Q2 2024 Invesco Mortgage Capital Inc Earnings Call
Speaker Change: i
Operator: Second Quarter 2024 Earnings Call. All participants will be in a listen-only mode until the question-and-answer session. At that time, to ask a question, press the star followed by 1 on your telephone. As a reminder, today's call is being recorded. Now, I'd like to turn the call over to Greg Seals in Investor Relations. Mr. Seals, you may begin.
Unknown Executive: 2nd quarter 2024 earnings call. All participants will be in a listening mode into the question-and-answer session. At that time, to ask a question, press star followed by one on your telephone. As a reminder, today's call is being recorded.
Greg Seals: Good morning, thank you for standing by. Welcome to the Invesco Mortgage Capital second quarter 2024 earnings call. All participants will be in a listen-only mode until the question-and-answer session. At that time, to ask a question press star followed by 1 on your telephone. As a reminder, today's call is being recorded. Now I'd like to turn the call over to Greg Seals in investor relations. Mr. Seals, you may begin.
Greg Seals: Now, I'd like to turn a call over to Greg Seals and Investor Relations. Mr. Seals, you may begin. This is a presentation that covers the topics we plan to address today. The press release and presentation are available on our website at VescoMortgageCapital.com. This information can be found by going to the Investor Relations section of the website. Our presentation in May will include forward-looking statements and certain non-GAAP financial managers. Please review the disclosures on slide 2 of the presentation regarding the statements and measures, as well as the appendix for the appropriate reconciliation to GAAP. Finally, Invesco Mortgage Capital is not responsible for it.
Greg Seals: Hi, Operator, and thanks to all of you joining us on Invesco Mortgage Capital's quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website, Invescommortgagecapital.com. This information can be found by going to the investor relations section of the website. Our presentation today will include forward-looking statements on certain non-GAAP financial matters.
Greg Seals: Thank you, operator. And thanks to all of you joining us on Invesco Mortgage Capital's quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today.
Speaker Change: The press release and presentation are available on our website, invescomortagecapital.com. This information can be found by going to the investor relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures.
Greg Seals: Please review the disclosures on slide 2 of the presentation regarding the statements, measures, as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome.
Speaker Change: Please review the disclosures on slide two of the presentation regarding the statements,
Speaker Change: for the appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for, does not edit, nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website.
Unknown Executive: It's not added, nor guaranteed the accuracy of our teleconference transcripts provided by third parties. The only authorized webcasts are located on our website.
Unknown Executive: Again, welcome. Thank you for joining us today.
John Ainslop: I'll now turn the call over to IVRCEO, John Ainslop. John. Good morning and welcome to Invesco Mortgage Capital, Second Quarter earnings call. I'll provide some brief comments before turning the call over to our key investment officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning are President Kevin Collins and our CFO, Lee Fedley. The second quarter was characterized by elevated interest rate volatility as uncertainty regarding near-term monetary policy persisted. And for initially rising by 50 basis points in April, the yield on the 10-year Treasury reversed course in rally during May and June, 10 the quarter only 14 basis points higher.
Speaker Change: Again, welcome. Thank you for joining us today. I'll now turn the call over to IVR's CEO , John Anzalone. John ? All right, good morning and welcome to Invesco Mortgage Capital's second quarter earnings call.
Operator: John Anzalone. John. All right.
John Anzalone: Good morning, and welcome to Invesco Mortgage Capital's second quarter earnings call. I'll provide some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning are our President, Kevin Collins, and our CFO, Lee Fedway.
Speaker Change: I'll provide some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning are President Kevin Collins and our CFO , Lee Fedley.
John Anzalone: The second quarter was characterized by elevated interest rate volatility, as uncertainty regarding near-term monetary policy persists. After initially rising by 50 basis points in April, the yield on the 10-year Treasury reversed course and rallied during May and June to end the quarter only 14 basis points higher. The sharp reversal is driven by data showing slowing inflation and increased confidence in a soft economic landing. As mortgage expectations for interest rate cuts change throughout the quarter, agency mortgages generally underperform compared to Treasury hedges.
Speaker Change: The second quarter was characterized by elevated interest rate volatility as uncertainty regarding near-term monetary policy persisted.
Speaker Change: After initially rising by 50 basis points in April , the yield on the 10-year Treasury reversed course and rallied during May and June to end the quarter only 14 basis points higher. The sharp reversal was driven by data showing slowing inflation and increased confidence in a soft economic landing.
John Ainslop: The sharp reversal was driven by data showing slowing inflation and increased confidence in the soft economic landing. As market expectations for interest rate cuts changed throughout the quarter, Invesco Mortgage generally underperformed compared to Treasury hedges. His underreformance was primarily in higher coupons, which are more affected by volatility and seasonal increases than supply.
Speaker Change: As mortgage expectations for interest rates cuts changed throughout the quarter, agency mortgages generally underperformed compared to Treasury hedges. This underperformance was primarily in higher coupons, which are more affected by volatility and seasonal increases in supply.
John Anzalone: His other performance was primarily in higher coupons, which are more affected by volatility and seasonal increases in supply. These factors led to a negative economic return of 4.1% for the quarter, consisting of an 8% decline in book value combined with our $0.40 Common Stock Dividend. Our debt-to-equity ratio ended the quarter at 5.9 times, up from the 5.6 times at the end of March. As of the end of the quarter, our $5 billion investment portfolio primarily consisted of $4.6 billion of agency RMBS, including agency TBA, and $400 million of agency CMBS, and we continue to maintain a sizable balance of unrestricted cash and unencumbered investments, totaling $446
John Ainslop: These factors went to a negative economic return of 4.1% for the quarter, consisting of an 8% decline in book value combined with our 40-cent common stock dividend. Our debt to equity ratio ended the quarter at 5.9 times, up from the 5.6 times at the end of March. As at the end of the quarter, our $5 billion investment portfolio primarily consisted of $4.6 billion of agency RMBS, including agency TBA, and $400 million of agency CNBS. And we continue to maintain a sizable balance of unrestricted cash and unencumbered investments totaling $446 million. Turning available for distribution was supported by attractive interest income on our target assets, favorable funding, and low-cost pay-fix swaps.
Speaker Change: These factors led to a negative economic return of 4.1% for the quarter, consisting of an 8% decline in book value combined with our $0.40 common stock dividend.
Speaker Change: Our debt-to-equity ratio ended the quarter at 5.9x, up from the 5.6x at the end of March.
Speaker Change: As of the end of the quarter, our $5 billion investment portfolio primarily consisted of $4.6 billion of agency RMBS, including agency TBA, and $400 million of agency CMBS.
Speaker Change: And we continue to maintain a sizable balance of unrestricted cash and unencumbered investments totaling $446 million.
John Anzalone: Earnings available for distribution were supported by attractive interest income on our target assets, favorable funding, and low-cost pay-fix swaps. For the quarter, EAD per common share was $0.86, unchanged from last quarter, and still comfortably above our $0.40 dividend.
Speaker Change: Earnings available for distribution was supported by attractive interest income on our target assets, favorable funding, and low-cost payfix swaps. For the quarter, EAD per common share was 86 cents, unchanged from last quarter, and still comfortably above our 40 cent dividend.
John Ainslop: For the quarter, EAD per common share was 86 cents, unchanged from last quarter and still comfortable above our 40-cent dividend.
John Ainslop: Entering the third quarter, the decline in interest rate to began in May accelerated due to weaker than expected employment data raising concerns about economic growth. Since Jan. June, the 10-year Treasury yield declined by over 50 basis points, and the 2-year Treasury yield fell by 85 basis. this point. This shift also caused the market to expect 405 cuts by year and according to Fed funds users. Despite these sharp declines and interest rates and continued elevated volatility, A.D.D. Morgan's performance has been modestly positive start to quarter with lower coupons in particular benefiting from lower rates and a steeper yield curve.
John Anzalone: Entering the third quarter, the decline in interest rates that began in May accelerated due to weaker-than-expected employment data raising concerns about economic growth. Since the end of June, the 10-year treasury yield declined by over 50 basis points, and the 2-year treasury yield fell by 85 basis points. This shift also caused the market to expect four to five cuts by year end, according to the Fed. Despite these sharp declines in interest rates and continued elevated volatility, agency mortgage performance has been modestly positive to start the quarter, with lower coupons in particular benefiting from lower rates and a steeper yield.
Speaker Change: Entering the third quarter, the decline in interest rates that began in May accelerated due to weaker-than-expected employment data, raising concerns about economic growth. Since the end of June , the 10-year Treasury yield declined by over 50 basis points, and the 2-year Treasury yield fell by 85 basis points.
Speaker Change: This shift also caused the market to expect 4-5 cuts by year-end according to FedMonsterUsers.
Speaker Change: Despite these sharp declines in interest rates and continued elevated volatility, agency mortgage performance has been modestly positive to start the quarter, with lower coupons in particular benefiting from lower rates and a cheaper yield curve.
John Ainslop: This has resulted in our book fiber remaining approximately unchanged since quarter, and as of yesterday's close.
John Anzalone: This has resulted in our book value remaining approximately unchanged since quarter end as of yesterday's close. Given our expectations for a steeper yield curve and an eventual decline in interest rate volatility, our outlook for agency mortgages is positive. In particular, we believe investors in agency mortgages stand to benefit from attractive valuations, favorable funding, and strong liquidity, as marked
Speaker Change: This has resulted in our book value remaining approximately unchanged since quarter end, as of yesterday's close.
John Ainslop: Given our expectations for a steeper yield curve and an eventual decline in interest rate volatility, our outlook for agency mortgages is positive. In particular, we believe investors in agency mortgages stand to benefit from attractive valuations, favorable funding, and strong liquidity as market conditions improve.
Speaker Change: Given our expectations for a steeper yield curve and an eventual decline in interest rate volatility, our outlook for agency mortgages is positive. In particular, we believe investors in agency mortgages stand to benefit from attractive valuations, favorable funding, and strong liquidity as market conditions improve.
Brian Norris: I'll stop here, and Brian will go through the portfolio. All right, thanks, John. Good morning, Trevor. We're listening to the call, but I'll begin on slide four, which provides an overview of the interest rate and agency mortgage markets, as shown on the chart in the upper left and U.S. Treasury yields increased across the yield curve, largely in a modest bear steepener during the second quarter. Yields on maturity from two to 30 years rose between 13 and 22 basis points as investors priced in greater potential for looser fiscal policy. This change has more than reversed since quarter end, as reflected by the purple line, which represents the yield curve as of Wednesday, August 7th.
Brian Norris: All right, thanks, John, and good morning to everyone listening for the call. I'll begin with slide four, which provides an overview of the interest rate and agency mortgage markets. As shown on the chart in the upper left, U.S. Treasury yields increased across the yield curve largely in a modest bear steepener during the second quarter. Yields on maturities from two to 30 years rose between 13 and 22 basis points as investors priced in a greater potential for looser fiscal policy.
Speaker Change: I'll stop here and Brian will go through the portfolio.
Brian: All right, thanks, John , and good morning to everyone listening for the call. I'll begin on slide four, which provides an overview of the interest rate and agency mortgage markets.
Brian: As shown on the chart in the upper left, U.S. Treasury yields increased across the yield curve largely in a modest bear steepener during the second quarter.
Brian: Yields on maturities from 2 to 30 years rose between 13 and 22 basis points as investors priced in greater potential for looser fiscal policy.
Brian Norris: This change has more than reversed since quarter end, as reflected by the purple line, which represents the yield curve as of Wednesday, August 7th. Recent employment data was softer than expected, increasing fears that monetary policy has been kept too tight for too long, leading to a sharp bullish steepening in the yield curve since quarter end. The chart on the bottom left details pricing in the Fed Funds futures market since year end.
Brian: This change has more than reversed since quarter end, as reflected by the purple line which represents the yield curve as of Wednesday, August 7th.
Brian Norris: Recent employment data was softer than expected, increasing fears that monetary policy has been kept too tight for too long, leading to a sharp, bold steepening in the yield curve since quarter end. The chart on the bottom left details pricing in the Fed Funds futures market since year end. By the end of the second quarter, the market expected 25 basis point cuts in 2024, consistent with the Fed's median dot plot and down from over six expected cuts at the beginning of the year. Since the end of the quarter, however, recent week in employment data has led to more than four cuts anticipated in 2024.
Brian: Recent employment data was softer than expected, increasing fears that monetary policy has been kept too tight for too long, leading to a sharp bull steepening in the yield curve since quarter end.
Brian: The chart on the bottom left details pricing in the Fed Funds futures market since year-end.
Brian: By the end of the second quarter, the market expected two 25-basis point cuts in 2024, consistent with the Fed's median dot plot and down from over six expected cuts at the beginning of the year.
Brian Norris: By the end of the second quarter, the market expected two 25-basis point cuts in 2024, consistent with the Fed's median dot plot and down from over six expected cuts at the beginning of the year. Since the end of the quarter, however, recent weak employment data has led to more than four cuts anticipated in 2020.
Brian: Since the end of the quarter, however, recent weak employment data has led to more than four cuts anticipated in 2024.
Brian Norris: The increased uncertainty about monetary policy and the economy has caused interest rate volatility to rise sharply, leading to modest underperformance in H2R. The chart in the upper right reflects the recent sharp decline in three months so far, highlighting the volatility in the short-term. Fortunately, our repo market counterparties have begun to price these cuts into their longer-term rates, offering more attractive financing for HCRMBS and CMS. Lastly, the bottom right chart details agency RMDS holdings by the Federal Reserve and U.S. Bank.
Brian Norris: The increased uncertainty about monetary policy and the economy is causing interest rate volatility to rise sharply, leading to modest underperformance in age two hours. The chart in the upper right reflects the recent sharp decline in three months so far, highlighting volatility and short-term interest rates. Positively, our repo market counterparties have begun to price these cuts into their longer-term rates, offering more attractive financing for age to RMBS and CNBS. Lastly, the bottom right chart details agency RMBS holdings by the Federal Reserve and US banks. Runoff of the Fed's balance sheet continues with agency RMBS declining by 15 to 20 billion per month, while US banks have added modestly to their balance sheets.
Brian: The increased uncertainty about monetary policy and the economy has caused interest rate volatility to rise sharply, leading to modest underperformance in agency mortgages.
Brian: The chart in the upper right reflects the recent sharp decline in three months so far, highlighting the volatility and short-term interest rates.
Brian: Positively, our repo market counterparties have begun to price these cuts into their longer-term rates.
Brian: offering more attractive financing for HCRMBS and CNBS.
Brian: Lastly, the bottom right chart details agency RMDS holdings by the Federal Reserve and U.S. banks.
Brian Norris: The runoff of the Fed's balance sheet continues, with agency RMBS declining by $15-20 billion per month, while U.S. banks have added modestly to their balances. We expect bank demand to rise as monetary policy eases, creating a more attractive investment environment with a steeper yield curve and less interest rate volatility. Additionally, the finalization of Basel III guidelines, likely by late 2024 or early 2025, should give banks more regulatory clarity and confidence, boosting demand in the sector.
Brian: Runoff of the Fed's balance sheet continues, with agency RMBS declining by $15 to $20 billion per month, while U.S. banks have added modestly to their balance sheets.
Brian Norris: We expect bank demand to rise as monetary policy eases, creating a more attractive investment environment with a steeper yield curve and less interest rate volatility. Additionally, the finalization of Basel III guidelines, likely by late 2024 or early 2025, should give banks more regulatory clarity and confidence, boosting demand in the sector.
Brian: We expect bank demand to rise as monetary policy eases, creating a more attractive investment environment with a steeper yield curve and less interest rate volatility.
Brian: Additionally, the finalization of Basel III guidelines, likely by late 2024 or early 2025, should give banks more regulatory clarity and confidence, boosting demand in the sector.
Brian Norris: Five, but more detail on the age to mortgage market. In the upper left chart, we show 30-year current coupon performance versus US Treasuries over the past 12 months, highlighting the second quarter in gray. Current coupons modestly underperform during the quarter, as interest rate volatility spiked both in April and late June. Since the end of the quarter, strong performance in July has been offset by increased interest rate volatility and a general risk-off tone in early August due to a weaker than expected August employment. Network Although nominal spreads on higher coupons are now narrower than in the second half of 2023, they are still historically attractive as ongoing interest rate volatility is limiting demand.
Brian Norris: Slide 5 provides more detail on the agency mortgage market. In the upper left chart, we show 30-year current coupon performance versus U.S. Treasuries over the past 12 months, highlighting the second quarter in gray. Current coupons modestly underperformed during the quarter as interest rate volatility spiked both in April and late June.
Speaker Change: Slide 5 provides more detail on the agency mortgage market.
Speaker Change: In the upper left chart, we show 30-year current coupon performance versus U.S. Treasuries over the past 12 months, highlighting the second quarter in gray.
Speaker Change: Current coupons modestly underperformed during the quarter, as interest rate volatility spiked both in April and late June .
Brian Norris: Since the end of the quarter, strong performance in July has been offset by increased interest rate volatility and a general risk-off tone in early August due to a weaker-than-expected August employment. However, although nominal spreads on higher coupons are now narrower than in the second half of 2023, they are still historically attractive as ongoing interest rate volatility is limiting demand. Specified pool pay-ups fell in the second quarter due to rising interest rates, but they have partially recovered as the abrupt decline in rates has led to more demand for prepayment protection.
Speaker Change: Since the end of the quarter, strong performance in July has been offset by increased interest rate volatility and a general risk-off tone in early August due to a weaker-than-expected August employment report.
Speaker Change: Although nominal spreads on higher coupons are now narrower than in the second half of 2023, they are still historically attractive as ongoing interest rate volatility is limiting demand.
Brian Norris: Specified pool pay-ups fell in the second quarter due to rising interest rates, but have partially recovered as the abrupt decline in rates has led to more demand for recruitment protection. Lastly, as shown in the lower right chart, the dollar-roll market for certain TVA securities has improved dramatically in the second quarter, as heavy demand for higher coupon genic collateral from CMO desks led to a significant imbalance in the supply and demand technicals in those coupons. This imbalance has since normalized; however, the dollar-roll market for most 30-year TVA securities is, once again, largely unattractive relative to repo financing on specified pools.
Speaker Change: Specified pool payups fell in the second quarter due to rising interest rates, but have partially recovered as the abrupt decline in rates has led to more demand for prepayment protection.
Brian Norris: Lastly, as shown in the lower right chart, the dollar roll market for certain TVA securities improved dramatically in the second quarter, as heavy demand for higher coupon Ginnie Collateral from CMO Desk led to a significant imbalance in the supply and demand technicals for those coupons. This imbalance has since normalized, however, and the dollar roll market for most 30-year TVA securities is, once again, largely unattractive relative to repo financing on specified.
Speaker Change: Lastly, as shown in the lower right chart, the dollar-roll market for certain TVA securities improved dramatically in the second quarter, as heavy demand for higher-coupon GENI collateral from CMO desks.
Speaker Change: led to a significant imbalance in the supply and demand technicals in those coupons. This imbalance has since normalized, however, and the dollar-roll market for most 30-year TBI securities is, once again, largely unattractive relative to repo financing on specified pools.
Brian Norris: Slide 6 details are agency RNBS investments and summarizes investment portfolio changes during the quarter. We continue to rotate a portion of our lower coupons by supply pools into agency CMBS at the beginning of the quarter. However, continued outperformance in agency CMBS limited the amount of the rotation, as contracting premiums throughout the quarter made the less sector less attractive relative to agency RNBS. We remain focused in higher coupons, which should benefit from a decline in interest rate volatility and are largely insulated from direct exposure to assets held by both commercial banks and on the Federal Reserve balance sheet.
Brian Norris: Slide 6 details our agency RMBS investments and summarizes investment portfolio changes during the quarter. We continue to rotate a portion of our lower coupon-specified pools into agency CMBS at the beginning of each quarter. However, continued outperformance in agency CMBS limited the amount of the rotation as contracting premiums throughout the quarter made the sector less attractive relative to agency RMBS. We remain focused on higher coupons, which should benefit from a decline in interest rate volatility and are largely insulated from direct exposure to assets held by both commercial banks and on the Federal Reserve's balance sheet. We focus our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environments, with our largest concentration in lower loan balance collateral given more predictable prepayments.
Speaker Change: Slide 6 details our agency RMBS investments and summarizes investment portfolio changes during the quarter.
Speaker Change: We continue to rotate a portion of our lower coupon-specified pools into agency CMBS at the beginning of the quarter.
Speaker Change: However, continued outperformance in Agency CMBS limited the amount of the rotation, as contracting premiums throughout the quarter made the sector less attractive relative to Agency RMBS.
Speaker Change: We remain focused in higher coupons, which should benefit from a decline in interest rate volatility and are largely insulated from direct exposure to assets held by both commercial banks and on the Federal Reserve's balance sheet.
Brian Norris: We focus our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discounted environments, with our largest concentration in lower low and balanced collateral, given more predictable prepayments. In addition, during the quarter, we added 200 million noisional and higher coupons in the TBA to benefit from very attractive levels in the dollar-roll market.
Speaker Change: We focus our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environments with our largest concentration and lower loan balance collateral given more predictable prepayments.
Brian Norris: In addition, during the quarter, we added $200 million notional and higher coupon genny TBA to benefit from the very attractive levels in the dollar roll market. Although we anticipate interest rate volatility to remain moderately elevated in the near-term, we believe current valuations on production coupon agents to RMBS largely reflect this risk and represent attractive investment opportunities. Couric Brose ROEs and the Mid-to-High.
Speaker Change: In addition, during the quarter, we added $200 million notional and higher coupon GENI TBA to benefit from the very attractive levels in the dollar roll market.
Brian Norris: Although we anticipate interest rate volatility to remain moderately elevated in the near term, we avoid current valuations on production coupons aged to our MBS; largely reflect this risk and represent attractive investment opportunities with current gross ROEs in the mid to high teams. Flight 7 provides detail on our agency CMBS purchases as well as an overview of the benefits of the sector. We purchased 120 million in the second quarter, bringing our exposure to approximately 7-8% of our total investment portfolio. We believe agency CMBS provides numerous benefits to the portfolio, primarily through its prepayment protection and bullet-like maturities, which reduces our sensitivity to interest rate volatility.
Speaker Change: Although we anticipate interest rate volatility to remain moderately elevated in the near term, we believe current valuations on production coupon agents to RMVS largely reflect this risk and represent attractive investment opportunities with current gross ROEs in the mid-to-high teams.
Brian Norris: Slide 7 provides detail on our agency's CMBS purchases, as well as an overview of the benefits of the sector. We purchased $120 million in the second quarter, bringing our exposure to approximately 7-8% of our total investment portfolio. We believe the agency's CMBS provides numerous benefits to the portfolio, primarily through its prepayment protection and bullet-like maturities, which reduces our sensitivity to interest rate volatility. Gross ROEs on new purchases were in the low double digits at the beginning of the second quarter.
Speaker Change: Slide 7 provides detail on our agency's CMBS purchases, as well as an overview of the benefits of the sector. We purchased $120 million in the second quarter, bringing our exposure to approximately 7-8% of our total investment portfolio.
Speaker Change: We believe Agency CMBS provides numerous benefits to the portfolio, primarily through its prepayment protection and bullet-like maturities, which reduces our sensitivity to interest rate volatility.
Brian Norris: Gross ROEs on new purchases were in the low-level digits at the beginning of the second quarter, but given the strong performance in the sector, that declined to the high-single digits. Financing capacity has been robust as we have been able to finance our purchases with numerous counterparties and attractive funding levels. We will continue to monitor the sector for opportunities to increase our allocation as they become available, recognizing the overall benefits of the portfolio as the sector diversifies the risk. The diversifies risks associated with an agency are against portfolio.
Speaker Change: Gross ROEs on new purchases were in the low double digits at the beginning of the second quarter, but given the strong performance in the sector, that declined to the high single digits.
Brian Norris: But given the strong performance in the sector, that declined to the high ceiling. Financing capacity has been robust, as we have been able to finance our purchases with numerous counterparties at attractive funding levels. We will continue to monitor the sector for opportunities to increase our allocation as they become available, recognizing the overall benefits of the portfolio as the sector diversifies risks associated with an agency RBS portfolio. Our agency's CMO allocation is detailed alongside our remaining credit investments on slide 8. Our allocation to both agency interest-only and credit securities remains unchanged, with $75 million allocated to agency I.O.
Speaker Change: Financing capacity has been robust, as we have been able to finance our purchases with numerous counterparties at attractive funding levels.
Speaker Change: We will continue to monitor the sector for opportunities to increase our allocation as they become available, recognizing the overall benefits to the portfolio as the sector diversifies risks associated with an agency RMVS portfolio.
Brian Norris: Our agency's CMO allocation is detailed alongside our remaining credit investments on flight 8. Our allocation to both agency interest only and credit securities remained unchanged: 75 million allocated to agency IO, and 18 million allocated to credit at quarter end. Although we anticipate limited near-term price appreciation in these investments, we believe they provide attractive yields for unlimited holdings. With returns in the high-single digits.
Speaker Change: Our agency's CMO allocation is detailed alongside our remaining credit investments on slide 8.
Brian Norris: and $18 million allocated to credit at quarter-end. Although we anticipate limited near-term price appreciation in these investments, we believe they provide attractive yields for unlevered holdings, with returns in the high single digits. Slide 9 details our funding and hedge book at quarter-end. Repurchase agreements collateralized by agency RMBS and agency CMBS declined modestly from $4.4 billion to $4.3 billion, and our notional payfix interest rate swaps decreased as well from $4.3 billion to $3.9 billion as the ratio of our hedges to borrowings decreased to 92% from 97% last quarter.
Speaker Change: Our allocation to both agency interest only and credit securities remained unchanged.
Speaker Change: with $75 million allocated to agency I.O. and $18 million allocated to credit at quarter end. Although we anticipate limited near-term price appreciation in these investments, we believe they provide attractive yields for unlevered holdings, with returns in the high single digits.
Brian Norris: Slide 9 details are funding and hedgebook at quarter end. Repurchase agreements collateralized by agency R and B.S., R.A.G., and agency CMS declined modestly, from 4.4 billion to 4.3 billion. And our notional paid fixed interest rates loss decreased as well, from 4.3 billion to 3.9 billion, as the ratio of our hedges to borrowing decreased to 92% from 97% last quarter. The increase in interest rates led to further repositioning of the hedgebook at the interest rate sensitivity of our assets increased, warranting a similar increase in the weighted average maturity of our interest rate swap hedges. Reflecting this change, the weighted average maturity of our hedges increased from 7.2 years at the end of the first quarter to 7.5 years, resulting in a modest increase in the weighted average coupon on our paid fixed swaps, from 1.17% to 1.22%.
Speaker Change: Slide 9 details our funding and hedge book at quarter end.
Speaker Change: Repurchase agreements collateralized by Agency RMBS and Agency CMBS declined modestly.
Speaker Change: from $4.4 billion to $4.3 billion, and our notional pay-fix interest rate swaps decreased as well, from $4.3 billion to $3.9 billion, as the ratio of our hedges to borrowings decreased to 92% from 97% last quarter.
Brian Norris: The increase in interest rates led to further repositioning of the hedge book as the interest rate sensitivity of our assets increased, warranting a similar increase in the weighted average maturity of our interest rate swap hedge. Reflecting this change, the weighted average maturity of our hedges increased from 7.2 years at the end of the first quarter to 7.5 years, resulting in a modest increase in the weighted average coupon on our payfix swaps from 1.17% to 1.2%. Economic leverage ended the quarter at 5.9 times debt-to-equity, up from 5.6 times at the end of March, mostly reflecting a decline in book value.
Speaker Change: The increase in interest rates led to further repositioning of the hedge book as the interest rate sensitivity of our assets increased.
Unknown Executive: 2nd quarter 2024 earnings call. All participants will be in a listening mode into the question-and-answer session. At that time, to ask a question, press star followed by one on your telephone. As a reminder, today's call is being recorded.
Speaker Change: warranting a similar increase in the weighted average maturity of our interest rate swap hedges.
Speaker Change: Reflecting this change, the weighted average maturity of our hedges increased from 7.2 years at the end of the first quarter to 7.5 years, resulting in a modest increase in the weighted average coupon on our payfix swaps, from 1.17% to 1.22%.
Greg Seals: Now, like to turn a call over to Greg Seals and investor relations, Mr. Seals, you may begin. This is a presentation that covers the topics we plan to address today. The press release and presentation are available on our website at vescomortgagecapital.com. This information can be found by going to the investor relations section of the website. Our presentation in May will include forward-looking statements and certain non-gap financial managers. Please review the disclosures on slide 2 of the presentation regarding the statements and measures as well as the appendix for the appropriate reconciliation to gap. Finally, Invesco Mortgage Capital is not responsible for it. It's not added nor guaranteed the accuracy of our teleconference transcripts provided by third parties. The only authorized webcasts are located on our website.
Brian Norris: Economic leverage ended quarter at 5.9 times debt to equity, up from 5.6 times at the end of March. Most were mostly reflecting the decline in book value. Slide 10 provides further detail on our asset yields and funding costs. Interest rates on our repurchase agreements and swap receivables were largely unchanged to quarter end, while yields on our HCR and gas portfolio increased five basis points to 5.4%, consistent with the five basis points increase in our swap pay rate.
Speaker Change: Economic leverage ended the quarter at 5.9 times debt-to-equity, up from 5.6 times at the end of March, mostly reflecting the decline in book value.
John Anzalone: Slide 10 provides further detail on our asset yields and funding. Interest rates on our repurchase agreements and swap receive rates were largely unchanged at quarter end, while yields on our HCT RMBS portfolio increased five basis points to 5.4%, consistent with the five basis point increase in our swap pay rate. To conclude our prepared remarks, despite a near consensus that easing and monetary policy will begin in the third quarter, financial markets remain quite volatile as investors debate the probability of a recession and the magnitude and timing of near-term policy.
Speaker Change: Slide 10 provides further detail on our asset yields and funding costs.
Speaker Change: Interest rates on our repurchase agreements and swap receive rates were largely unchanged at quarter end, while yields on our agency RMVS portfolio increased five basis points to 5.4%, consistent with the five basis point increase in our swap pay rate.
Brian Norris: To conclude our prepare remarks, despite a near consensus that easing and monetary policy will begin in the third quarter, financial markets remain quite volatile as investors debate the probability of a recession and magnitude in timing of near term policy easing. The recent chart decline in interest rates has provided a supportive backdrop for lower coupon agency mortgages since quarter end, while higher coupons have modestly lagged given the spike in interest rate volatility. We believe IVR is well positioned to navigate future mortgage market volatility and selectively capitalize on historically attractive agency R and gas spreads, given our balance of discount and higher coupon agency mortgages and agency CNPS.
Speaker Change: To conclude our prepared remarks, despite a near consensus that easing and monetary policy will begin in the third quarter, financial markets remain quite volatile as investors debate the probability of a recession and magnitude and timing of near-term policy easing.
John Anzalone: The recent sharp decline in interest rates has provided a supportive backdrop for lower coupon agency mortgages. Invesco Mortgage Capital Inc. All rights reserved. We believe IVR is well-positioned to navigate future mortgage market volatility and selectively capitalize on historically attractive agency RMBF spreads, given our balance of discount and higher coupon agency mortgages and agency CMBS. In addition, we believe the easing of monetary policy will eventually lead to further declines in interest rate volatility and a steeper yield curve, both of which provide a supportive backdrop for H2O.
Unknown Executive: Again, welcome. Thank you for joining us today.
Speaker Change: The recent sharp decline in interest rates has provided a supportive backdrop for lower coupon agency mortgages since quarter end, while higher coupons have modestly lagged given the spike in interest rates.
John Ainslop: I'll now turn the call over to IVRCEO, John Ainslop, John.
John Ainslop: Good morning and welcome to Invesco Mortgage Capital, second quarter earnings call. I'll provide some brief comments before turning the call over to our key investment officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning are President Kevin Collins and our CFO, Lee Fedley. The second quarter was characterized by elevated interest rate volatility as uncertainty regarding near-term monetary policy persisted. And for initially rising by 50 basis points in April, the yield on the 10-year treasury reverse course in Rally during May and June 10, the quarter only 14 basis points higher.
Speaker Change: and Interest Rate Volatility.
Speaker Change: We believe IVR is well-positioned to navigate future mortgage market volatility and selectively capitalize on historically attractive agency RMBS spreads, given our balance of discount and higher-coupon agency mortgages and agency CMBS.
Brian Norris: In addition, we believe the easing of monetary policy will eventually lead to further declines in interest rate volatility and a steeper yield curve, both of which provide a supportive backdrop for agency mortgages.
Speaker Change: In addition, we believe the easing of monetary policy will eventually lead to further declines in interest rate volatility and a steeper yield curve, both of which provide a supportive backdrop for H2 mortgages.
Brian Norris: Lastly, our liquidity position remains robust and provides a cushion for further potential stresses in the market, while also providing capital to deploy into our target assets as the investment environment improves.
John Anzalone: Lastly, our liquidity position remains robust and provides a cushion for further potential stresses in the market while also providing capital to deploy into our target assets as the investment environment. Thank you for your continued support for Invesco Mortgage Capital, and now we will open the line for Q&A.
Speaker Change: Lastly, our liquidity position remains robust and provides cushion for further potential stresses in the market, while also providing capital to deploy into our target assets as the investment environment improves.
John Ainslop: The sharp reversal was driven by data showing slowing inflation and increased confidence in the soft economic landing. As market expectations for interest rates cuts changed throughout the quarter, Invesco Mortgage generally underperformed compared to treasury hedges. His underreformance was primarily in higher coupons, which are more affected by volatility and seasonal increases than supply. These factors went to a negative economic return of 4.1% for the quarter, consisting of an 8% decline in book value combined with our 40-cent common stock dividend.
Unknown Executive: Thank you for your continued support from Best Go Mortgage Capital, and now we will open the line for today. Thank you. As a reminder, if you'd like to ask a question, please press star, then one on your phone. Remember to unmute your phone and record your name and company clearly when prompted. If you'd like to withdraw that question, you may press star two. Again, to ask a question, please press star, then one.
Speaker Change: Thank you for your continued support for Invesco Mortgage Capital, and now we will open the line for Q&A.
Operator: Thank you. As a reminder, if you'd like to ask a question, please press star then 1 on your phone. Remember to unmute your phone and record your name and company clearly when prompted. If you'd like to withdraw that question, you may press star 2. Okay, now the first question comes from Jason Weaver with Jones Trading. Your line is open.
Speaker Change: Thank you. As a reminder, if you'd like to ask a question, please press star then 1 on your phone. Remember to unmute your phone and record your name and company, clearly when prompted. If you'd like to withdraw that question, you may press star 2. Again, to ask a question, please press star then 1.
Jason Weaver: Okay, now the first question comes from Jason Weaver with Jones Trading. Your line is open. Hey, good morning. Thanks for taking my question. Brian, I appreciate your comments around leverage, and I understand it was book value related to change in the quarter. But can you comment on your comfort zone going forward? It seems like, with the comments around easier monetary policy leading to tighter spreads, it might be appropriate to get more aggressive at some point in the near future.
John Ainslop: Our debt to equity ratio ended the quarter at 5.9 times up from the 5.6 times at the end of March. As at the end of the quarter, our $5 billion investment portfolio primarily consisted of 4.6 billion of agency RMBS, including agency TBA, and 400 million of agency CNBS. And we continue to maintain a sizable balance of unrestricted cash and unencumbered investments totaling $446 million. Turning available for distribution was supported by attractive interest income on our target assets, favorable funding and low-cost pay-fix swaps.
Speaker Change: Okay, now first question comes from Jason Weaver with Jones Trading. Your line is open.
Jason Weaver: Hey, good morning. Thanks for taking my question. Brian, I appreciate your comments around leverage, and I understand it was book value related to the change in the quarter. But can you comment on your comfort zone going forward? It seems like with the comments around easier monetary policy leading to tighter spreads, it might be appropriate to get more aggressive at some point in the near future.
Jason Weaver: Hey, good morning. Thanks for taking my question. Brian , I appreciate your comments around leverage, and I understand it was book value related, the change in the quarter, but can you comment on your...
Jason Weaver: Your comfort zone going forward, it seems like with the comments around easier monetary policy leading to tighter spreads, it might be appropriate to get more aggressive at some point in the near future?
Brian Norris: Yeah, hey Jason, good morning as well. Thanks. Yeah, I mean, right now we would consider our leverage to kind of be in the middle of our range. You know, I think, I mean, you're right; if we start to see a decline in interest rate volatility and a steeper yield curve, that would potentially warrant an increase in leverage. But as of right now, you know, we're still in a pretty volatile environment. So I think, you know, remaining somewhat in the middle of that range is true. Got it. That makes sense.
Brian Norris: Yeah, hey, Jason. Good morning as well.
Brian: Yeah, hey Jason. Good morning as well. Thanks. Yeah, I mean right now we would consider our leverage to kind of be in the middle of our of our range.
John Ainslop: For the quarter, EAD per common share was 86 cents unchanged from last quarter and still comfortable above our 40-cent dividend. Entering the third quarter, the decline in interest rate to began in May accelerated due to weaker than expected employment data raising concerns about economic growth. Since Jan. June, the 10-year treasury yield declined by over 50 basis points, and the 2-year treasury yield fell by 85 basis, this point. This shift also caused the market to expect 405 cuts by year and according to Fed funds users.
Speaker Change: You know, I think, I mean, you're right, if...
Speaker Change: If we start to see a decline in interest rate volatility and a steeper yield curve, that would potentially warrant an increase in leverage, but as of right now, you know, we're still in a pretty volatile environment, so I think, you know, remaining somewhat in the middle of that range is prudent.
Brian Norris: Thanks. Um, yeah, I mean, right now, we would consider our leverage to kind of be in the middle of our range. You know, I think you're right, if we start to see a decline in interest rate volatility and a steeper yield curve, that would potentially warrant an increase in leverage. But as of right now, you know, we're still in a pretty volatile environment. So I think, you know, remaining somewhat in the middle of that range.
Jason Weaver: Got it, that makes sense. And just one clarification, when you made the comments on agency CMBS, is that not likely to become a much larger portion of your portfolio going forward? We certainly like the benefits.
Brian Norris: And just one clarification. You made the comments on agency CMBS. Is that not likely to become a much growing portion of your portfolio going forward? We certainly like the benefits that it brings to the portfolio. You know, like I said, you know, spread got a little too tight for it to make sense later in the second quarter. But, you know, if we were to see some, you know, compression between agency CMBS and HCRMDS, it's likely that we would look to increase allocation there.
Speaker Change: Got it, that makes sense. And just one clarification, when you made the comments on agency CMBS, is that not likely to become a much growing portion of your portfolio going forward?
John Ainslop: Despite these sharp declines and interest rates and continued elevated volatility, A.D.D. Morgan's performance has been modestly positive start to quarter with lower coupons in particular benefiting from lower rates and a steeper yield curve. This has resulted in our book fiber remaining approximately unchanged since quarter and as of yesterday's close. Given our expectations for a steeper yield curve and an eventual decline in interest rate volatility, our outlook for agency mortgages is positive.
Brian Norris: We certainly like the benefits that it brings to the portfolio. You know, like I said, spreads got a little too tight for it to make sense later in the second quarter. But, you know, if we were to see some compression between agencies, CMES and HCR.
Speaker Change: We certainly like the benefits that it brings to the portfolio. You know, like I said, you know, spreads.
Speaker Change: got a little too tight for it to make sense later in the second quarter. But you know if we were to see some you know compression between agency CMBS and agency RMBS, it's likely that we would we would look to to increase the allocation there.
John Ainslop: In particular, we believe investors in agency mortgages stand to benefit from attractive valuations, favorable funding, and strong liquidity as market conditions improve.
Jason Weaver: Got it.
Jason Weaver: Got it. Thank you for that.
Jason Weaver: Thank you for that.
Speaker Change: Got it. Thank you for that.
Unknown Executive: Thank you.
Operator: Thank you. The next question comes from Doug Harter with UBS. Your line is open. Okay, moving on to our next question. Jason Stewart with Janie, your line is open. Hey, good morning. Thanks.
Doug Harter: The next question comes from Doug Harter with UBS. Your line is open. Okay.
Speaker Change: Thank you. The next question comes from Doug Harter with UBS. Your line is open.
Brian Norris: I'll stop here and Brian will go through the portfolio. All right, thanks, John.
Unknown Executive: Moving on to our next question. Jason Stewart with Jamie. Your line is open. Hey, good morning. Thanks.
Brian Norris: Good morning, Trevor, we're listening to the call, but I'll begin on slide four, which provides an overview of the interest rate and agency mortgage markets as shown on the chart in upper left and U.S. Treasury yields increased across the yield curve largely in a modest bear steeper during the second quarter. Yields on maturity from two to 30 years rose between 13 and 22 basis points as investors priced in greater potential for looser fiscal policy.
Speaker Change: Okay, moving on to our next question. Jason Stewart with Janie, your line is open.
Jason Stewart: Hey, good morning. Thanks. Can you give us an update on where taxable income stands relative to the dividend and then how you see that evolving going forward?
Jason Stewart: Can you give us an update on where taxable income stands relative to the dividend and how you see that evolving going forward? Hey, Jason. Yes, Brian. It's taxable income is a challenging one. You know, I think, you know, that's going to be in our queue. So, you know, I think, you know, the thing that we look at certainly is, you know, EAD, which is comfortably above the dividend. And, you know, taxable income typically gets driven kind of by, you know, drift as pricing. So, that tends to be a little bit more volatile, depending on what rates are doing during the quarter.
Jason Stewart: Hey, good morning, thanks. Can you give us an update on where taxable income stands relative to the dividend and then how you see that evolving going forward?
Brian Norris: This change has more than reversed since quarter end as reflected by the purple line, which represents the yield curve as of Wednesday, August 7th. Recent employment data was softer than expected, increasing fears that monetary policy has been kept too tight for too long, leading to a sharp bold steepening in the yield curve since quarter end. The chart on the bottom left details pricing in the Fed funds futures market since year end.
Speaker Change: Thank you for watching, and I'll see you in the next video.
Brian Norris: Hey, Jason. Yeah, it's Brian. Getting taxable income is a challenging one, you know, I think. You know, that's going to be in our queue. I don't know. So, you know, I think. The thing that we should certainly look at is EAD, which is comfortably above the dividend. And, you know, taxable income typically gets driven kind of by, you know, derivatives pricing. So that tends to be a little bit more volatile depending on what rates are doing during the quarter. So it makes it a little bit more challenging to use that as a guide. Okay.
Speaker Change: Hey Jason, yeah it's Brian .
Speaker Change: Taxable income is a challenging one, I think.
Speaker Change: You know, that's going to be in our queue.
Speaker Change: So, you know, I think...
Speaker Change: You know, the thing that we look at certainly is, you know, EAD, which is comfortably above the dividend.
Brian Norris: By the end of the second quarter, the market expected to 25 basis point cuts in 2024, consistent with the Fed's median dot plot and down from over six expected cuts at the beginning of the year. Since the end of the quarter, however, recent week in employment data has led to more than four cuts anticipated in 2024. The increased uncertainty about monetary policy and the economy is caused interest rate volatility to rise sharply, leading to modest underperformance in age two hours.
Speaker Change: And, you know, taxable income typically gets driven kind of by, you know, derivatives pricing. So that tends to be a little bit more volatile depending on what rates are going during the quarter. So it makes it a little bit more challenging to use that as a guide.
Brian Norris: So, it makes it a little bit more challenging to use that as a guide. Okay.
Jason Stewart: Okay, maybe generally, and I'm looking it up right now, could you give us, like, are we in a position of being over-distributed or under-distributed, just generically, kind of mid-year?
Brian Norris: Maybe, maybe generally, and I'm looking it up right now. Could you, could you give us, like, are we in a position of being over-distributed or under-distributed just generically kind of bid year? Relentive to our taxable income. Is that the question? Correct. Yeah. Hey, Brian. Yeah. You only address that? Sure. So, we have operating laws carried forwards that allow us to sustain the delta between taxable income right now being in excess of the disclosure that we're in excess of the dividend that we're doing. If that's the question in terms of the tax going to drive a need to increase the dividend, we have flexibility there based on our operating laws carried forwards.
Speaker Change: Okay, maybe generally, and I'm looking it up right now, are we in a position of being over-distributed or under-distributed, just generically, kind of mid-year?
Brian Norris: The chart in the upper right reflects the recent sharp decline in three months so far, highlighting volatility and short-term interest rates. Positively, our repo market counter parties have begun to price these cuts into their longer-term rates, offering more attractive financing for age to RMBS and CNBS. Lastly, the bottom right chart details agency RMBS holdings by the Federal Reserve and US banks. Runoff of the Fed's balance sheet continues with agency RMBS declining by 15 to 20 billion per month while US banks have added modestly to their balance sheets.
Operator: Relative to our taxable income, is that the question? Correct. Yeah. Thank you, Brian.
Speaker Change: Relative to our taxable income, is that the question?
Jason Stewart: Correct, yeah. Thanks, Brian.
Brian: Hey Brian
Brian: Yeah, you want me to address that?
Brian Norris: So we have operating loss carry forwards that allow us to sustain the delta between taxable income right now being in excess of the disclosure that we're, in excess of the dividend that we're paying. If that's the question in terms of, is tax going to drive a need to increase the dividend? We have flexibility there based on our operating loss carry forwards.
Brian: Church.
Brian: Greg.
Greg Seals: We have operating laws carried forward that allow us to sustain the delta between taxable income right now being in excess of...
Speaker Change: In terms of the disclosure that we're, in excess of the dividend that we're paying, if that's the question in terms of the, is tax going to drive a need to increase the dividend, we have flexibility there based on our operating loss carry forward.
Brian Norris: We expect bank demand to rise as monetary policy eases, creating a more attractive investment environment with a steeper yield curve and less interest rate volatility. Additionally, the finalization of Basel III guidelines, likely by late 2024 or early 2025, should give banks more regulatory clarity and confidence boosting demand in the sector.
Brian Norris: Okay, okay, that's helpful.
Jason Stewart: Okay, okay, that's helpful. And then you guys addressed where I think marginal economic returns were and, amid the high teens on a gross basis, where do you see them on the existing book? Today, and what do you think the best path forward is, I mean, given your view of the basis and the macro environment, is it raising capital to deploy at incremental returns? You know, how does that look relative to the existing book, taking the benefit of swaps? into account? I mean, how do you think about those two factors going forward?
Jason Stewart: And then you guys addressed where I think marginal economic returns were, and I'm in the high teens on a growth basis. Where do you see them on the existing book today? And what do you think the best path forward is? I mean, given your view of the basis and the macro environment, is it raising capital to deploy incremental returns? How does that look relative to the existing book? You know, taking the benefit of swaps into account, I mean, how do you think about those two factors going forward? Yeah, hey, Jason, you know, I think the current book has been mostly added at wider spreads than where we are now.
Speaker Change: Okay, okay, that's helpful.
Speaker Change: And then, you guys addressed where I think marginal economic returns were amid the high teens on a gross basis. Where do you see them on the existing book?
Speaker Change: Today and what do you think the best path forward is? I mean given your view of the basis and the macro environment Is it raising capital? To deploy at incremental returns, you know, how does that look relative to the existing book? You know taking taking the benefit of swaps
Brian Norris: Five, but more detail on the age to mortgage market. In the upper left chart, we show 30 year current coupon performance versus US treasuries over the past 12 months, highlighting the second quarter in gray. Current coupons modestly underperform during the quarter, as interest rate volatility spiked both in April and late June. Since the end of the quarter, strong performance in July has been offset by increased interest rate volatility and a general risk off tone in early August due to a weaker than expected August employment.
Speaker Change: into account. I mean, how do you think about those two factors going forward?
Brian Norris: Yeah, hey Jason. I think the current book has been mostly added at wider spreads than where we are now, so I would say the... The yields on those, or the ROEs, are in the high teens to 20 area because we've seen over the last couple of years more attractive environments on a spread basis than we currently see right now for that.
Jason Stewart: Sorry, what was
Speaker Change: Yeah, hey Jason. You know, I think, you know, the current book has been mostly added at wider spreads than where we are now. So I would say, you know, the...
Brian Norris: So I would say, you know, the yields on those are the orallys are, you know, in the high teens to 20 area because, you know, we've seen over the last couple of years, more attractive environments on a spread-based system than we currently see right now. So that, sorry, what was the second part of the question? How do you see, you know, the benefit of the swaps today and the current economic returns on the book, how do you balance that versus raising capital to invest in marginal economic returns? And again, I think you're... Yeah, sorry, Jason.
Brian Norris: Network Although nominal spreads on higher coupons are now narrower than in the second half of 2023, they are still historically attractive as ongoing interest rate volatility is limiting demand. Specified pool pay-ups fell in the second quarter due to rising interest rates but have partially recovered as the abrupt decline in rates has led to more demand for recruitment protection. Lastly, as shown in the lower right chart, the dollar-roll market for certain TVA securities has improved dramatically in the second quarter, as heavy demand for higher coupon genic collateral from CMO desks led to a significant imbalance in the supply and demand technicals in those coupons. This imbalance has since normalized however, and the dollar-roll market for most 30-year TVA securities is, once again, largely unattractive relative to repo financing on specified pools.
Jason: So that, sorry, what was the second part of the question?
Jason Stewart: I guess, how do you see, you know, the benefit of the swaps today and the current economic returns on the book? How do you balance that versus raising capital to invest in marginal economic returns?
Jason: I guess, how do you see, you know, the benefit of the swaps today and the current economic returns on the book? How do you balance that versus raising capital to invest in marginal economic returns? And I guess... Yeah, give it a run.
Jason Stewart: And I, again, thank you for your...
Brian Norris: Yeah, sorry, Jason. Given our current capital structure is, you know, it's not optimal. You know, raising capital and deploying new assets becomes quite accretive given where spreads are right now. So, we view that as a relatively attractive option.
Brian Norris: Yeah, given that our current capital structure is, you know, it's not optimal, you know, raising capital and deploying in new assets becomes quite a creative, given where spreads are right now. So, you know that we view as a relatively attractive option for us. Okay.
Speaker Change: Yeah, sorry Jason. Given our current capital structure is, you know, it's...
Jason: not optimal. You know, raising capital and deploying new assets becomes quite accretive given where spreads are right now. So, you know, that we view as a relatively attractive option.
Brian Norris: Slide 6 details are agency RNBS investments and summarizes investment portfolio changes during the quarter. We continue to rotate a portion of our lower coupons by supply pools into agency CMBS at the beginning of the quarter. However, continued outperformance in agency CMBS limited the amount of the rotation as contracting premiums throughout the quarter made the less sector less attractive relative to agency RNBS. We remain focused in higher coupons, which should benefit from a decline in interest rate volatility and are largely insulated from direct exposure to assets held by both commercial banks and on the federal reserve balance sheet.
Unknown Executive: All right, I'll jump out and let Bob get back in here. Thanks. There's another quick reminder: if you'd like to ask a question, please press star followed by one. Show no further questions, but we'll allow one moment. Okay, and I'm showing no further questions at this time.
Jason Stewart: All right, I'll jump out and let Doug get back in here. Thanks.
Jason: Okay. All right. I'll jump out and I'll get back in here. Thanks.
Operator: As another quick reminder, if you'd like to ask a question, please press star followed by one. Show no further questions, but we'll allow one moment. Okay, and I'm showing no further questions at this time.
Speaker Change: As another quick reminder, if you'd like to ask a question, please press star followed by one.
Speaker Change: Show no further questions, but we'll allow one moment.
Speaker Change: www.invescomortgage.com
Brian Norris: We focus our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discounted environments with our largest concentration in lower low and balanced collateral given more predictable prepayments. In addition, during the quarter, we added 200 million noisional and higher coupons in the TBA to benefit from a very attractive levels in the dollar-roll market.
Speaker Change: Thanks for watching, and I'll see you in the next video.
Speaker Change: Thank you very much for watching this video, and I'll see you in the next video.
Speaker Change: Okay and I'm showing no further questions at this time.
Unknown Executive: All right, well, thank you, everybody, for joining us, and we look forward to next quarter's call. Thanks. Thank you, Nick; it concludes today's conference. You may all disconnect at this time. Speakers, you may stand by for a post-conference.
John Anzalone: All right, well, thank you everybody for joining us, and we look forward to next quarter's call. Thanks.
Brian Norris: Although we anticipate interest rate volatility to remain moderately elevated in the near term, we avoid current valuations on production coupons aged to our MBS largely reflect this risk and represent attractive investment opportunities with current gross ROEs in the mid to high teams. Flight 7 provides detail on our agency CMBS purchases as well as an overview of the benefits of the sector. We purchased 120 million in the second quarter, bringing our exposure to approximately 7-8% of our total investment portfolio.
Operator: Thank you, and that concludes today's conference; you may all disconnect at this time. Speakers, you may stand by for a post-conference report.
Speaker Change: Thank you and that concludes today's conference, you may all disconnect at this time.
Brian Norris: We believe agency CMBS provides numerous benefits to the portfolio primarily through its prepayment protection and bullet-like maturities, which reduces our sensitivity to interest rate volatility. Gross ROEs on new purchases were in the low-level digits at the beginning of the second quarter, but given the strong performance in the sector, that declined to the high-single digits. Financing capacity has been robust as we have been able to finance our purchases with numerous counterparties and attractive funding levels.
Brian Norris: We will continue to monitor the sector for opportunities to increase our allocation as they become available, recognizing the overall benefits of the portfolio as the sector diversifies the risk. The diversifies risks associated with an agency are against portfolio.
Brian Norris: Our agency's CMO allocation is detailed alongside our remaining credit investments on flight 8. Our allocation to both agency interest only and credit securities remained unchanged, 75 million allocated to agency IO, and 18 million allocated to credit at quarter end. Although we anticipate limited near-term price appreciation in these investments, we believe they provide attractive yields for unlimited holdings. With returns in the high-single digits.
Brian Norris: Slide 9 details are funding and hedgebook at quarter end, repurchase agreements collateralized by agency R and B.S., R.A.G., and agency CMS declined modestly, from 4.4 billion to 4.3 billion. And our notional paid fixed interest rates loss decreased as well, from 4.3 billion to 3.9 billion, as the ratio of our hedges to borrowing decreased to 92% from 97% last quarter. The increase in interest rates led to further repositioning of the hedgebook at the interest rate sensitivity of our assets increased, warranting a similar increase in the weighted average maturity of our interest rate swap hedges.
Brian Norris: Reflecting this change, the weighted average maturity of our hedges increased from 7.2 years at the end of the first quarter to 7.5 years, resulting in a modest increase in the weighted average coupon on our paid fixed swaps, from 1.17% to 1.22. Economic leverage ended quarter at 5.9 times debt to equity, up from 5.6 times at the end of March, most were mostly reflecting the decline in book value. Slide 10 provides further detail on our asset yields and funding costs, interest rates on our repurchase agreements and swap receivaries were largely unchanged to quarter end, while yields on our HCR and gas portfolio increased five basis points to 5.4%, consistent with the five basis points increase in our swap pay rate.
Brian Norris: To conclude our prepare remarks, despite a near consensus that easing and monetary policy will begin in the third quarter, financial markets remain quite volatile as investors debate the probability of a recession and magnitude in timing of near term policy easing. The recent chart decline in interest rates has provided a supportive backdrop for lower coupon agency mortgages since quarter end, while higher coupons have modestly lagged given the spike in interest rate volatility.
Brian Norris: We believe IVR is well positioned to navigate future mortgage market volatility and selectively capitalize on historically attractive agency R and gas spreads, given our balance of discount and higher coupon agency mortgages and agency CNPS. In addition, we believe the easing of monetary policy will eventually lead to further declines in interest rate volatility and a steeper yield curve, both of which provide a supportive backdrop for agency mortgages. Lastly, our liquidity position remains robust and provides cushion for further potential stresses in the market while also providing capital to deploy into our target assets as the investment environment improves.
Unknown Executive: Thank you for your continued support from Best Go Mortgage Capital, and now we will open the line for today. Thank you, as a reminder, if you'd like to ask a question, please press star than one on your phone. Remember to unmute your phone and record your name and company, clearly when prompted. If you'd like to withdraw that question, you may press star two. Again, to ask a question, please press star than one.
Jason Weaver: Okay, now first question comes from Jason Weaver with Jones Trading. Your line is open. Hey, good morning. Thanks for taking my question. Brian, I appreciate your comments around leverage, and I understand it was book value related to change in the quarter. But can you comment on your comfort zone going forward? It seems like with the comments around easier monetary policy leading to tighter spreads, it might be appropriate to get more aggressive at some point in the near future.
Jason Weaver: Yeah, hey Jason, good morning as well. Thanks. Yeah, I mean, right now we would consider our leverage to kind of be in the middle of our range. You know, I think, I mean, you're right, if we start to see decline in interest rate volatility and steeper yields curve, that would potentially warrant an increase in leverage, but as of right now, you know, we're still in a pretty volatile environment. So I think, you know, remaining somewhat in the middle of that range is true.
Jason Weaver: Got it. That makes sense. And just one clarification. You made the comments on agency CMBS. Is that not likely to become a much growing portion of your portfolio going forward? We certainly like the benefits that it brings to the portfolio. You know, like I said, you know, spread got a little too tight for it to make sense later in the second quarter. But, you know, if we were to see some, you know, compression between agency CMBS and HCRMDS, it's likely that we would look to increase allocation there. Got it. Thank you for that.
Unknown Executive: Thank you.
Doug Harter: The next question comes from Doug Harter with UBS. Your line is open. Okay.
Unknown Executive: Moving on to our next question.
Jason Stewart: Jason Stewart with Jamie. Your line is open. Hey, good morning. Thanks. Can you give us an update on where taxable income stands relative to the dividend and how you see that evolving going forward? Hey, Jason. Yes, Brian. It's taxable income is a challenging one. You know, I think, you know, that's going to be in our queue. So, you know, I think, you know, the thing that we look at certainly is, you know, EAD, which is comfortably above the dividend.
Jason Stewart: And, you know, taxable income typically gets driven kind of by, you know, drift as pricing. So, that tends to be a little bit more volatile, depending on what rates are doing during the quarter. So, it makes it a little bit more challenging to use that as a guide. Okay. Maybe, maybe generally, and I'm looking it up right now, could you, could you give us, like, are we in a position of being over-distributed or under-distributed just generically kind of bid year?
Jason Stewart: Relentive to our taxable income. Is that the question? Correct. Yeah. Hey, Brian. Yeah. You only address that? Sure. So, we have operating laws carried forwards that allow us to sustain the delta between taxable income right now being in excess of the disclosure that we're in excess of the dividend that we're doing. If that's the question in terms of the tax going to drive a need to increase the dividend, we have flexibility there based on our operating laws carried forwards.
Jason Stewart: Okay, okay, that's helpful. And then you guys addressed where I think marginal economic returns were and I'm in the high teens on a growth basis. Where do you see them on the existing book today? And what do you think the best path forward is, I mean, given your view of the basis and the macro environment, is it raising capital to deploy incremental returns? How does that look relative to the existing book?
Jason Stewart: You know, taking the benefit of swaps into account, I mean, how do you think about those two factors going forward? Yeah, hey, Jason, you know, I think the current book has been mostly added at wider spreads than where we are now. So I would say, you know, the yields on those are the orallys are, you know, in the high teens to 20 area because, you know, we've seen over the last couple of years, more attractive environments on a spread-based system than we currently see right now.
Jason Stewart: So that, sorry, what was the second part of the question? How do you see, you know, the benefit of the swaps today and the current economic returns on the book, how do you balance that versus raising capital to invest in marginal economic returns? And again, I think you're... Yeah, sorry, Jason. Yeah, give it our current capital structure is, you know, it's not optimal, you know, raising capital and deploying in new assets becomes quite a creative, given where spreads are right now. So, you know, that we view as a relatively attractive option for us. Okay.
Unknown Executive: All right, I'll jump out and let Bob get back in here. Thanks. There's another quick reminder, if you'd like to ask a question, please press star followed by one. Show no further questions, but we'll allow one moment. Okay, and I'm showing no further questions at this time. All right, well, thank you, everybody, for joining us, and we look forward to next quarter's call. Thanks. Thank you, Nick, it concludes today's conference. You may all disconnect at this time.
Unknown Executive: Speakers, you may stand by for a post-conference.