Q1 2025 Orchid Island Capital Inc Earnings Call
[music].
Okay.
Good morning, and walking through the first quarter of 2025 earnings conference call for Orchid Island capital.
This call is being recorded today April 25th 2025.
At this time the company would like to remind the listeners that statements made during todays conference call relating to matters that are not historical facts are forward looking statements subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Listeners are cautioned that such forward looking statements are based on information currently available on the managements. Good faith belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward looking statements.
Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent.
Annual report on Form 10-K.
Company assumes no obligation to update such forward looking statements to reflect actual results changes in assumptions or changes in other factors affecting forward looking statements.
Speaker Change: Now I'd like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead Sir.
Speaker Change: Thank you operator, and good morning, Thank you for joining us today I'm sitting here with Jerry Center, as our controller and Hunter Haas, Our Chief investment Officer, and Chief Financial Officer will follow Oh by the way before we start I hope everybody had a chance to download the deck, which will be following under the course of the call. So.
Speaker Change: I mean, you'd have that with you we will be proceeding.
Speaker Change: Logical order just.
Just to give you a summary of what we'll do well first half Jerry go over our financial results for the quarter. I'll, then discuss the market developments that shaped the decisions. We did in the performance of the portfolio and Hunter will dive into the portfolio and.
Speaker Change: And hedging positions described well, where we stand and what we've done and then finally I will do what you kind of wrap up and then we'll open the call up to question and answers so with that I will turn the call over to Jerry Center.
Speaker Change: Thank you.
Speaker Change: Multi turn to page five we'll start with the financial highlights for the quarter.
Speaker Change: But Q1, we earned <unk> 18 per share compared to seven cents in Q4.
Speaker Change: Book value at 331 was $7.84 per share compared to 809 at 12 31.
Speaker Change: Total return for the quarter was two 6% on annualized competitive zero, 6% for Q4.
Speaker Change: And we declared and paid dividends of $36 36 per share for each quarter.
Speaker Change: The Cherokee page six without with some portfolio highlights.
Speaker Change: For Q1, the average portfolio was just under $6 billion compared to $5 3 billion in Q4.
Speaker Change: Our leverage ratio of 331 was seven eight compared to $7 three at 12 31.
Speaker Change: And prepayments speeds.
Speaker Change: Seven 8%.
Speaker Change: Q1, compared to 10, 5% for Q4.
Speaker Change: The quiddity at 331 was 52, 2% compared to 52, 9% at 12 31.
Speaker Change: On page seven is our.
Speaker Change: Summarized financial statements, which you can read at your convenience and now I'll turn it back over to Bob for markets discussion.
Bob: Thanks, Jerry and before we move on to the market develops I just wanted to apologize in our initial release.
Bob: I think it was on a night when we released our preliminary earnings per share and book value numbers, we have the.
Bob: Breakdown of earnings per share between net interest income and capital gains and losses reversed.
Bob: It implies that the capital gain component was the larger of the two and in fact it was a much smaller as we show in the press release it was roughly a little under two cents for the capital gains in the rest of it was from net interest income. So I do apologize for that turning now to slide nine.
Ben: It's Ben.
Ben: Q1 was actually very much continuation of what we saw in Q4 absent what happened very late in the quarter and then of course very much.
A lot in early April so just with respect to Q1 as you see in the top left you can see the Red line. There Thats, just where we were at the end of the year and we had a significant rally in.
Ben: Cash Treasury curve have a green light and then since quarter end we've had.
Ben: Significant move with.
Ben: With respect to the tariffs and their expected impact on the economy and inflation the market moved to price and three fed cuts are three plus fed cuts by the end of the year and the long end sold off quite a bit.
Ben: The initial concern was that this was foreigners dumping treasuries.
Ben: The safe Haven status of the dollar and U S treasuries somewhat in doubt.
Ben: I'm not so sure now that that's the case, but we did see earlier. This week the results of last week's auctions last specifically the 10 and 30 year and there was really nothing that changed with respect to foreign participation in those auctions.
Ben: But what we have seen in long end.
Ben: Pressure theres, probably a couple of trade.
Ben: Trading trends that explain that one is what are known as basis trades with respect to the futures market is typically very highly levered trades put on by hedge funds and what may have to de lever they involve selling along and quite a bit. Another is just the fact that with the forced selling that was caused by the.
Ben: <unk> is in the market our dealers had to take a lot of bogs onto their balance sheet and that tends to.
Ben: And one just selling of treasuries that are already instrument. It was liquid enough to be sold but also dealers take on a lot of positions on our balance sheets, you typically see movements and swap spreads.
Ben: Downward more negative and in fact, if you look just to the right you can see what happened at a swap curve. It's notable two things one if you look at the movements over the course of the quarter from $12 31 to $3 31, similar to what happened in the cash market.
Ben: What happened since quarter end kind of mirrors that as well, but notably.
Ben: Absolute numbers are much lower so swap spreads move meaningfully negative late in the quarter and into April.
Ben: April.
Ben: And that had a lot to do with mortgage performance, which we'll get to in a minute in fact arguably movements as swap spreads are the biggest drivers of mortgage performance today.
Ben: And we will talk about that as I mentioned.
Ben: Going on to the next slide on Slide 10, as you can see at the top this is just the spread of the current coupon mortgage debt of tenure over very large periods of time, that's probably most appropriate benchmark, but more meaningfully of late it's really the five year, just because the current coupon mortgages, a higher coupon premium or.
Ben: Premium, but higher coupon security and it has a shorter duration at a 10 year. So really if you look at this versus five year, you would see that the spread had widened out quite a bit is basically looking here you would say that we really havent widened that much. However, as I've mentioned previously swap spreads are very negative and if you look at the spread of our current coupon.
Ben: Wanted to benchmarks of the swap curve that spread is at very wide levels.
Ben: What we've seen probably since the outbreak of the Covid pandemic.
Ben: The bottom left you can see the performance of mortgages absent what happened late in the quarter in early April did quite well in fact, if you look at the Bloomberg indices mortgages agency mortgages or the second best sector and the fixed income markets behind only tips and as you can see here on the left here as we approach late February into March.
Ben: The market was rallying mortgages did very well orchid did well most of our peers had solid positive returns.
Ben: It kind of characteristic with mortgage market as a whole to the right you see the roll market.
Ben: I'll point out a couple of things on.
Ben: On the left two thirds of that slide you can see during most of 2024 roles were not very attractive that did change quite a bit in the first quarter. They became did quite well that also just helps the class as a whole there's a lot of factors that drive roles one of which is just a technical supply and demand such that if there is the.
Ben: Demand for mortgages in the front month, but theres not a lot of supply the price of the front months mortgage can get bid up.
Ben: The drop appears to be larger that gives you a nice attractive roll most of what we saw in the first quarter was actually demand from CMO desks for mortgages as they were generating unprecedented the higher levels of CMO floaters, mainly for the banking community. So that helps support the role.
Ben: Did fall off quite a bit as we enter April.
Ben: Now just moving on to slide 11 volatility as you can see the top slide is quite high.
Ben: Top slides a 12 month look back we are at the highest levels for that period.
Ben: You'll note that the VIX, which is equity vault was also very high.
Ben: And correlations, which we typically see.
Nick: Been in place for decades between bonds treasuries rates or treasuries or in particular in equities is really broken down to a large extent over the last month or so so for instance, when you would typically have equity weakness and a flight to quality bids you would see treasuries rallied in fact, we saw just the opposite Nick.
Ben: Relations have become more positive which is very atypical.
Speaker Change: Looking at some perspective here on the bottom just shows this vol levels going back 10 years and you can see we're at quite high levels that Big Spike you see in March of 'twenty three as the regional banking crisis, and then back in March of 'twenty. That's the Covid pandemic evolved has generally been elevated and outside of the regional banking crisis.
Speaker Change: The current level of ball's really at the highs of the rates that we've had for the last few years.
Speaker Change: Now moving on to Slide 12, and this is a new slide this shows swap spreads as I'd mentioned, they've moved quite a bit. So what we show here are just four different tenors that top line is the two year.
Speaker Change: Orange line is the five year to three lines of seven year and the Blue line is the tenure as you can see they have moved dramatically and become quite volatile of late so theres two takeaways from this one if you have new capital deployed today and Youre looking to hedge that with swaps.
Speaker Change: <unk> opportunities are phenomenal extremely attractive spreads wider spreads we've seen in quite a time the flip side of that is if you entered this period by hedging with swaps it might've been painful.
Speaker Change: Hunter is going to talk at length about what we've done in the portfolio I will just give you a brief executive summary, what we generally deadly raised quite a bit of capital during the quarter. We deployed a lot of that proceeds into higher coupon shorter duration assets, so shorter duration assets and we hedge them predominantly.
Speaker Change: With longer duration hedges, so the combination of a short duration asset being hedged by a longer duration hedge means that you don't need as much notional to do so so that mitigated our exposure to these decline in swap spreads.
Speaker Change: And.
Speaker Change: Going forward.
We would also we've also changed the mix not as much swaps, we've used more treasury futures and so a few for instance look at our swap notional versus our.
Speaker Change: Our.
Repo balance it's much lower and the reason is the repo balance tends to track your asset size, but because of the asset mix has moved to more shorter duration assets and we're using a longer tenor swaps or futures, the notional or low in relation to the repo liabilities.
Speaker Change: Moving on to Slide 13. This story Hasnt as this remains the same it's just what we've been experiencing for quite some time the top left the Blue line. There is just the refi index. We are at historically low levels and the Red line as mortgage rates. They are very very high.
Speaker Change: It's keeping refinancing activity low if you look at the bottom chart you can see that the percentage of mortgages versus refinance what was very low by historical standards, but top right. Just shows the primary secondary spreads charges somewhat misleading just reflects the fact that one rates have been very very volatile, but also we have.
Speaker Change: Right data on a minute by minute day by day basis of mortgage rates, we don't get the data is regularly and so sometimes you just have timing differences, where you can can lead to apparent spikes down and the primary secondary spreads basis, but that really has been fairly stable. One thing with respect to spreads we do want to mention is that.
Speaker Change: As you probably heard the merge between rocket mortgage and Nationstar.
Speaker Change: Has the potential to definitely increase speeds are perfect convexity of the mortgage universe.
Speaker Change: We have added a slide to the appendix, which we'll talk about later slide 28, and it basically breaks down our exposure to loans serviced by Nationstar and obviously there is the potential for this development to affect performance in the payouts.
Speaker Change: For specified pools, but as of yet we really don't have any hard data to point to that's still TBD.
Speaker Change: Slide 14, I don't really have to say about that other than it just shows you. The long term historical relationship between the notion of nominal GDP in the money supply as you can see is the government's reminding massive deficits of late money supply is very far above its long term trend growth is corresponded into higher.
Speaker Change: GDP growth with that that's it for the market and I will turn it over 200, you will go through the portfolio.
Speaker Change: Thank you Bob and good morning.
Speaker Change: We have a lot to discuss this morning, and very busy quite active in the capital markets in the first quarter.
Speaker Change: And so we have a lot of updates for you. We also want to be mindful of letting our shareholders as well as our.
Speaker Change: As well as the Counterparties with which we are credit relationships.
Speaker Change: What measures we've been taking to safeguard ourselves from recent market volatility.
Speaker Change: As such I'll be discussing activity in several metrics that are.
Speaker Change: As.
Speaker Change: Fresher as of last night's close.
Speaker Change: And I just want to mention that April 24th I, just wanted to reiterate how important is that these discussions.
Speaker Change: Relating to activity. This month are our company's best estimates and our internally generated unaudited and subject to change and.
Speaker Change: All the things that Howard said of the Safe Harbor discussion at the beginning of the call.
Speaker Change: So with that on.
Speaker Change: On slide 16.
Speaker Change: As I mentioned, we were quite busy we raised.
Speaker Change: Proportionate to our size are quite a bit of capital in the first.
Speaker Change: Quarter $206 million worth in fact, we sold 25 million shares of stock.
Speaker Change: We estimate that the.
But the.
Speaker Change: With the shares that we sold were a little bit accretive slightly accretive to shareholders.
Speaker Change: So above book value in.
In the aggregate net of any fees, we would have had to pay.
Speaker Change: With that said as the market became more volatile coming into the end of March and.
Speaker Change: More so in April.
Speaker Change: The stock price just didn't perform very well and we implement.
Speaker Change: Reactivated our buyback program.
Speaker Change: April month to date, we've repurchased over a $1 billion $1 1 million shares of stock.
Speaker Change: We did so.
Speaker Change: Weighted average price net of commissions of $6 44 at a time when.
Speaker Change: Spot of our book value at roughly 736 give or take.
Speaker Change: So there's that.
Speaker Change: Buyback was also quite accretive to shareholders equity.
Speaker Change: Getting back to the portfolio and what we did with that capital that we raised in the first quarter.
Speaker Change: We bought.
Speaker Change: Quite a bit of Av.
Speaker Change: Any 55665.
Speaker Change: Exclusively those three coupons.
Speaker Change: We did early in the quarter, we had been carrying.
Speaker Change: $200 million Fannie three short just because that role was trading really poorly.
Speaker Change: It firmed up a little bit and we found some.
Speaker Change: Slow paying Fannie threes that really werent doing anything for us more or less just delivered them into that TBA I think we've got a little bit of pay up for the pools. We sold that we just sold them on swap and took a little pay up and reduced our exposure to Fannie threes by $200 million.
Speaker Change: Really sort of helped the carry of the.
Portfolio overall.
Speaker Change: Going back to the capital New capital.
Speaker Change: <unk>.
Speaker Change: We added.
Speaker Change: Approximately 306 million, Fannie, 5% and 30 or $55 <unk> those were all either New York or Florida pools.
Speaker Change: We've broken them onto their Florida story, I think relatively early.
Speaker Change: I think that those are going to be.
Speaker Change: Good assets to hold.
Speaker Change: Especially in the premium space.
Speaker Change: We added a lot of 30 year sectors.
Speaker Change: Dominic Lee, Florida, and low loan balance pools, and kind of a 200 to 275 K.
Speaker Change: Max range and some FICO and we also added $458 million 30 year $6 has again those are the same sort of combination is six.
Speaker Change: 225 case, Florida FICO.
Speaker Change: During the month, we also put on.
Speaker Change: A little bit of a basis hedge and what we hope will be a little bit of a basis hedge.
Speaker Change: Hey.
Dorothy: Dorothy <unk> Fannie five five swap we like that four times when mortgages get a little too snug.
Speaker Change: They were really in going into February.
Speaker Change: With respect to the going back to slide 16, sorry.
Speaker Change: I just wanted to point out one more thing.
Speaker Change: Two more things the WAC of the portfolio and importantly, the end of December was 503 as you can see the result of.
Speaker Change: The securities we purchased in the quarter that drifted up to $5 32.
Speaker Change: We have sold some assets.
Speaker Change: Since the end of the quarter and so the lack of the portfolio has drifted up a little bit more.
Speaker Change: Yes.
Speaker Change: And that leads me to some activity thats taken place since the end of the period.
Speaker Change: Sold.
Speaker Change: Roughly $692 million worth of securities basically to get our leverage back into check our leverage at the end of December was 7378 at the end of the first quarter and I spotted last night at seven four.
Just to kind of carry through that thought.
Speaker Change: <unk>.
Speaker Change: You have a choice to make anytime that you suffer some losses in the portfolios down in value.
Speaker Change: Estimate that the portfolio was down gross book value was down.
Speaker Change: Roughly.
Eight 3% as of last night.
Speaker Change: And so.
Speaker Change: As we.
Speaker Change: Move down in book value experienced some losses.
Speaker Change: We have the choice to either explicitly let your leverage ratio rise.
Speaker Change: Or.
Speaker Change: Mitigate that by selling some securities.
Speaker Change: I thought it would be prudent to go ahead and sell some bonds.
Speaker Change: And so.
Speaker Change: The ones we sold.
Speaker Change: Lower carry assets lower coupon as I discussed the lack of the portfolio drifted up slightly because of what we sold.
Speaker Change: 353 million, Fannie fours 125 million $5 $114 million.
Speaker Change: <unk>.
Speaker Change: $5 five we also put on TBA hedge.
Speaker Change: $200 million more Fannie fours.
Speaker Change: We looked last night.
Speaker Change: There were maybe four or five basis points tighter on mortgage swap based system that they were at the time that we.
Speaker Change: That we execute the sales and the market has swung around violently since the first few.
Speaker Change: A couple of days of this week and so.
Speaker Change: We're starting to recover some.
Speaker Change: The past three days have been quite positive for mortgage assets and so we'll jump back into those securities as things.
Speaker Change: FX as and if things.
Speaker Change: Continue to quiet down.
Speaker Change: Volatility drops portfolio gains value and our leverage ratio would then.
Speaker Change: Start filling lowered lowered so we like where we are positioned kind of mid <unk> leverage ratio. We are comfortable with that our liquidity position is actually a little bit higher than it was.
Speaker Change: <unk>.
Speaker Change: Yes.
Speaker Change: At the end of $3 31.
Speaker Change: So we feel good about the risk of our portfolio and the steps that we've taken to mitigate potential for future losses.
Speaker Change: Slide 17 is just kind of a rehash of the.
Speaker Change: Portfolio Strats that we've just discussed.
Speaker Change: The funding the funding.
Speaker Change: On slide 18.
Speaker Change: End of <unk>.
Speaker Change: <unk> 31, our weighted average repo rate was $4 46.
Speaker Change: 66.
Speaker Change: 466, I'm, sorry, 466, 446 at the end of.
Speaker Change: At the end of March and as of last night. The weighted average repo rate was 447, so not a lot of change there we have not seen a change in.
Speaker Change: Any material changes in haircuts or.
Speaker Change: Yes.
Speaker Change: The.
Speaker Change: Counterparties pulling back from the space.
Speaker Change: So far at least so I think that.
Speaker Change: In our space are reasonably well positioned and while we might incur some losses.
Speaker Change: Nothing as dramatic as it was say during Covid times.
Speaker Change: Who knows anything can change right. So.
Speaker Change: The average term for the repo book was also 26 days at the end.
Speaker Change: December 40 days at the end of <unk>.
Speaker Change: March and is currently 40 days at the end of March and is currently 30 days.
Speaker Change: Right now so not a lot of changes to report on the repo side or the other side of the house.
Speaker Change: As it relates to.
Speaker Change: Slide 19, we talked about our hedges of course I've mentioned, we on Mount several mortgage securities.
Speaker Change: Several different mortgage securities.
Speaker Change: We also unwound a number of.
Speaker Change: Swaps.
Speaker Change: Offset that risk.
Speaker Change: Just kind of go through some of the hedging activity that we did in the period.
Speaker Change: Early in the quarter as expectations for fed cuts were low.
Speaker Change: The fed funds curve was very flat really with only one full priced into 2025 and 2026 we.
Speaker Change: We use that as an opportunity to unwind, a 500 million one and two year swaps on the very front end of the curve, we move that duration out the curve kind of 10 year point.
Speaker Change: And then as we added assets during Q1, we.
Speaker Change: We predominantly hedged them with a mix of five centers intents skewing, a little more heavily towards the seven and 10 years and skewing more heavily to swaps and treasuries.
Speaker Change: So we did.
Speaker Change: So on the 10 year Ultra futures.
Speaker Change: Late in February early March the market has gone from price again, only one cut to $25 26 to almost four and so we reestablished a hedge on the front end of the yield curve.
Speaker Change: Economically lock in rates projected fed cuts and did so by adding.
Two years, so for future strip.
Speaker Change: I think $115 million and 250 million six months for a two year forward starting swap those are done at rates of around $3 60.
Speaker Change: Yes.
Speaker Change: Because I think the yield that we were.
Speaker Change: That we were that we have achieved on the incremental capital that we put to work was in the 560 area, whereas the legacy portfolio is quite a bit lower than that so feel good about where we got in and where we've been able to hedge our funding costs.
Speaker Change: Yes.
Speaker Change: Slide 20 is just more of kind of the.
Speaker Change: The hedge pitcher.
Speaker Change: Yes.
Speaker Change: We.
Speaker Change: You can see the stats.
Most of this week as I mentioned we.
Speaker Change: <unk>.
Speaker Change: We added some $5 7 million tonnes.
Speaker Change: Since quarter end. So this gives you a breakdown of the portfolio from 12 31.
Speaker Change: Hedging book from 12, 31 to $2 31, and subsequent to that.
Speaker Change: What we've done on the online has been <unk>.
Speaker Change: $8 nine points of the curve.
Speaker Change: $474 million seven to eight year payer swaps and wheat shortage.
Speaker Change: $200 million.
Speaker Change: Fannie fours.
Speaker Change: Slide 21, I'll just leave this with you which is just like what the.
Speaker Change: What the.
Speaker Change: Return and.
Speaker Change: Risk reward.
Speaker Change: The comparison of the coupon stack. This is generic TBA is and who isn't really specific to our portfolio. Although we do still confusing with you at our portfolio allocation over it again.
Speaker Change: These are just generic TBA is of course our portfolio is.
Speaker Change: Constructed.
Speaker Change: Almost all specified pools that have some sort of story to them. So we don't really have anything that's.
Speaker Change: We have some lower pay up bonds, which is a lot of what we sell in times like April with England stress periods, but.
Speaker Change: We don't have anything.
Speaker Change: We do.
Speaker Change: Called TBA ish.
Speaker Change: Yes.
Speaker Change: Page 22.
Speaker Change: Is.
Speaker Change: Our interest rate sensitivity profile.
Speaker Change: It has the <unk> one of the portfolio listed there as well as kind of.
Speaker Change: The dollar and.
Speaker Change: Percent change of.
Speaker Change: Up and down 50 shop.
Speaker Change: Note that.
Speaker Change: The end of it.
Speaker Change: March.
Speaker Change: One this was at the end of March is very flat.
Speaker Change: This wall guard against basis widening that we've seen almost all of our.
Speaker Change: Losses that we've experienced in the fourth quarter.
Speaker Change: Starting in the second quarter have.
Speaker Change: Been attributable to.
Speaker Change: The basis widening this profile is even more flat as of.
Speaker Change: Yesterday down 0.05% down $50 million down two 4% up 50, we keep an eye on this every day.
Speaker Change: As well as several other risk measures.
Speaker Change: Slide number 23 is our.
Speaker Change: Prepayment experience.
Speaker Change: As you can see we had.
Speaker Change: Speeds were $6 two in Jan seven three in.
Speaker Change: Fed and nine in March.
Speaker Change: On an average basis for the first quarter that was seven 5% versus.
Speaker Change: 10, 2% in the fourth quarter I would note that as we've added assets that are higher in coupon, we're going to start seeing that speed, probably creep up a little bit in <unk>.
Speaker Change: April's was.
Speaker Change: Jumped up a little bit up to 9%.
Speaker Change: How does that relates to our.
Speaker Change: Book value.
Speaker Change: We had.
Speaker Change: We had.
Speaker Change: In January one two ratio of $1 $2 million worth of accretion. So our discounts were paying fast enough that they're overwhelmed the.
Speaker Change: The pay downs associated with our premiums to the tune of $1 $2 million. So paydowns actually helped us in that case.
Speaker Change: February that number was 800000 March it was 640 and then as I just alluded to we've skewed up much higher in coupon over the last over the course of the first quarter. So we had $325000 worth of debt paydown related amortization.
Speaker Change: The month of April.
Bob: That's about all I have for you so I'll turn it back over to Bob too.
Bob: Thank you the outlook in the Q1 wrap up thanks.
Thanks Hunter.
Bob: Just to summarize kind of looking back.
Bob: Q1 for the most part was a very good quarter.
Bob: <unk> performance was very strong.
Bob: That was reflected in the price of the stock as well, we were able to raise capital on an accretive basis.
Bob: We did take some meaningful changes to the portfolio and we're happy with how we've repositioned the portfolio.
Bob: Looking forward.
Bob: Tons of uncertainty.
Bob: The market has become quite volatile of the driver of the volatility as we all know are of course, the tariffs and the impact they will have on trade relationships inflation growth.
Bob: But also the fact that a lot of this information as we all know comes out kind of in the form of headlines, which means they are kind of hard to predict it's not like regularly scheduled economic data that's actually taken a big back seat to these developments in fact, given the fact that most of the economic data is backward looking it tends to be.
Bob: Disregarded by the markets are the most part and everything is focused on everything with respect to trade tariffs and so forth.
Bob: Clearly the market has taken all of this too.
Bob: And process that and try to try to guess what this means going forward.
Obviously, the tariffs are expected to have some potential impact on inflation drive prices higher at least in the short term even if it is a onetime shock in nature remains to be seen whether or not it plays out in that regard, but any of that it's expected to be at least short term inflationary, but also drive growth slower.
Bob: Already seen the economy being resilient, but not robust.
Bob: These events are likely to cause us to slow as we mentioned before the market is pricing in three or four cuts. This year, maybe as soon as June.
Bob: So you would expect as combination of slower growth, which would put upward pressure on the unemployment rate.
And tariffs and pricing pressures, which put upward pressure on inflation those work against both of the fed's mandates. So the fed has clearly.
Bob: Our predicament here in any event, we don't know with any degree of certainty we have no basis of having any conviction in our outlook in terms of how exactly this is going to play out it's just too volatile and too much remains to be seen but as I mentioned that kind of general takeaway from this is it's probably slower for growth there is potential for fed eases.
And it's going to push inflation up which would tend to push long term rates up both of those developments lead to a steeper curve.
Bob: Which is good for us. So if you look at the way, we're positioned with a skew towards higher coupon charter duration assets.
Bob: They generate lots of carry.
Bob: Hedged on the long end predominantly.
Bob: And grooming the steepness of the curve there should work quite well, however, happy with our position, but we also are very very aware of the fact that this can all change and.
Bob: Everybody else or just watching the market every day.
Bob: Just interpreting the events as they occur and hoping we can be positioned our repositioned as effectively and quickly as possible.
Bob: But by and large we are all things considered happy with our positioning.
Bob: And that's about it with that we can turn the call over to questions operator so.
Bob: That is all of our prepared remarks.
Ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue simply press star one again.
Bob: Once again, if you have a question or comment at this time. Please press star one one on your telephone keypad. Please.
Bob: Please stand by while we composed of Q&A.
Bob: Q&A roster.
Speaker Change: Our first question or comment comes from the line of Jason Weaver from Jones trading Mr. Weaver. Your line is open.
Jason Weaver: Thanks, Hey, guys How're you doing.
Thanks, Jason.
Bob: First of all.
Speaker Change: Can you tell me, where you see your duration gap both at the end of the quarter and to date after the sales you've made.
Speaker Change: We don't do that 100 mentioned that we don't look at it in terms of just numbers, we do on an <unk> basis.
Speaker Change: Baked.
Speaker Change: Slide 22.
Speaker Change: We have that as.
Speaker Change: 13 is that.
Speaker Change: Is that right.
Speaker Change: So that'd be 13, it's very narrow.
Speaker Change: And I think.
You mentioned it was about the same as of now yes, very very flat.
Speaker Change: It's slightly where we're kind of in the.
Speaker Change: Convexity elbow so.
Speaker Change: The decline in value.
Speaker Change: And this 50 basis point shift if we narrow it down a little bit more.
Speaker Change: The duration.
Speaker Change: Maybe one hasnt changed materially since then and since then I've got it I was just thinking I was just thinking about how you made the comment about how you're hedging with longer dated swaps and I didn't know if that had changed post quarter end, but it seems like you would benefit from a steepening action in that.
Speaker Change: Yes, yes.
Speaker Change: Predominantly.
Speaker Change: Longer assets.
Speaker Change: Most of what we unwind.
Speaker Change: We're discounts so for us I think for <unk>.
Speaker Change: At a five.
Speaker Change: The $5 has a little closer to par but.
Speaker Change: Like I said we.
Speaker Change: I think we really only have to unwind to swaps and one was a seven year, one was kind of like a two year old.
Speaker Change: The one to two year old 10 year, yes. So.
Speaker Change: Other than that yes.
Speaker Change: We can really after unwanted.
Having some TBA hedge as well so.
Speaker Change: Got it.
Speaker Change: And just one more clarification I heard you mentioned your quarter to date book value was eight something and I got cut off.
Speaker Change: Yes, let me just go through that so I know that a lot of our peers have already reported and they reflected their book as of last Thursday.
Speaker Change: Our book last Thursday estimate was 724 thats down eight 8%.
Speaker Change: Had a rough day Monday, but the market's been good since then so as of last night.
Speaker Change: Our estimate is 728, <unk> <unk> above where it was last Thursday, and that equates to a decline of eight 3%.
Speaker Change: Quarter to date.
Speaker Change: And as we mentioned in our leverage ratio was about 74, it's actually lower on the quarter.
Speaker Change: Got it okay. That's very helpful. Thanks for the color guys.
Speaker Change: Yes, it's worth throwing in.
Speaker Change: I would like to mention the total returns as well, we'll talk about book value because our dividend is relatively high so when we think about.
Speaker Change: How the total return was of course it was two 6% we mentioned for the first quarter.
Speaker Change: Quarter to date.
Speaker Change: Yes.
Speaker Change: The change in book value reflects the dividend accrual so its dividends.
Speaker Change: As has been taken out at book, if you will and so the total return and dividend.
Speaker Change: Dividend count for the dividend that's going to be paid in.
Speaker Change: And may is six 8% quarter to date and year to date.
Speaker Change: Having the benefit of three three more months worth of dividends.
Speaker Change: October returns negative 4%.
Speaker Change: Got it thank you for the time.
Speaker Change: Yes, absolutely.
Speaker Change: Thank you. Our next question or comment comes from the line of Jason Stewart from Janney Montgomery Mr. Stuart Your line is open.
Jason Stewart: Alright, thank you.
Jason Stewart: Thanks, guys for all the color as usual.
Jason Stewart: A question after these portfolio changes and hedged changes, where do you see growth Roe in setting.
Jason Stewart: <unk>.
Jason Stewart: Well versus swaps.
Jason Stewart: Very very high pick your moment, because they are very volatile.
Jason Stewart: But I would say, 20% I don't have numbers in front of me, but there.
Jason Stewart: These are the highest levels we've seen in some time.
Jason Stewart: We look at the spreads.
Jason Stewart: Sure.
Jason Stewart: Seven year swaps versus current coupon.
Jason Stewart: As above 200 basis points or I don't know what it is record second but has been over the course of the last week or so like you said, it's been it's been very volatile so.
Jason Stewart: On a mark to market basis.
Jason Stewart: It wasn't quite that wide at 331, but going forward. If we were say putting new money to work.
Jason Stewart: I think very high teens and even into the low twenty's is probably achievable.
Jason Stewart: With our.
Jason Stewart: In the context of our.
Jason Stewart: Leverage framework, that's at our current leverage framework.
Jason Stewart: Got it okay. Thank you for that and then as it relates to that return environment.
Jason Stewart: Your cautiousness going forward in terms of spreads capital raising activity versus buybacks and the dividend kind of it seems like.
Cost of capital is a little north of.
Jason Stewart: Of where the returns are and how are you looking at the dividend.
Jason Stewart: Issuance and buybacks.
Jason Stewart: Our cost of capital.
Jason Stewart: Well, let me see to start with where the stock is trading now obviously buybacks.
Jason Stewart: The table.
Jason Stewart: We got so cheap there.
Jason Stewart: We just in spite of the basically waited for the market to come down and we felt somewhat comfortable using some cash to buy back stock we did.
Jason Stewart: No.
Jason Stewart: Given where stock is trading today, we are not far from bulk.
Jason Stewart: We would I would say that going forward, assuming nothing changes, where we sit today, which is a big if but.
Jason Stewart: We would even consider raising some capital just if nothing else to pad liquidity.
Jason Stewart: Not so much.
Jason Stewart: As much as the market is appealing.
Jason Stewart: And we would love to put money to work, but also be cognizant of the need maybe just to add some liquidity.
Jason Stewart: Because you never know when the turbulent periods going to come back.
Jason Stewart: But even if you do I mean investing at these levels.
Jason Stewart: The yield on the stock got I don't remember what it was at the lows I assume mid twenties, when we were trading.
Jason Stewart: Low sixes.
Jason Stewart: It's come up so it's not as heinous the yield but.
Jason Stewart: These are pretty attractive returns.
Jason Stewart: Just.
Jason Stewart: This question comes up a lot when people look at the dividend yield and so forth.
Jason Stewart: A component of the dividend that we pay and have always paid is derived from hedges in particular closed hedges.
Jason Stewart: And so that's you can't ignore the fact that when you put on significant hedges and then close the amount that they have a lasting impact on your taxable earnings because the gains on those derivatives at the time, you close them or advertise basically over the remaining term of that hedge.
Jason Stewart: US and our peers in the past have talked about the benefit of these closed hedges.
Jason Stewart: But that that's coming out of book value of those dollars are no longer present on the balance sheet right and so if you look at the dividend that's paid versus taxable earnings it looks like it's fully covered but not necessarily by current period GAAP earnings. So I wanted to make that distinction.
Jason Stewart: What you can earn today.
Jason Stewart: Forgetting effective hedge and hedge accounting and tax accounting.
Jason Stewart: As extremely attractive if you're hedging with swaps.
Jason Stewart: Really hike I said, we haven't seen anything like this.
Jason Stewart: And some time so yes.
Jason Stewart: To reiterate that point.
Jason Stewart: <unk>.
Jason Stewart: Companies in this space talk about earnings available for distribution and those types of non-GAAP metrics.
Jason Stewart: We prefer to talk about tax I guess and for tax you defer the.
The benefit of those closed hedges.
Jason Stewart: Realize them over time, but for gap once its mark to market its coming out of book value to the extent that you have an in the money swap whether its open or closed so.
Jason Stewart: Yeah, that's just slightly different way.
Jason Stewart: Different tack, we take in how we approach that.
Jason Stewart: Yes, I guess, just coming back to the economic side of it though.
Jason Stewart: The dividend on a book value basis compared to the marginal return it seems like.
Jason Stewart: Once you take out operating costs.
Jason Stewart: Settling to see why raising capital here is accretive on an economic basis.
Jason Stewart: Relative to the dividend, obviously changed the dividend.
Jason Stewart: Well like I said.
Jason Stewart: The dividend that you're paying.
Jason Stewart: Is closely related to taxable earnings.
Jason Stewart: But you are not some of Thats coming out of book because it's closed.
Jason Stewart: Part of that or the deferred interest expenses associated with hedges that had been closed.
Jason Stewart: And that's coming out of book simple as that those dollars are no longer here, let me explain another way, let's say you have $1 billion portfolio and you hedge it let's say the market sells off and the value of your assets goes up by 100000 and the value of our hedges goes up by 100000. So there is no impact on <unk>.
Jason Stewart: Look.
Jason Stewart: Alright.
Jason Stewart: Now, let's say shortly after that you close those hedges.
Jason Stewart: The value of the <unk> equity in that hedge a $100000 is amortized against interest expense over the balance of that hedge period.
Jason Stewart: However in My example, you had $800000 gain on your hedge and $100000 gain or loss on your assets now, let's assume that your counterparties are efficient with respect to margining activity. So in other words your hedges.
Jason Stewart: In your favor by 100000, you call it in a 100000.
Jason Stewart: Your assets went against you by 100000.
Jason Stewart: And your Counterparties caused you for $100000.
Jason Stewart: So your net economic impact of that is zero right 101 in 100000 went up so your cash balance is unchanged.
Jason Stewart: For tax purposes that $100000 of gain on those hedges. If you close the swaps at the end of that period is amortized against interest expense for the remainder of that term lets say its a 10 year swap youre going to reduce interest expense over the remaining term of that 10 year swap by $100000.
Jason Stewart: You don't have that in book value right 900000 was sent out to your asset counterparties when they collagen.
Jason Stewart: But it is a component of taxable income so.
Jason Stewart: So you pay a dividend based on that and you say well look the yield on that dividend is so high why.
Jason Stewart: Or would you raise new capital, but how much of that.
Jason Stewart: That dividend, which is a byproduct of taxable earnings is actually being earned in the future.
Jason Stewart: It's coming out of book. So you have to look at what are you going to earn on a purely economic basis versus what you're paying on a purely economic basis apples to apples.
Jason Stewart: And it is higher than the current market.
I guess I would just add that the portfolio hasnt changed so much that.
Jason Stewart: And it could very well change I mean, do we have to cut the portfolio more we might get in a position, where we're not earning as much but our outlook now is that we.
Jason Stewart: We have a tax obligation we haven't we have a distribution obligation to pay out taxable income as we.
As we.
Jason Stewart: Go through the course of this year.
Jason Stewart: And part of that is attributable to two things that are on the books anymore. So.
Jason Stewart: Don't have a lot of leeway there we need to pay taxes or we can pay a dividend with respect to your question about whether or not it's prudent to raise capital I don't think.
Jason Stewart: Neither one of US were trying to say that we're 100% going to be doing that the market's been very volatile.
Jason Stewart: Pointing out the fact that we are we are trading closer to book closer than we were especially when.
Jason Stewart: We bought back shares.
Jason Stewart: We bought back shares at $6.44. After commissions book value. We estimated at that time was around seven mid 700, <unk> right. So that was enormously accretive it's less it's much less seven settlement point.
Speaker Change: Yes, I got it I understand the accounting one last quick question and then I'll jump out so the expectation is that at the current dividend level and based on your taxable earnings outlook. The 2025 dividend would be 100% taxable income and that return of capital.
Speaker Change: Certainly not going to say that late April I did mention earlier this year with respect to 2024.
Speaker Change: I think it was 96%.
The 2024 dividend was taxable.
Speaker Change: At this point I would say that does not appear to have changed.
Speaker Change: But we've got a lot of months to go in.
Speaker Change: We have no idea, what's going to happen in the last thing I wanted to do is say on our recorded earnings call that our dividend is going to be all taxable earnings for 2025.
Speaker Change: No basis for making such a statement year to date.
Speaker Change: And then what was the case in 2024.
Speaker Change: It has been the case.
Speaker Change: In other words the <unk>.
Speaker Change: Percentage of the dividend Thats tax learnings is retained and stayed in that level. The balance of the year is completely uncertain, yes year to date.
Speaker Change: Our taxable income has been right on top of our distribution.
Speaker Change: So.
Speaker Change: And those are.
Speaker Change: Massive estimates at this point in the year so.
Speaker Change: But.
Speaker Change: We're not formally.
Speaker Change: During this but we do keep track of attacks on a month to month basis Everytime factors come out.
Speaker Change: And so far the distribution has been.
Speaker Change: Right on top of taxable earnings.
Speaker Change: Alright, alright, thank you.
Speaker Change: Yep.
Speaker Change: Thank you. Our next question or comment comes from the line of Mikhail Goldman from citizens. Mr. Government. Your line is now open.
Mikhail Goldman: Hey, good morning, guys hope, you're doing well not much for me.
Speaker Change: Hey.
Speaker Change: Not much for me given all of the terrain that we've already covered.
Speaker Change: But if I could ask you mentioned in slide 28 in the appendix.
Speaker Change: Maybe just.
Speaker Change: Just maybe some thoughts on the.
Speaker Change: No.
Speaker Change: Rocket, Mr Cooper deal and how that effects.
Speaker Change: Prepay speeds in the MSR is there.
Speaker Change: Yes.
Speaker Change: Yeah. So just I did want to go over that and I'm glad you brought it up so on the bottom of the slide just shows you by coupon.
Speaker Change: The dollar amount.
Speaker Change: Loan service by Nationstar versus our total holdings in that coupon.
Speaker Change: As you can see.
Speaker Change: Runs in the high single generally high single to low double digits, I think whats constructive to consider is.
Speaker Change: What percent of the universe.
Speaker Change: Is serviced by Nationstar and how do we stack up so for instance, let's say that in the 6% coupon across the cohort Nationstar service 15%.
Speaker Change: And only 12, 1% of ours are so thats somewhat beneficial.
Speaker Change: Our position to be in so that's just kind of observation.
Speaker Change: We know that rocket is a very fast servicer, we presume that once they start servicing nationstar loans, they're going to get faster. So the convexity of the mortgage universe will be impacted in a negative way, we havent specified pull specified polls traded a pay up the reason they traded a payoff is because.
Speaker Change: Relatively slower speed now in this case it remains to be seen.
Speaker Change: Certainly the specified pools would be expected to pay faster because more of them are going to be serviced by nationstar.
Speaker Change: Same with respect to the TBA, though the underlying cohort so theyre both going to get faster. The question is does the relative speed stay the same.
Speaker Change: In other words does 150, K six pay at 80% of TBA or is it pay at 90.
Speaker Change: That will determine over time, how tba's evolve.
Speaker Change: That remains to be seen but theres no question that having rocket service a greater percentage of the mortgage universe is not a good thing from the perspective of the convexity of the mortgage universe.
Speaker Change: Yes, I would just add that we have.
Speaker Change: A lot.
Speaker Change: Of discounts I think this slide kind of alludes to the fact that.
Speaker Change: At the time, we put this together at 331, five halves and below or discounts and six six and seven is worth premiums. So we have a little bit of exposure in the premium space, but what you'll also notice that the rockets of faster for.
Speaker Change: Out of the money.
Speaker Change: Borrowers as well so.
Speaker Change: Mixed bag TBD I don't think it's today's problem that might be coming down.
Speaker Change: Pike in a few months.
Speaker Change: Transfers have occurred in the loan officers are able to.
Speaker Change: Start using rockets technology to try to refi people.
Speaker Change: I am not terribly worried about it we didn't see it.
Speaker Change: The Gse's sold some pools.
Speaker Change: Earlier in the months Fannie Mae didn't really restricts the percent of nationstar on that list.
Speaker Change: It might've, even come out before the announcement, but.
Then.
Speaker Change: Already we've already pulled back.
Speaker Change: Limited the amount going into the cash window pools.
Speaker Change: 210% going forward and I think they've indicated that going forward, they're going to we're.
Speaker Change: We're going to keep that rule in place we have some things to do to the extent we have a few pools are high.
Speaker Change: Hi, Nationstar percentages, we combine them with other with other pools, we own and get the.
Speaker Change: The percent Nationstar slash rocket down.
Speaker Change: I don't expect it to be a material impact to the portfolio.
Speaker Change: It's been certainly something to talk about the.
Speaker Change: Great. Thanks for that and just a follow up on a piece of that.
Speaker Change: Slide two slides prior to that.
Speaker Change: Given perhaps expectations at the margin for fed easing at some point what are your thoughts generally on the Mds.
Speaker Change: MBS supply going forward, if that were to happen.
Speaker Change: Oh.
Speaker Change: Florida I wanted to mentioned is the one thing we don't have in our slide is affordability, which as we all know is extremely low.
And if theres any credence to the argument that these tariffs are going to be.
Speaker Change: Harmful to growth slow growth drive the unemployment rate higher.
Speaker Change: I don't I don't see supply getting too high I mean as far as the coming summer I would expect it to be a below average.
Speaker Change: <unk>.
Speaker Change: All summer.
Speaker Change: And.
Speaker Change: Theres just a combination of too many factors working against that affordability is low rates are still high if there's inflationary impacts on these tariffs it's going to keep the long end higher.
Speaker Change: And if you have people worried about their jobs.
Speaker Change: Good thing it's interesting you mentioned that the home sales data that came out new home sales I don't know what the change was month over month, but if you looked at the details the pursuit of a number of absolute number of new homes for sale is the highest since 2009 and we all know what happened in two.
Speaker Change: Eight 2009.
Speaker Change: That's not a good sign.
Speaker Change: So.
Speaker Change: Theres build or buy downs, that's very prevalent they can support the market that way, but I don't think were going to have a huge surge of supply.
Speaker Change: No.
Speaker Change: Totally agree.
Speaker Change: Alright, guys. Thank you very much as always in the best of luck going forward.
Mikhail Goldman: Thanks Mikael.
Mikhail Goldman: Thank you. Our next question or comment comes from the line of Eric Hagen from <unk>. Mr. Hagan. Your line is open.
Eric Hagen: Yeah, Thanks, guys How're you doing hey.
Mikhail Goldman: Good to hear from you guys.
Speaker Change: Wanted to ask about whether you think the level of spreads.
Speaker Change: Has reset higher wider as a result of the tariff war like in a scenario where interest rates are all comes down and spreads tightened like what do you think the level that we could tightened too is and has that level changed already.
Speaker Change: These last few weeks well.
Speaker Change: Pre covet. It was 80 I don't think were going there.
Speaker Change: We havent seen on slide 26 banks have been.
Speaker Change: Not very aggressive participants.
They used to be kind of the backbone big money managers were very supportive of late.
Speaker Change: Had redemptions they haven't been.
Speaker Change: Tighter.
Speaker Change: No.
Speaker Change: It depends on your benchmark, obviously swap spreads are wider number than the tenure of the five year I think tightening.
Speaker Change: I don't think we're going to have.
Speaker Change: Outsized tightening sits.
Speaker Change: It's tough to say.
Speaker Change: On an OAS basis.
Speaker Change: Adverse treasuries mortgages don't look nearly as compelling as they do versus swaps.
Speaker Change: That's because treasuries of almost penetrated like our risk asset here.
Speaker Change: This more recent.
Speaker Change: Move in April so.
Speaker Change: It could certainly be constrained.
Speaker Change: Owing to.
Speaker Change: Entering a period of.
Speaker Change: We're the market expects increased volatility that certainly not good for mortgages that can keep that.
Speaker Change: Keep spreads on the on the wider side.
Speaker Change: But it's been amazing to see how with one <unk>.
Speaker Change: <unk> things tightened back up so.
Speaker Change: On.
Speaker Change: On firepower de <unk>.
Speaker Change: <unk> hundred 21, it was looking pretty bleak.
Speaker Change: Things are just.
Speaker Change: We've come back.
Speaker Change: As much as 26 and a couple of days very quickly so.
Speaker Change: So, yes, I think that.
Speaker Change: Full circle I guess.
Speaker Change: This is going to be how things are and I think investors are going to demand.
Speaker Change: A wider spread to deal with that uncertainty.
Speaker Change: And the ability for them to take leverage down to a more.
Speaker Change: The appropriate level for <unk>.
Speaker Change: Thats type of volatile environment I would say one thing this is purely speculation, though but if there is really a softening in the economy and it really truly weakens.
Speaker Change: Mortgages could just benefit from spread widening corporate bond market high yield investment grade and they could be deemed to be more of a safe haven asset that could be beneficial in the short term.
Speaker Change: Especially if long end stays high and speeds are slow.
Speaker Change: You can see that in the near term.
Speaker Change: Money managers, making relative value allocations, but they were pretty overweight mortgages not long ago. So.
Speaker Change: I don't know how much more they could go back the other way from where they are now.
Speaker Change: So no I don't I don't see any.
Speaker Change: Catalysts for us materials tightening in the near term.
Speaker Change: Okay I appreciate you guys.
Speaker Change: What are your thoughts on buying swaption.
Speaker Change: The overall cost of hedging volatility right now like do you feel like you have the flexibility and the liquidity to hedge vol. If you. If you wanted to or are we basically kind of like getting the 20% yield as a result of sort of not hedging that volatility risk.
Speaker Change: Well, it's expensive alright, so yes, that's right.
Speaker Change: Great idea.
Speaker Change: In February yes.
Speaker Change: Putting that on now would be pretty pricey, but we do I think as you know we have in years past with quite active.
Speaker Change: Vol trades.
Speaker Change: Really.
Speaker Change: Caught off guard by feeling pretty good about the world coming into this the first quarter of this year. So.
Speaker Change: We certainly didn't see the market reacting to.
Speaker Change: The tariff.
Speaker Change: Tariff talks.
Speaker Change: Threats.
Speaker Change: Violence, they did it particularly in the treasury market. So.
Speaker Change: Yes, it's something that we look at.
Speaker Change: What.
Speaker Change: We spend a lot of time on trains that we don't execute.
Speaker Change: We had a great win that we looked at that.
Speaker Change: Perfect for this scenario.
Speaker Change: We've executed dual digital options in the past whereby.
Speaker Change: Rates rates up or down in equities down as well.
Speaker Change: If we had won that we evaluated in December opted not to do it and kick.
Speaker Change: Kicking ourselves a little bit for that but yes, we will try to.
Speaker Change: Sure.
Speaker Change: Be more cognizant certainly volatility I, just think it's tough to to leg in right now et cetera.
That's a tough trade to do right now so we're just going to keep doing is we have been which is sort of a delta hedging and.
Speaker Change: Sure.
Speaker Change: And.
Speaker Change: Staying on top of keeping our leverage in check and.
Speaker Change: And adding when we've had a few days of strengths.
Speaker Change: And to the extent that we feel more uncertain about things.
Speaker Change: We like to use the leverage lever to really help.
Speaker Change: Help us manage our risk because we can't ever get away.
Speaker Change: Completely away from the risk of <unk>.
Speaker Change: This.
Speaker Change: Portfolio without some volatility and convexity hedging but.
Speaker Change: We can insulate it through lowering leverage.
Speaker Change: Just one final point not to belabor it but a lot of our use of swaption, which is usually driven by attractive entry points into those positions when those present themselves and sometimes it's just because of all this low or sometimes its because you can do a long and a short yes to get your all in costs down.
Speaker Change: That's it's really challenging to do right now.
Speaker Change: We tend to focus on.
Speaker Change: Data minimization strategies, where we're doing some kind of a spread trade.
Speaker Change: Or putting on a trade that is very highly geared where we have.
Speaker Change: Defined.
Speaker Change: Kind of defined risk, where we are comfortable losing 100% of our premium but are looking for outcomes that might have eight.
Speaker Change: Eight to 10 X multiples of that premium to the extent that.
Speaker Change: Hedge goes our way, who is going to be kind of tail risk type of events and so.
Speaker Change: Yes.
Speaker Change: It's just tough to put out a tail risk trade when youre in the middle of kind of the tail.
Or deepen the tail.
Speaker Change: I appreciate all you guys are the comments. Thank you guys. Thanks, Eric.
Speaker Change: Thank you. Our next question or comment comes from the line of Christopher Nolan from Ladenburg Thalmann <unk> Company. Mr. Nolan. Your line is now open.
Christopher Nolan: Hey, guys I'll be short.
Christopher Nolan: It seems really surprised by your comment, saying that banks are not coming back into the market because.
Christopher Nolan: Looking at the Steepening of the Treasury curve.
Christopher Nolan: <unk> commercial real estate asset quality.
Christopher Nolan: It would seem to me that the banks naturally be increasing their purchases of.
Speaker Change: Of MBS, where am I wrong on that.
Speaker Change: I know they haven't Ginnie space.
Speaker Change: I don't know that we've seen in <unk>.
Speaker Change: Structured space and agencies, but not I don't think we've seen a lot in pass throughs conventional passengers. They are there. Its just I don't think enough to overwhelm the.
Speaker Change: Seen in.
Speaker Change: Money manager redemptions and hedge fund redemptions that deleveraging.
Speaker Change: May as we speak because mortgages are attractive, but when you look at early April when you had all the four selling.
Speaker Change: Money managers, a lot of T plus one saddle because when they get a redemption they have to meet it. The next day, so they're selling what they can mortgages treasuries for T plus one settle so that overwhelmed and that created a very cheap attractive mortgage universe. They may be now but.
Speaker Change: Really this week the commentary on mortgage done well this week I havent seen other than <unk> and again some structured product.
Speaker Change: Final question would be on housing affordability.
Speaker Change: A question Matt asked earlier.
Speaker Change: Higher property insurance costs are part of it and some places you can even get.
Speaker Change: Homeowners insurance and.
Speaker Change: And my question is is why hasn't that been more new insurance pools formed for home insurance because rates are so hard there.
Speaker Change: I don't know well, it's really hard.
Speaker Change: Well two things one that yield book, which we all of this space use updated model yesterday, one of the changes in the model was to reflect the slow prepayment activity of Florida pools because of insurance insurance is very very high of I've always been a believer that global warming will manifest itself through that given what's happened over the last six.
Speaker Change: Six months with fires in California, Hurricanes here reinsurance prices around the mone.
Speaker Change: Sure.
Speaker Change: Our new pulse I mean, I think thats, a government source from the government private capital.
Speaker Change: Expensive.
Speaker Change: I would think the risk premium associated with entering that business it would be very very high.
Speaker Change: Whether you believe in global warming and that it is no question in the last few years between hurricanes floods and whatever.
Speaker Change: Theyre not theyre very very high and the costs are staggering and then you have to deal with regulators and I look at California were regularly when they set.
Speaker Change: <unk> rates, it's backward looking based on historical.
Speaker Change: Losses versus projected losses.
Speaker Change: Sort of the high end homes in California insured by D&O providers would have staggeringly high premiums.
Speaker Change: Basically what they call retention or deductibles.
Speaker Change: I think theres going to be meaningful.
Speaker Change: <unk> brought to the insurance market is going to have to come from the government.
Speaker Change: Okay. Thank you.
Yes.
Speaker Change: Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.
Speaker Change: I'm showing no additional questions in the queue at this time I would like to turn the conference back over to Mr colleagues for any closing remarks.
Speaker Change: Thank you operator, and thanks, everyone for listening in to the extent that a question comes to mind after the call or if you listen to the replay and have a question. Please.
Speaker Change: Please feel free to reach out to us at the office. The number is 770 22311400, otherwise we look forward to talking to you agenda in the second quarter. Thank you.
Speaker Change: Yes.
Speaker Change: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.