Q1 2025 Dynex Capital Inc Earnings Call
Speaker Change: "...I have spoken... I have never asked anyone to help me find, to help me try to protect, to help me respect someone, and I, I was connected to it.
Speaker Change: Greetings and welcome to the Dynex Capital Inc. 1st quarter 2025 earnings conference call. At this time all participants are in a listen only mode.
Speaker Change: The question and answer session will follow the formal presentation. If anyone wants to require operator assistance during the conference, please press star zero on your telephone key path. As a reminder, this conference is being recorded. It is now my pleasure to introduce Alison Griffin, VP and investor relations. Thank you. You may begin.
Good morning.
Speaker Change: The press release associated with today's call was issued and filed with the SEC this morning April 21, 2025.
Speaker Change: Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the private security litigation reform act of 1995.
Speaker Change: The words believe expect forecast, anticipate, estimate, project plan, and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties.
Speaker Change: Some of which cannot be predicted or quantified. The company's actual results and timing of certain events could differ considerably from those projected and or contemplated by those four looking statements as a result of unforeseen external factors or risks.
Speaker Change: For additional information on these factors or risks, please refer to our Disclosure style with the SEC, which may be found on the Dynex website, under Investors, as well as on the SEC's website.
Speaker Change: This conference calls being broadcast live over the internet with a streaming slide presentation which can be found through the webcast link on the homepage of our website.
Speaker Change: The flight presentation may also be referenced under quarterly reports on the Investor Center page.
Speaker Change: Joining me on the call today are Byron Boston, Chairman, and Co-Chief Executive Officer, Swriti Popenoe, Co-Chief Executive Officer, and President, Rob Colligan, Chief Financial Officer, and Chief Operating Officer, and TJ Connelly, Chief Investment Officer.
I will now turn the call over to Smriti.
Speaker Change: Thank you, Alison, and thanks to all of you for joining us on the call today.
Smriti: We have viewed and continued to view this environment as being favorable to our business model. The yield curve is steeper, asset prices are now reflecting higher risk premiums, financing costs are lower, and our ability to generate an above average dividend yield remains largely intact.
Smriti: However, we must manage our business through the rapid conditions that are happening across the global and US economy.
Smriti: My goal for you today is to leave our call with a better understanding of Dynex, our long-term approach to the business, and why we continue to feel comfortable owning Dynex stock in our personal portfolios.
Smriti: From the very beginning of our time here at Dynex, we've been very disciplined in our approach, not being swayed by the hot investment ideas that crop up from time to time.
Smriti: We recognize very early in the last decade how investing in global markets continue to become more complex.
Smriti: We focus on the multiple demographic, social, and political factors that are interacting to create potential surprises.
Smriti: This thought process is the foundation of our approach to the markets and the management of our shareholders capital.
Smriti: So what we're experiencing now is not unfamiliar territories for us. It's a moment we have planned and prepared for.
Smriti: Over the past several quarters, we have deliberately positioned ourselves for a more dynamic macro environment.
Smriti: We've taken decisive steps to build resilience, including raising capital at attractive terms, preserving liquidity and adding flexibility across our portfolio.
Smriti: This proactive approach has given us optionality so that rather than react to market shocks, we can make strategic decisions from a position of strength.
Speaker Change: To give you a better sense of the environment and how we're responding, I'm going to ask and answer a series of questions. And after that, I'll turn it over to Rob and TJ, who'll give you more details.
Speaker Change: Let me start with why do we feel comfortable owning Dynex Personality?
Speaker Change: It starts with the team and our process. Our experience and our mindset and discipline continue to serve us in making clear decisions.
Speaker Change: Our investment strategy is simple, and yes, we must make the right decision through volatility.
Speaker Change: We are relying on our experience and our processes to do so.
Speaker Change: Finally, the dividend. It cushions a lot here. In these moments, dividend paying stocks, particularly Dynex, where you can rely on the mass equality and the team really shine.
So what happened in the last three weeks?
Speaker Change: The April 2nd tariff announcement was a shock for the markets. As announced, it was larger than anticipated and if implemented could be described as one of the most significant trade policy changes in many decades.
Speaker Change: We've seen an immediate de-wisking to reflect a degree of uncertainty that this posture brights.
Speaker Change: Deleveraging of the riskiest positions such as Treasury basis trades drove some of the most. Many companies exposed the pair of uncertainty have experienced large declines in share prices.
Speaker Change: Credit Spreads in both Investment Grade and Pyle Bond or wider.
Speaker Change: We also saw that long and treasury yields unexpectedly rose, reflecting some type of selling and the dollar experienced weakness versus major currencies that has only been seen during times of severe crisis.
So what did Dynex experience during this time?
Speaker Change: Most of the turbulence directly affecting us within the treasury and swap market.
Speaker Change: and as TJ will outland, it had some impact on our both values. Besides that, we followed our normal discipline. We have made minor adjustments to the portfolio, margin and cash collateral of change to hands in both directions as markets dilated.
Speaker Change: repo availability is excellent and short-term fluctuation than interest rates seem reflective of the flows
Speaker Change: We have had no trouble turning out our financing and we remain engaged with our major counterparties as we have always prioritized openness and proactive communication.
Speaker Change: Next, how is your portfolio constructed today given the global complex backdrop?
Speaker Change: Second, our strategy is simple, to extract the spread between agency RMBS and our hedge financing costs. Both instruments are dollar-denialinated and they're relatively correlated.
Speaker Change: The most important decisions we make are our side ratio, how much liquidity to hold, and how much leverage risk to take. Our track record shows we have extensive experience and success making these decisions in some of the most volatile moments in markets over the last decade.
Speaker Change: In 2019, we began operating with a significantly higher liquidity position.
Speaker Change: We are entering the coming period with a robust liquidity position and a liquid balance sheet allowing us to remain agile, even as the external environment shift. We have also operated with generally lower leverage. We are entering the next period of time, and we are entering the next period of time.
Speaker Change: Next question. Why are you invested in agency R&BS? Will there be changes to the GSEs and what should we expect?
Speaker Change: So, we have been up and credit and up in liquidity for several years now. We believe that agency MBS are still an excellent choice in terms of where to allocate our shareholders capital. TJ will give you more detail on how we are positioned within this market.
Speaker Change: In terms of a change to the GSEs, here is our current thinking.
Speaker Change: The US housing finance system has underpinned the American dream for over a century, helping millions of families build wealth and economic security through home ownership. It stands as one of the most effective and dynamic in the world.
Speaker Change: Agency and B.S. remain a foundational component of the U.S. financial system.
Speaker Change: Central to bank balance sheets, retail money market and bond mutual funds, and an integral part of the wealth of average Americans.
Speaker Change: With over 8 trillion in agency and BS outstanding, any disruption to the current guarantee structure would have immediate and far reaching implications for capital markets, mortgage rates and systemic risk.
Speaker Change: We are preparing for the possibility of accelerated policy action around the GSEs, evaluating outlier scenarios for market reactions and we will take proactive steps.
Speaker Change: to protect shareholder capital across our exposures. Regardless of the pace or path, our focus remains disciplined risk management and real-time adjustment as the regulatory and political landscape evolves.
Speaker Change: How are we thinking about the dollar and the demand for US income assets? Will that go down? How does that impact Dynex?
Speaker Change: The answer here is that it depends on how policy evolves. As it stands today, US equities and sovereign bonds represent 70% of total global market capitalization and outstanding.
Speaker Change: So while investors could start to sell dollar assets in the short term, it'll take a lot of time to move into other currencies because there just isn't enough out there to move into.
Speaker Change: We do believe that the trend will be towards some caution on the US due to shifting policy, so you could see some selling of bond holdings, including MBS, but that could present a more durable opportunity for Dynex to step in and earn those extra returns.
Speaker Change: Next question. How are we preparing for changes across other fronts such as the structure of the Fed or other policy changes?
Speaker Change: We recognize that change is not only inevitable but it's accelerating.
Speaker Change: From tariffs, to monetary policy, to regulatory shifts, and power dynamics, we are preparing for potential transitions across many fronts, often with little warning.
Speaker Change: Our strategy acknowledges this reality. We're not waiting for stability to return, we're actually building for agility.
Speaker Change: That means maintaining a wide field of vision, engaging in discipline scenario planning [inaudible]
Speaker Change: keeping an open and flexible mindset and ensuring our capital is protected and ready to be deployed when opportunities align with our risk framework. As we always say, we don't predict, we prepare.
Speaker Change: Next, will the global financial and economic environments continue their volatile trend? The short answer to this question is that we are prepared for yes.
Speaker Change: We have talked about this for the last 11 years. We expect the future will be full of surprises and we will be managing our business from this perspective.
Finally, how are we thinking about the debate?
Speaker Change: The dividend is a long-term decision that we make very carefully, and we have made it in the context of a capital risk management decision.
Speaker Change: We've set our dividend based on many factors, including our view on long-term returns.
Speaker Change: Availability of Capital, Yeals on Comparable Instruments, Liquidity Risk, Overall Risk and Taxable
Speaker Change: We raised our monthly dividend in February , reflecting our confidence in our continued ability to generate attractive returns. In the long term, we are operating at the intersection of global capital markets and the US housing finance system. This is a business we feel is strongly supported by demographic trends. [inaudible]
Speaker Change: In the shorter term, we believe agency MBS are still an excellent choice in terms of where to allocate our shareholders capital and we are managing our risk in this sector with the rigor and discipline I have outlined for you thus far.
I'll not turn it over to Robb and teach it [inaudible]
Rob: Thank you, Smriti. We have several highlights this quarter that we'd like to share.
Rob: First, as you can see from our results, net interest income continues to trend up, as new investments carrying attractive yields are added to our portfolio, and financing costs continue to
Rob: Despite another quarter of all little rates and the 70 basis point intra-quarter move in the tenure treasury to mark the market impact of our MBS investments compared to our hedges was close to neutral
Rob: This year, we significantly strengthened our capital position. Year to date, we've raised $270 million of new capital, and given the strength of our stock during the first quarter, we raised this capital at a premium to book value, which is accreted to shareholders.
Rob: Raisin Capital above book value has allowed us to grow a chief scale and deploy in soon attractive market
Rob: Similar to last year's first quarter, this quarter we have an Accelerated Bessings Condition for Equity Compensation.
Rob: The impact of this acceleration compared to a standard vesting schedule was about 1 million dollars during a quarter
Rob: While expenses are up this quarter, I do expect expenses to level out and trend down over the course of the year. And combined with our equity growth, we're planning for a lower expense ratio this year compared to 2024.
Rob: We continue to have a commitment for expense efficiency with strive shareholder value over the long term.
Rob: I'll now turn it over to TJ for the Investment Portfolio Outlook.
TJ: Thank you, Rob. I'll cover our performance and decisions to the first quarter before addressing in quarter-day changes and our outlook.
TJ: Our 2.6% T.E.R. was delivered during a quarter with significant swings and rips. Current coupon mortgage yields, for example, moved over 70 basis points high to low. And the yield curve moved 20 basis points flatter before steepening again.
TJ: This performance validates what I have long emphasized about this marker regime.
TJ: Guild investors can earn substantial risk premiums from mortgage-backed securities while effectively hedging interest rate risk.
TJ: The portfolio is generated a solid total return despite mortgage spreads widening from around 138 basis points on the current coupon versus seven year treasuries, so around 144 basis points by the end of the quarter.
Speaker Change: As Rob mentioned, we raised a significant amount of capital and regularly deployed. We invested about two-thirds and held the balance to allow us to remain flexible, which served as a cushion during the post-terror market turbulence.
Speaker Change: We also chose to shift our exposures down in coupon, towards more durations stability, added some call swaps and maintained our portfolio bias towards new refrigeration with the curved steepening bias. Most of our heads are concentrated in the long end of the yield curve.
Thank you very much.
Speaker Change: Turning to the current quarter, the April 2nd tariff announcement was a volatile event, not a mortgage event. Initially, we saw a classic risk-off reaction that started with equity price decline and then interest rates dropping sharply. [inaudible]
Speaker Change: However, this quickly evolved as an investor concerns about potential de-dollarization and Treasury selling caused yields to spike. We also experienced a tightening in swap spread as some hedge funds were forced to unwind
Speaker Change: Some of the price action in these markets was very volatile, indicative of poor market debt.
Speaker Change: By last week, realized volatility has subsided modestly and uncertainty still remains high.
Speaker Change: Agent CRMBS spreads wide and sharply this month. Spreads have ranged from 145 to 160 basis points over treasures, or nearly 200 basis points over interest rate swaps.
Speaker Change: Trading in the agency RMBS markets has been orderly. While bid offers widened during certain periods, we have not experienced the gapy price action we saw during the COVID crisis, the LD guy crisis, or even the volatility of October 2023.
Speaker Change: Our book value as a Thursday's market closed was estimated between $11.55 and $11.65 per share.
Speaker Change: Leverage to total capital was at 7.8, up 4.10 since quarter end, due entirely to lower book value.
Speaker Change: We have followed our discipline, liquidity-focused risk management process. We continue to keep an open and flexible mind as we navigate the market. Our robust liquidity position placed us in a position of strength where we were not forced to crystallize losses or adjust positions amid the volatility.
We are actively managing several risk factors.
First, Volatility Risk [inaudible]
Speaker Change: The April tariff induced volatility underscores the importance of our hedging strategy and the quitter-de-management. We expect options will be a core part of our hedging strategy going forward.
Second
Repayment Risk
Speaker Change: This has intensified following rocket mortgage acquisition of Mr. Cooper, creating a formidable original originator servicer capable of offering expedited refinancing.
Speaker Change: We've adjusted our portfolio to focus on specified pools with strong pre-payment protection and we shifted our sources towards lower coupon mortgages backed by borrowers with lower mortgage rates.
Speaker Change: Third, GSE Transition. The FHFA continues to implement changes at Fannie Mae and Freddie Mack that could introduce spread volatility. Our team remains engaged with Washington policymakers to stay ahead of these developments.
Finally, regulatory changes.
Speaker Change: The regime is changing rapidly, and there's scope for sharp movement and assets as capital requirements for banks involved in both the short and medium term. In the short term, we could see changes to the supplemental leverage ratio that could make it easier for banks to hold treasury securities. [inaudible]
Speaker Change: There is also scope for broader changes that will lessen the bank regulatory burden and ease capital treatment for many of their assets.
Speaker Change: Looking ahead, recent volatility in spread widening has strengthened our conviction in the opportunity to earn attractive returns through the spread premium available in agency R&B yet.
Speaker Change: Mortgage spreads to swaps and treasuries remain close to historic wide, offering double-digit ROEs, positioning us to generate solid returns even without spread tightening from today's historically wide levels.
The Supply and Demand Balance in the Market remains healthy.
Speaker Change: While money managers saw redemption as investors reallocated from bonds to stocks after the equity price declined, we expected broader trend in fund flows towards income-producing assets to resume. Demographics still strongly support a need for income and portfolios.
Speaker Change: Moreover, there is scope for Bankdoman, which was strongly in the first quarter, to reaccelerate as the monetary and regulatory policy environments become less uncertain.
Speaker Change: Spread tightening from today's levels will be a function of a reduction in overall macroeconomic uncertainty and policy uncertainty.
Speaker Change: If we enter any type of recession, as expected by many in the market, agency RMS should outperform credit sensitive assets as investors rotate away from default risk.
Speaker Change: In this scenario, lower financing costs could also support strong returns.
Speaker Change: While our portfolio can generate outsized returns from spread tightening, my optimism is tempered with a deep respect for the complexity of the global macroeconomic environment.
Thank you very much.
Speaker Change: Even in quarters without a major fall event like we've seen this month, we expect realized
Speaker Change: In addition to insulating our portfolio from these moves by adjusting our exposure and adding suction as I mentioned, we have continued to pursue opportunities in the agency CMDS market where we can add credit protected bonds with much more certain durations
Speaker Change: We added exposures to Fannie Mae Dutt in the first quarter and expect to make further additions in the coming quarters as opportunities arise
Speaker Change: Financing Remarkets were remarkably stable throughout the recent volatility, and we expect repo rates relative to sofa to remain in a tight 15 to 20 basis point range. Availability funding is good with nearly $7 trillion in money market fund balances.
Speaker Change: Our discipline approach to leverage an expert management of liquidity, Hallmarks of Dynex Capital, will be needed to navigate us through this environment.
Speaker Change: That is something this team is very proud to have demonstrated over more cycles than any other publicly traded mortgagery.
Speaker Change: With that, I'd like to turn the call to our chairman and co-CEO Byron Boston
Thank you T.J.
Speaker Change: Our goal today is to give you a clear picture of the complex environment in which we currently invest. For our shareholders we would like to leave you with the reinforced impression that you can continue to trust your capital with this management team.
Speaker Change: We came into the spec a believe in the global complex. We have continued to make deliberate decisions for capital management, personnel, technology, risk, and investments with this mindset.
Let me reiterate [inaudible]
Speaker Change: We continue to see a compelling opportunity to invest in agency residential mortgage-backed securities, but we must manage our company through a rapidly changing landscape.
Speaker Change: We have ample drive powder to protect our capital and take advantage of attractive investment opportunities as they develop.
Speaker Change: Second, it is important now more than ever to be able to rely on our team. We have been building our bench for the long term and the experience we have will be critical to developing the strategy and navigating this complex environment.
It's also important to have transparency in your investment.
Speaker Change: The Dynex balance sheet can be clearly and cleanly valued. All of our assets are marked and reflected in earnings and book value.
Speaker Change: We do not have any health and maturity investments or other unrealized losses that are hidden from flight.
Speaker Change: These are essential aspects in assessing not only who manages your capital, but where your capital is invested. We take responsibility as managers and stewards of your savings very seriously.
Speaker Change: The Dynex team is personally invested alongside our existing shareholders and we will continue to manage risk and invest as we see value.
Speaker Change: As stewards of your capital, we want you to know we're in this together We're in this together.
Speaker Change: The executive team collectively owns nearly 2% of the company, making us the fourth largest shareholder with a significant portion of our personal net worth invested alongside yours through long-term incentive grants and direct ownership, aligning our interests fully with yours for the long haul.
Speaker Change: I thank you for your trust, and I look forward to updating you on our performance and the environment next quarter. I'll now open the line to questions. Operator?
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad.
Speaker Change: The confirmation tone will indicate your line isn't the question Q. You may press star 2 to remove yourself from the Q.
Speaker Change: For participants using speaker equipment and maybe necessary to pick up your handset before pressing the star keys, one moment please while we pull for your questions.
Boz George: Our first question comes from the line of Bose George with KBW. Please proceed with your questions.
Boz George: Hey everyone, good morning. Thanks for all that color. The first question is just on the repo. I guess it sounds like the availability remains strong. Can you just provide more color on repo funding class? Have you seen much in terms of increases?
Yeah. Hi, folks. Good morning.
Boz George: You know, maybe on the longer end, of course the, you know, forward sofas are moving quickly, but maybe on six months, you're ear...
Boz George: 3 or 4 basis points wider than where we were before this, but overall
Boz George: It's been impressive how much availability there is in the financing markets and it's a testament to the plumbing of the system working very well.
Boz George: Okay, great. Thanks. And then just on the hedging side, you know, given the volatility, you know, is there anything that changes your views on whether to hedge with treasuries versus swaps? Yeah, any change there?
Boz George: I think broadly, you know, swaps tend to be a more natural hedge for a mortgage portfolio. We are very comfortable with how we're set up at this point in terms of the hedge composition. There is some room for us to adjust in both directions as opportunities arise, but I think where we are today is a very natural position for the portfolio at this point.
Okay, great, thanks [inaudible]
Speaker Change: Thank you. Our next questions come from the line of Jason Weaver with Jones Trading. Please proceed with your questions
Speaker Change: Good morning, thanks for taking my question. Maybe for GGA, I was wondering if you might be able to frame the investing opportunity you see today versus historically, you know, steeper curve and widespread
Things to reflect them really high are we potential, but…
Speaker Change: How do you frame that against what is increasingly a more volatile interest rate backdrop?
Speaker Change: Yeah, great question Jason, good morning. And as you said, the steeper curve environment spreads our wider, you know, we're out to around 200 basis points versus interest rate swap hedges. There's the opportunity for
Speaker Change: and that enables us to get a little more duration certainty into the book. And now, at this point, you also have, you know, opportunities arising on the ATTC and BS side of things, which I think is increasingly interesting. So yes, to your point, it is...
Speaker Change: A great environment for things going forward with a lot of positive carrying.
Speaker Change: Got it. And just one follow up. I was curious about your sort of pace of capital deployment from the ending of the first quarter into the second, and it's been relatively even.
Speaker Change: Hey Jason, so I think we re-announced that the leverage had gone up from 7.4 to 7.8 times and that was entirely due to book value decline.
Right, okay, that's fair. Thank you.
Yes.
Speaker Change: Thank you. Our next questions come from the line of Doug Harter with UBS. Please proceed with your questions.
Doug Harder: Thanks. Just first off, hoping to get a clarification on the book value update you gave and how that factors in the dividend that goes X this week.
Speaker Change: Yeah, good morning, Doug. The book value I stated includes the dividend accrued through Thursday through that day where I quoted the book value.
Great, appreciate it.
Speaker Change: that as you just mentioned, leverage is at 7.8. [inaudible]
Speaker Change: Times, how do you think about the right range of leverage in this environment, where things are volatile, spreads are wide, how do you think about that, and in the context of...
Speaker Change: kind of earning, attempting to kind of earn the dividend.
Hi Doug, yeah.
Doug Harder: Thank you for the question. So this is really like a tale of two situations, right? One is the good situation is that you have mortgages at 200 overswap.
Speaker Change: These are really good returns. On the other hand, you're managing through a world in transition and so one of the things we respect, as you know, as long as you've been covering us, I think we've been saying.
You know, the globe is complex [inaudible]
Speaker Change: and managing our business in this environment requires a great deal of respect. So, yes, there are-
Speaker Change: Returns available, and we must manage ourselves through this environment.
Speaker Change: And so for now, what I would say is, we're watching and seeing how things develop. The bar to add risk here is quite high.
Speaker Change: So I would say that's something definitely in mindset in which we're operating. We have operated with lower leverage coming into this quarter. And so that just is reflective of our of our stance on this environment.
Speaker Change: And I guess along the lines of the bar being high to add risk, you know, how do you think about, you know, continuing to use the ATM, you know, to, you know, to add to the portfolio at these at these threads.
Speaker Change: Yeah, once again, I think we've always followed the discipline of when...
Speaker Change: There are risk-adjusted returns that are available to us that we feel are pleaded for the cost of capital. We should raise capital and deploy that capital [inaudible]
Speaker Change: We are looking at the risk environment with somebody else just asked the question, how do we see these returns in the context of historical returns? These are very, very good long term returns on capital.
Speaker Change: So that is driving some of our thought process with respect to capitalizing and as you can imagine.
Speaker Change: You know, Lee's and Caval about book was was very good for us in the first quarter, you know, as as the stock has declined and and the value commensurately, you can see you expect us to adjust our our thought process around that as well we've been very disciplined generally. [inaudible]
Speaker Change: in terms of when and how much capital that we're raising. And really we think of it as just us doing the same thing on the equity side as we do on the investing side. So we're opportunistic about that as well. Thank you very much.
Great. Appreciate the answers. Thank you, guys.
Speaker Change: Thank you. Our next questions come from the line of Trevor Cranston with Citizens JMP. Please proceed with your questions.
Trevor Cranston: Thanks, and appreciate all the color you guys have given this morning. I wanted to follow up on your commentary around kind of how you guys approach risk and you know thinking about your scenario planning.
Speaker Change: You know, two of the things you mentioned were potential for changes at the G.O.C.'s [inaudible]
Speaker Change: and also some potential for forend selling, including an MBS.
Speaker Change: I was wondering if you could use the provides and context around kind of how you think about those scenarios and how much sort of incremental spread widening they could cause in NBS for more we are today. Thanks.
Doug Harder: Thanks, Trevor. Yes, of course. So I'll tackle the GSE question first. You know, as I mentioned in my comments.
Doug Harder: It's very interesting. This is a market that is not only big in the US economy in terms of its size.
Doug Harder: with respect to just housing, but it's also super embedded in the financial system, right? So banks own 2.8 trillion of agency on BS, the Fed owns another 2 trillion.
Doug Harder: And any changes to the guaranteed thought process in and of itself, it's going to have consequences, you know, directly affects the mortgage rate and so on.
Doug Harder: Logic would have it that when something is so entrenched and entwined in the system, there would be a fair amount of caution with respect to...
and changing those notes. Right? So, and so...
Doug Harder: If you think logically, yes, you know, things could go just fine. And so what we're preparing for is if things don't go fine. You know, we're looking to scenario analysis to say, you know, how much could mortgage it's really liven? Should there be some?
Doug Harder: A kind of announcement that changes the level of pricing. You can look to the non-agency market as an indicator there in terms of that spread. So we thought through those types of scenarios.
What are three more guys?
Doug Harder: That there'll be an announcement of some sort that maybe the market doesn't like the market reacts to that and then there's an adjustment in the policy so it's worth the market prices versus what actually happens that's something we really focus on in terms of the framework so I hope that helps you
Doug Harder: You know, understand how we're thinking GSEY's logic would have it that, you know, things would be well thought out and we're just prepared for some kind of shock in the event that it isn't. On the second question that you asked about.
You know, it's kind of...
Doug Harder: selling of MBS or just, you know, negative sentiment on the dollar, et cetera, et cetera.
Doug Harder: There's a short medium and long from aspect to these things.
Doug Harder: In the short term obviously there's been a knee-jerk reaction the dollar is selling off [inaudible]
Doug Harder: We've seen some mutual fund selling or bond fund selling of agency MBS but again in the long term as I mentioned
Doug Harder: It's super difficult for large investors to really reallocate away from the dollar and reallocate from dollar instruments. So, over time, could that happen? Will that happen? We're actually preparing for that to happen.
Doug Harder: And then on the spread widening side, very difficult to really say how much that could widen spreads and, you know, again, we want scenarios for all of this stuff.
Doug Harder: Yeah, I would just add on the supply and demand balance there in the mortgage market.
Doug Harder: As we forecast out the year and look at the supply relative to potential demand this year, we really were not assuming anything in the way of demand from foreign investors.
Doug Harder: And I expect that selling, and I don't think we'll see much selling, right? They're portfolios even on the treasury side, official portfolios anyway are fairly short in duration and they can just allow a lot of these securities to mature and roll off. And on the mortgage side, really haven't been very active players for some time now. [inaudible]
. . . .
Got it. Okay, let's open. Thank you.
Jason Weaver, Byron Boston,
Speaker Change: Thank you. Our next questions come from the line of Eric Hagen with BTIG. Please proceed with your questions.
Hey, thanks. Good morning guys.
Speaker Change: Maybe just to follow up on the portfolio here. How much yield do you think you pick up in the current coupon and the TBAs? Is there a scenario in which you'd actually maybe crystallize the losses in these lower coupons and reinvest in the current coupon or are we basically sitting with those bonds at this point? Is there even a scenario in which you'd add to the lower coupons at this point? [inaudible]
Speaker Change: Yeah, I think that the lower coupons actually offer a lot of value, the tremendous amount of duration certainty to them at this point
Speaker Change: to speak as a mortgage guy, the convexity of those securities is very compelling relative to the rest of the coupon stack, and I think there's a place for those in our portfolio at least is...
Speaker Change: as far as I can have an outlook on things at this point. So in terms of yield available, you're talking about 155 basis points or more of spread to the treasuries, 205, even 210, 20 at points.
of spread versus the interest rates warp curve. [inaudible]
Speaker Change: Yeah, I think there's a tremendous amount of yield available to be earned and a lot of cushion really when you think about that yield it's a tremendous amount of cushion relative to any sort of duration uncertainties sort of the classic metrics that at times can make it difficult to manage a mortgage portfolio so and some of those you know the other thing I'll point out is [inaudible]
Relative to... Yeah.
Speaker Change: Some mortgage portfolios in our space we have, we do have a bias towards higher coupons because we're very cognizant of the pre-payment risk on the higher coupons.
Speaker Change: We saw a kind of what I'll call a re-fire wavelet in September and it was really nasty and to be honest that's some of what our economy needs, those borrowers who are sitting with race that are 6 plus
Speaker Change: percent are consumers and they're being pinched in a big way so they're going to need to refinance at some point in order to continue to drive the economy forward. So I think this is a very reasonable probability at this point. So yeah, highly diversified coupon stack makes a ton of sense, avoiding those borrowers who could be the fastest to prepay and the overall yield spread available today gives a tremendous amount of cushion for the mortgage market.
Speaker Change: Gotcha, that's really helpful. Just to maybe drill down a little bit on the capital and liquidity, I hear you on the leverage and where that currently stands. But of the 240 million that you raised last quarter, how much has actually been deployed up to this point? And what's your current liquidity after these last couple of weeks of spread widening? [inaudible]
Speaker Change: And then another follow-up. I was going to say, is there an internal philosophy for how much liquidity you guys keep as a percentage of your capital base or how are you benchmarking your liquidity right now?
Speaker Change: Yeah, I'll start with this. Oh, go ahead and take a little bit. Well, just just the last question because I think that'll help you with the deal. So yes, we have been running a higher level of liquidity in general.
Speaker Change: versus our total capital. That is how we think about it. We also think about it in terms of how much cash we have relative to unencumbered assets. That is how much cash we have relative to unencumbered assets.
Speaker Change: In times like these, you'll see us run with a higher level of cash as a total of unencumbered plus unencumbered and then you'll also see us run somewhere between, we tried to target between six and seven times, seven percent of equity over time.
Speaker Change: And that's typically how we think about liquidity as a level of versus capital.
That's really helpful. Of course, that's actually a commercial asset, right?
Yeah, not capital. Yeah, back.
Yeah, okay.
Okay, 60 to 70 percent of equity.
Speaker Change: and in terms of the amount that we've deployed, I think about two-thirds that I had mentioned of that capital was deployed and the remaining has been a buffer for the liquidity in it. I'll note that some of the reason you carry so much
Speaker Change: Liquidity in a portfolio like this is because there is a lot of margin movements between the assets and the liability sides of the portfolio and that has been functioning extremely well. So again, it's another part of the system that has been very healthy throughout all this volatility.
Got you. Thank you guys very much.
Speaker Change: Thank you. Our next questions come from the line of Jason Stewart with Janie Montgomery. Please proceed with your questions.
Jason Stewart: Thank you. Can we go back to the GSE question for a moment? Pick your number in terms of where spreads would go to, but what are the ways you are preparing for that potential price action?
Hi Jason, how are you doing?
for that.
Speaker Change: So really, the number one thing is having the liquidity available to withstand a price shock.
Jason Stewart: So pick a number of 25, 30, 50 basis points. One of the things that we do is we stress our equity to make sure that we can withstand a significant degree of shock.
Jason Stewart: The second piece is just our mindset as we're coming into this situation. We are operating with lower levels of leverage.
Jason Stewart: We are thinking about dry powder and there has to be, as I mentioned, a very high bar right now to raise levels of risk.
Jason Stewart: in the portfolio. So the number one defense against any of this stuff is the ability to withstand a shock, and that starts with our liquidity position.
Speaker Change: Okay, that's helpful. And then obviously it's an uncertain environment but is there any marker that you're looking at in particular for this acceleration in GSE policy action?
Speaker Change: I think there's a massive recognition by people in charge that, you know, how big the mortgage market is and what an integral part of it is of the US economy. I think there's also been a state of objective.
Speaker Change: of Bringing Mortgage Race Down. So those are things that, you know, we listen to the rhetoric or what's out there. Those are things that go in the favor of saying, okay, you know, there's some recognition of how important this is.
Speaker Change: On the other hand, there are steps that could be taken that get misunderstood by the market and that's the part that we really get concerned about.
Speaker Change: More than sort of a deliberate policy in one direction or another. So that's what we're really preparing for, more of like a surprise for the market that then gets adjusted somehow.
Speaker Change: We've, we've made very minor adjustments as what we mentioned on the call.
Speaker Change: It looks like four plus rate cuts are priced in. Historically, you've taken the opportunity when four rate markets are priced in a substantial amount of cuts to lock in some of that.
Speaker Change: Hello, our funding cost, is this a particular, I guess maybe just speak to how you think about maybe forwards on the short end of the curve, the hedge portfolio and how you see that evolving and the hedge portfolio moving going forward.
Yeah, right. We're on the same page. Okay. Great.
We're thinking a lot about that in terms of-
Speaker Change: Where we position the repo portfolio, and there are opportunities to extend out. You also have a lot of uncertainty coming in summer. We still have to deal with debt ceiling, things of that nature. So we're considering all those where we think about where to and how to position the repo. [inaudible]
Speaker Change: book. And in the context of that, the nice thing is we have the opportunity to head across the spectrum of so-for-futures and...
Speaker Change: interest rate swap options. So it is a great environment in that sense. There's been a lot of opportunity both up and down to lock in lower funding costs over time.
Okay, got it. Thanks for taking the questions, appreciate it.
You bet.
Speaker Change: Thank you. That does conclude our question and answer session. I would now like to turn the floor back over to Smriti, Popenoe for closing comments.
Smriti Popenoe: Great. Thank you everyone for your attention today and we look forward to updating you on our poll next week, next month, next quarter. I beg your pardon.
Speaker Change: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines. Have a wonderful day.