to the cost of capital right.
Speaker Change: Right now you are able to earn.
Speaker Change: A double digit return from Macquarie on mortgages relative to hedges without incorporating any combo spread tightened.
Speaker Change: So when you add the spread tightening potential into the future Youre really looking at <unk>.
Speaker Change: <unk> grew 20.
Speaker Change: Long term returns.
Speaker Change: So when you when you view those types of returns in the current picks up.
Speaker Change: Margin on dividend yield being in the 12%.
Speaker Change: These are great investments.
Speaker Change: So that's how we think about it in the long term.
We will ask shareholders benefit from that.
Speaker Change: Australia and deploying the capital.
Speaker Change: We believe the answer is yes and no.
Speaker Change: Keith we're making the decision to raise them.
Keith: Hey, Brian Thank you to add a little a little color to that you also asked about leverage we do have the ability if we see an opportunity to take leverage up and then add to our capital base at a different time I do think the market given our performance will give us opportunities to raise and grow.
Keith: Sure.
But sometimes it's not exactly the right timing right over time.
Keith: Our price to book has gotten smaller.
Keith: Gap has gotten smaller.
Keith: The market's understanding our performance, we will have the ability to grow but.
Keith: If it is not exactly the right time, we'll temporarily take leverage up and backfill it with capital and be very judicious about that throughout the year and going forward.
Keith: Your next question will come from the line of Bose George with K BW. Please go ahead.
Bose George: Hey, everyone. Good morning.
Bose George: I just wanted to ask about hedging just with the the rotation more into pools versus TBA does that change anything in terms of how you view the use of treasuries versus versus swaps or you just touched on that.
Speaker Change: Hi Bose.
Speaker Change: Not really.
Speaker Change: We we still see the capital cost of using interest rate swaps to be.
About twice as much.
Speaker Change: <unk>.
Speaker Change: Thank you James.
Speaker Change: On a capital adjusted basis.
Speaker Change: In terms of hedges and they limit flexibility in times of stress.
Speaker Change: So our macro view really drives the selection.
Speaker Change: Hum.
Speaker Change: Having us be in pools really doesn't make a difference yes.
Speaker Change: <unk>.
Speaker Change: You have a different type of financing that you're hedging in the repo markets relative to just a few days, but we still feel like we're in the right in the REIT sector.
Speaker Change: Okay, great. Thanks, and then separately you mentioned the benefit of rates going down.
Peanut to your spread can you just go over that again and is that a benefit to the economic return.
Speaker Change: GAAP EPS, so yeah, just kind of a little more detail on that would be great.
Speaker Change: Yeah.
Speaker Change: <unk> term so how are we thinking total economic return com site.
Speaker Change: And if you want to decompose that.
Speaker Change: It's really we think in terms of like the benefits of it comes with some cost.
Speaker Change: So all else being equal if the financing costs go down by 25 basis points and nothing else changes, let's say the shape of the yield curve doesn't change.
Speaker Change: Our investment multiples mutually.
Speaker Change: The positive benefit would be 2% economic return.
Speaker Change: If you could just think of just financing costs going down is about 2%.
Speaker Change: On the total economic return.
Speaker Change: Okay, great. Thanks, and then just one last one just what are your expectations just for longer term mortgage spreads you've talked about spread tightening and just touch on.
Where it goes in sort of the cadence.
Speaker Change: Yeah look I think there's something very.
Speaker Change: Important happened in the fourth quarter right the feds stance on monetary policy.
Speaker Change: Changed in December you can call it a pivot.
Speaker Change: But once that happens.
Speaker Change: Fox corporate bonds and agency MBS, they all benefit from that change in stance. So that's that's the person right.
Speaker Change: Last year banks were a net seller they sold about $250 billion in mortgages.
Speaker Change: Net sold about $300 billion of margin.
All of that is shifting to the clients.
Speaker Change: Ed.
Speaker Change: That's from being.
Speaker Change: Tightening stance to a neutral stance and potentially even an easing stance.
Speaker Change: The possibility of banks starting to come back in.
Speaker Change: Alright that that's already happened if you looked at <unk> results. This past quarter. They were a net buyer of about 17 billion of mortgages.
Speaker Change: All of that kind of shift the technical within the mortgage market right.
Speaker Change: And then we've also we've also seen housing activity in terms of turnover rates starting to pick back up again madam existing home sales numbers.
Speaker Change: Turnover activity is starting to rise again.
Speaker Change: All of this to us points to equilibrium spreads more in sort of like the 100 to 140 basis point range over the seven year Treasury relative to the 140 to 190 that we're sitting at right now is it going to happen today tomorrow.
Speaker Change: And this all could happen right, yes, you get.
<unk>.
Speaker Change: A decline in China yields because the fed easing all of that so we're not saying it will happen we're saying.
Speaker Change: Possibly.
Speaker Change: Could happen those factors in play now.
Speaker Change: The fundamentals and technicals have shifted.
Speaker Change: The range of spreads is actually.
Speaker Change: Lower if you will in a sense that instead of being on 140 to 190, maybe we're sitting in.
Speaker Change: On the 120 to 160 <unk> kind of range. So that's kind of how we're thinking about it but in the long term as banks come back in the CMO market gets active the curve steepen all of these things are supportive of.
Speaker Change: Tighter and lower.
Speaker Change: Reds on an equal equilibrium basis.
Speaker Change: Okay, great. Thanks, a lot.
Speaker Change: Your next question comes from the line of Matthew <unk> with Jones trading. Please go ahead.
Matthew: Hey, good morning, guys. Thanks for taking the question can you talk about the relative attractiveness of TBA versus cash at the moment.
Matthew: Looking at the balance sheet, you guys have a lower cash position. Since 2020. So can you talk about that and just where you've been deploying that across the coupon stack.
Speaker Change: Yeah, I think so you.
We need to be versus versus pools.
Speaker Change: The relative attractiveness.
Speaker Change: Yes, okay.
Yeah.
Speaker Change: So right now I would say the story in TBA depends on the coupon.
Speaker Change: The higher coupons are still coming from a level that is.
Speaker Change: Lower band.
Lower than.
Speaker Change: Actually no the higher coupons are financing at a rate that is about equal or slightly higher.
Speaker Change: Then Paul.
Speaker Change: In the in the belly coupons like the fourth form those are actually trading very special relative to cost.
Speaker Change: Because you need to have a TBA position.
Speaker Change: Good.
Speaker Change: And the lowest coupons, it's actually very difficult to.
Speaker Change: To figure out just because there is no production in the twos to enhance et cetera.
Speaker Change: That just depends on what's happening.
Speaker Change: And in the lowest coupons, but right now the spot.
Speaker Change: Show much in in.
Speaker Change: And the goal is actually limited to before coupon in the form of coupon.
Speaker Change: Everything else is in the trade and on top of pools or slightly above cost.
Speaker Change: On.
And in terms of cash versus unencumbered also say I think that was your other question.
Speaker Change: We've continued to keep a fairly big allocation to our liquidity position.
Speaker Change: And Rob can give you the exact number.
Speaker Change: We closed the closed the year at.
But.
Speaker Change: Cash earned close.
Speaker Change: Close to five 5%.
Speaker Change: So.
Speaker Change: It's not as big a drag on earnings as it was when we.
You can wait for MTO.
Speaker Change: Which you know at that point it would be more <unk>.
Speaker Change: Inclined to hold pools are.
Speaker Change: Assets that yielded higher so at this point with cash rates so high.
Speaker Change: Hesitate to hold.
Speaker Change: Okay.
Speaker Change: If that was your.
Speaker Change: Question with Tony.
Tony: Yes, that's helpful and then talking about the supply and demand technicals.
Tony: The fed kind of getting towards the end of Q2 do you guys have an opinion on the fed gets back in the market and when that might occur.
Tony: Okay.
Tony: Look we can only go by what the fed is communicating.
Tony: As communicated.
Tony: With respect to Qt.
Tony: Laurie Logan David speech in January.
Tony: Thank is what kept a lot of us off.
Tony: From what we can tell they are interested in.
Tony: <unk>.
Tony: Quantitative tightening based on what they call the least comfortable level of reserves right.
Tony: The biggest part of Q T. You really need to think about is that there is it puts a floor.
Tony: Im acutely and put the slower on on lots of things that put the floor on the amount of duration coming into the market.
Tony: And that in and of itself I think is very supportive for us.
Tony: Mortgage mortgage spreads even if they reinvest only in treasuries.
Tony: It takes out it takes out.
Tony: Yields are yielding assets out of the market. It creates crowding out of private capital and that creates a demand for.
Tony: Take securities have Nots, that's I think those supportive.
Tony: The other possible outcome.
Tony: The end of Q T is that.
Tony: Delivered volatility goes down because of fed backing.
Tony: <unk> securities in the market. That's also really supportive of mortgage spreads.
Tony: And that those are the things that I think.
Tony: Just add to the idea that the president.
Tony: There's been a shift in the technicals in the mortgage market.
Speaker Change: That's helpful. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Again to ask a question press Star one and our next question will come from the line of Eric Hagen with BPI. Please go ahead.
Eric Hagen: Hey, good morning, guys hope, we're doing well.
Eric Hagen: You guys feel like there's good liquidity in the funding market put on longer dated repo right now to take advantage of whats priced into the forward curve and what's the shortest that you could envision running the repo book.
Eric Hagen: Conviction builds around the fed cutting maybe sooner rather than later.
Eric Hagen: Hi.
Speaker Change: Thank you for the question.
Speaker Change: So really the way, we think about financing number one I'll tell you availability of financing.
Speaker Change: Sure.
Speaker Change: We continue to have Counterparties offer financing were able to fund out the term.
I think we reported our weighted average term to maturity original term to maturity is like 78 days, we're not having any trouble.
Running longer.
Speaker Change: Longer dated financing anything like that so availability has been just fine.
Speaker Change: There has been pressure around quarter end as you've seen right like in September that was little pressure December there was a little pressure.
Speaker Change: So in general we try to manage around those bye bye bye funding out Tom.
Speaker Change: So that hasnt been a problem for us.
Speaker Change: So yes, there is the ability to lock in financing to the extent that we don't we won't.
And we disagree with the market's pricing et cetera et cetera.
Speaker Change: You you've seen us manage this book for a long time Eric.
Speaker Change: We're always balancing two things.
One is whether there will be quarter end pressure and balance sheet pressure or event driven pressure versus the risk of kind of running an overnight slash shorter shorter maturity book.
Speaker Change: And we kind of land somewhere in the middle of some of our financing is going to be locked up and and and turn some of that is going to be in.
Speaker Change: Not locked up and maybe rolling.
A little sooner typically we have not been an overnight.
Speaker Change: Wonder.
Speaker Change: And we very rarely taken.
Speaker Change: Taken all attending St lower than 30 days out.
So.
Speaker Change: We are looking to take term at opportunistic levels, when we see that in the marketplace.
Speaker Change: In general we tend to be more focused on.
Speaker Change: And.
Avoiding funding disruption than then.
Speaker Change: Then kind of turn to make money off that.
Speaker Change: But many of the same buckets, it's a risk that we just don't feel like it's good for us to expose our shareholders too.
Speaker Change: So we ended up we ended up actually just really respecting.
Speaker Change: When we get our financing and making sure that it's locked up before we.
Speaker Change: If there is any kind of.
Speaker Change: Economically turn benefit that we can get.
Speaker Change: From from thinking about the fed expectations versus not we would be.
Speaker Change: These hedges to help us.
Speaker Change: Take advantage of that.
Yes.
Speaker Change: I appreciate that response.
Speaker Change: We're still full year away actually a little bit more of a full year, but how are we thinking about the fixed to floating rate preferred stock rolling into the floating leg next year and maybe how you think about the cost of the capital structure overall.
Speaker Change: Spreads are tighter or wider or what the subsequent deal.
Speaker Change: Yeah.
Don't forget.
A big a big part of that if not all of that is in part of the hedging that we do.
Speaker Change: On the liability side alright.
Speaker Change: So from a from an economic perspective, we feel really good about the fact that.
Speaker Change: That entire.
Speaker Change: That entire issue is hedged.
Speaker Change: Without features position.
Speaker Change: In general you. So again, it's going to be a question of what are the available opportunities where can we refinance should we want to.
Speaker Change: We will go through we'll go through the exact.
Speaker Change: Thought process.
Speaker Change: As we approach.
Speaker Change: The call date.
Speaker Change: Yes. Thank you guys. So much I appreciate it and welcome.
Speaker Change: Do we have no further questions at this time I will turn the call back to Byron Boston for any closing remarks.
Thank you very much for joining our call today, just remember we are a long term view skilled risk management disciplined allocation of capital a very experienced team and most of all we take a very ethical approach as to how we manage our business. So thank you for joining us and we look forward to speaking to you again next quarter. Thank you.
Speaker Change: That will conclude today's meeting thank you all for joining and you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
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