Q1 2025 Invesco Mortgage Capital Inc Earnings Call
Operator: Welcome to the Invesco Mortgage Capital first quarter 2025 earnings call. All participants will be in a listen only mode until the question and answer session. At that time to ask a question, press the star followed by the one on your telephone.
Welcome to the Invesco mortgage capital first quarter 2025 earnings call.
Speaker Change: All participants will be in a listen only mode until the question and answer session at that time to ask a question press. The star followed by the one on your telephone as a reminder, this call is being recorded now I would like to turn the call over to Greg Seals, and Investor Relations. Mr. Seals, you may begin the call.
Operator: Reminder, this call is being recorded.
Greg Seals: Now I would like to turn the call over to Greg Seals in Investor Relations.
Greg Seals: Mr. Seals, you may begin the call. Thanks, Operator, and to all of you joining us on Invesco Mortgage Capital's quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website, Invescomortgagecapital.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures in Slide 2 of the presentation regarding the statements and measures, as well as the appendix for the appropriate reconciliations to GAAP.
Greg Seals: Thanks, operator and to all of you joining us on Invesco mortgage capitals quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics. We plan to address today press release and presentation are available on our website at Invesco mortgage capital Dot Com. This information can be found by going to the.
Speaker Change: Esther relations section of the website.
Speaker Change: Presentation. Today will include forward looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two the presentation regarding the statements and measures as well as the appendix for the appropriate reconciliations to GAAP finally, invesco mortgage capital is not responsible for and does not edit nor.
Greg Seals: Finally, Invesco Mortgage Capital is not responsible for, and does not edit, nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome. Thank you for joining us today.
Speaker Change: Guarantee the accuracy of earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website again welcome and thank you for joining US today I'll now turn the call over to Invesco mortgage Capital's CEO, John It's Joe.
John Ansblom: I'll now turn the call over to Invesco Mortgage Capital's CEO, John Ansblom. John? Good morning, and welcome to Invesco Mortgage Capital's first quarter earnings call. I'll provide some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning for Q&A is our President, Kevin Collins, our COO, Dave Lyle, and our CFO, Mark Reichert.
Speaker Change: And welcome to Invesco mortgage Capital's first quarter earnings call I will provide some brief comments before turning the call over to our Chief investment Officer, Brian Norris to discuss our portfolio of more detail.
Speaker Change: Also joining us on the call. This morning for Q&A is our president Kevin Collins, our COO, while and our CFO Marc Greg.
John Ansblom: The first quarter of 2025 is characterized by tightening financial conditions, as both equity markets and credit spreads reacted negatively to anticipated U.S. fiscal and trade policy. Although inflation measures stabilized during the quarter, investors increased expectations for future inflation given concerns about the potential impact of U.S. trade-related policy. As inflation forecasts were increasing, softer employment data and fears the combination of potential trade wars and fiscal austerity would continue to an economic slowdown, led to a repricing of the market's expectations of future monetary policy. The Fed Funds Futures Market as of quarter end reflected a further 75 basis point reduction at the target rate through the end of the year.
Speaker Change: The first quarter of 2025 is characterized by tightening financial conditions as both equity markets and credit spreads reacting negatively to anticipated U S physical trade policies.
Speaker Change: Although inflation measure stabilized during the quarter investors increased expectations for future inflation, given concerns about the potential impact of U S trade related policies.
Speaker Change: The inflation forecast for increasing software employment data and fears that combination of potential trade wars and fiscal austerity will contribute to an economic slowdown led to a repricing of the market's expectations of future monetary policy.
Speaker Change: The fed funds futures market as of quarter end reflected a further 75 basis point reduction at the target rate through the end of the year.
John Ansblom: Interest rates dropped across the maturity spectrum during the quarter, while short-dated interest rate volatility increased, reflecting the market's shifting expectations of monetary and trade policy, while longer-dated volatility declined modestly. Despite weaker market sentiment, agency mortgages' performance was largely consistent with Treasury's, with higher coupons modestly outperforming hedges as longer-dated interest rate volatility trended lower. Supply and demand technicals for higher coupon agency mortgages were supportive, as originations remained subdued given slower housing seasonals and elevated mortgage rates, while banks, money managers, and mortgage REITs met added exposure during the quarter. Prepayment speeds remained at low levels given limited purchasing or financing activity.
Speaker Change: Interest rates dropped across the maturity spectrum during the quarter, our short dated interest rate volatility increased reflecting the market shifting expectations of monetary train allstate on longer dated volatility declined modestly.
Speaker Change: Despite weaker market sentiment agency mortgages performance was largely consistent with treasuries with higher coupons modestly outperforming hedges as longer dated interest rate volatility trended lower.
Speaker Change: Supply and demand technicals for higher coupon agency mortgages were supported as originations remained subdued given slower housing seasonal and elevated mortgage rates, while banks money managers and mortgage Reits net added exposure during the quarter.
Speaker Change: Prepayment speeds remained at low levels, given limited purchase and refinancing activity.
John Ansblom: However, a notable decline in mortgage rates in the latter half of the quarter should result in faster prepayment speeds in the coming months if the decline coincided with the seasonal increase in housing activity. Premiums on specified pool collateral were largely unchanged during the quarter as the move lower in mortgage rates led to support for prepayment protection. Additionally, agency CMBS risk premiums increased during the quarter, reflecting weakness in broader fixed income markets.
Speaker Change: However, a number of notable decline in mortgage rates in the latter half of the quarter should result in faster prepayment speeds in the coming months decline coincided with the seasonal increase in housing activity.
Speaker Change: Premiums on specified pool collateral were largely unchanged during the quarter as the move lower in mortgage rates led to support for prepayment protection.
Speaker Change: Additionally agency MBS risk premiums increased during the quarter, reflecting weakness in broader kicked in fixed.
Speaker Change: Fixed income markets.
John Ansblom: In this environment, our portfolio produced a positive economic return for the quarter of 2.6%, consisting of our $0.34 dividend and a modest $0.11 decline in book value to $8.81. Following additional trade policy announcements on April 2, financial conditions tightened further, and investor inflation expectations declined as concerns about an economic slowdown outweighed concerns about potentially higher prices. Agency mortgages significantly underperformed treasuries, and the initial reaction to the announcement saw interest rate volatility spike sharply higher and risk assets sell off across those fixed income inequities as markets priced in potentially slower economic growth. Further, hedge funds were selling U.S.
Speaker Change: In this environment our portfolio produced a positive economic return for the quarter of two 6% consisting of our 34% dividend and a modest 11, 11% decline in book value to 81.
Speaker Change: Following additional trade policy announcements on April 2nd financial conditions, tightened further and invest and investor inflation expectations declined as concerns about an economic slowdown outweighed concerns about potential essentially higher prices.
Speaker Change: Agency mortgages significantly underperformed treasuries and the initial reaction to the announcement saw interest rate volatility spiked sharply higher in risk assets sell off across the fixed income and equities as markets priced and potentially slower economic growth.
Speaker Change: Further hedge funds were selling U S treasuries and receiving swaps do an unwind of a previous trade, where they purchase treasuries and hedge them with swaps as cost swap spreads to move sharply higher negatively impacting book value.
John Ansblom: treasuries and receiving swaps due to an unwind of a previous trade where they purchased treasuries and hedged them with swaps. This caused swap spreads to move sharply tighter, negatively impacting book value. Given this challenging environment, our growth value per common share declined in April, and our estimate for April 30 is between $7.74 and $8. Given elevated interest rate volatility and continued policy uncertainty, We remain cautious on agency mortgages in the near term. However, our long term outlook is favorable as you expect investor demand to improve in higher coupons given attractive valuation.
Speaker Change: Given this challenging environment, our book value per common share declined in April and our estimate for April 30 is between 774 and $8 six.
Speaker Change: Given the elevated interest rate volatility and continued policy uncertainty we remain cautious on agency mortgages in the near term. However, our long term outlook is favorable as we expect investor demand to improve in higher coupons, given attractive valuations and eventual decline in interest rate volatility and a steeper yield curve.
John Ansblom: and eventual decline in interest rate volatility and its deep revealed Lastly, while agency CMBS risk premiums may remain elevated, limited issuance, strong fundamental performance, and stable cash flow profile should provide favorable support for the sector.
Speaker Change: Lastly, while agency MBS risk premiums may remain elevated limited issuance strong fundamental performance and stable cash flow profile should provide favorable support for the sector.
Brian Norris: Now I'll turn the call over to Brian to provide more Thanks, John.
Brian Norris: Now I'll turn the call over to Brian to provide more details.
Brian Norris: Good morning to everyone listening to the call. I'll begin on slide four, which provides an overview of the interest rate and agency mortgage markets over the past year. As shown on the chart in the upper left, during the first quarter, U.S. Treasury yields declined 20 to 40 basis points across the yield. yields on shorter maturities falling more than longer. The decline was driven largely by concerns over the economic growth prospects in the U.S. as fiscal and trade policy was rapidly adjusting under the new administration. The yield curve continued to steepen in April as U.S. economic growth expectations diminished further amidst growing trade policy uncertainty following Liberation Day on April 2nd.
Brian Norris: Thanks, John and good morning to everyone listening this call I'll begin on slide four which provides an overview of the interest rate and agency mortgage markets over the past year as shown on the chart in the upper left during the first quarter U S. Treasury yields declined 20% to 40 basis points.
Brian Norris: <unk> charged with yields on shorter maturities falling more than longer maturities. The decline was driven largely by concerns over economic growth prospects in the U S as physical and trade policy was rapidly adjusting under the new administration.
Brian Norris: Yield curve continues to steepen in April as U S economic growth expectations diminished further amidst growing trade policy uncertainty falling liberation day on April 2nd.
Brian Norris: As depicted on the chart on the bottom left, the Fed Funds futures market is now pricing in deeper cuts over the next two years, with the target rate expected to be reduced three to four times in 2025 and bottoming near 3% in 2026. As a result, futures markets are now pricing in a greater number of interest rate cuts than previously expected. At the start of the year, only one or two cuts were anticipated in 2025, with the target rate declining to just 3.75%. The chart in the upper right reflects changes in short-term funding rates over the past Positively, the funding market for our assets has been stable since year-end, with haircuts unchanged and one-month repo spreads remaining between SOFR plus 15 to 18 basis.
Brian Norris: As depicted on the chart on the bottom left the fed funds futures market is now pricing in deeper cuts over the next two years.
Brian Norris: <unk> rate expected to be reduced three to four times in 2025, and bottoming near 3% in 2026.
Brian Norris: As a result futures markets are now pricing at a greater number of interest rate cuts than previously expected at the start of the year only one or two customer anticipated in 2025 with a target rate declining to just 375%.
Brian Norris: Okay.
Brian Norris: The chart in the upper right reflects changes in short term funding rates over the past year.
Brian Norris: Positively the funding market for our assets has been stable since year end with haircuts unchanged at one month repo spreads remaining between sofa, plus 15% to 18 basis points.
Brian Norris: Lastly, the bottom right chart details agency MBS holdings by the Federal Reserve and U.S. banks. As announced by the FOMC at their March meeting, runoff of the Fed's balance sheet continues, but at a reduced pace starting in April. runoff of the treasury portfolio declining from $25 billion to $5 billion per month, and the agency mortgage runoff cap remaining unchanged at $35 billion per month. Agency mortgage runoff has been averaging approximately $15 billion per month in recent months. So the reduction in treasury runoff essentially reduces the overall monthly decline of the balance. 40 to 20 billion.
Brian Norris: Lastly, the bottom right chart details agency MBS holdings by the Federal Reserve and U S banks.
Brian Norris: As announced by the iPhone C. At their March meeting runoff of the Fed's balance sheet continues but at a reduced pace starting in April with runoff of the treasury portfolio declining from 25 billion to $5 billion per month, and the agency mortgage runoff capped remaining unchanged at $35 billion per month.
Brian Norris: Agency mortgage run off has been averaging approximately $15 billion per month in recent months. So the reduction in Treasury wrote off essentially reduces the overall monthly decline of the balance sheet from $40 to $20 billion.
Brian Norris: Given the reduced pace, quantitative tightening is now expected to conclude in 2026 instead of 2025. U.S.
Brian Norris: Given the reduced pace.
Brian Norris: Native tightening is now expected to conclude in 2026 and set a 2025.
Brian Norris: banks added marginally to their portfolios in the first quarter, but we expect demand for agency RMBs to increase notably in the second half of the year as deregulation, a slowing economy, and a steeper yield curve provides an attractive environment for deployment of deposits. Slide five provides more detail on the agency mortgage market. In the upper left chart, we show 30-year current coupon performance versus U.S. Treasuries over the past year, highlighting the first quarter in gray. Although lower coupons underperformed, higher coupons modestly outperformed during the quarter, given a favorable supply and demand environment, as well as a trend lower in long-term interest rate volatility.
Brian Norris: U S banks added marginally to their portfolios in the first quarter, we expect demand for ADT RBS to increased notably in the second half of the year.
Brian Norris: <unk>, a slowing economy and a steeper yield curve provides an attractive environment for deployment of deposits.
Brian Norris: Slide five provides more detail on the agency mortgage market and the Upper left chart. We show 30 year current coupon performance versus U S treasuries over the past year, highlighting the first quarter and gray.
Brian Norris: The lower coupons underperformed higher coupons modestly outperformed during the quarter, given a favorable supply and demand environment as well as the trend lower long term interest rate volatility the sector underperformed significantly in the first half of April however, as interest rate volatility spiked higher after separation date.
Brian Norris: The sector underperformed significantly in the first half of April, however, as interest rate volatility spiked higher after liberation. This increase in interest rate volatility reduced investor demand for agency mortgages, and the sharp underperformance in risk assets led to a substantial amount of selling in the sector, as money managers sold agency mortgage pools for short settle to fund redemptions and rotate into other sectors. The impact of these sales can be seen in the chart on the upper right, which shows specified pool payouts over the past year. Best Buy pool pay has declined notably in early April, as the need for cash settle led to substantial selling.
Brian Norris: This increase in interest rate volatility reduced investor demand for agency mortgages and the sharp underperformance in risk assets led to a substantial amount of selling in the sector as money managers sold agency mortgage pools for short settle to fund redemptions and rotate into other sectors.
Brian Norris: The impact of these sales can be seen in the chart on the upper right, which showed specified pool pay ups over the past year.
Brian Norris: Specified pool pay ups declined notably in early April at the need for cash settle that's a substantial selling in pools.
Brian Norris: Lastly, as shown in the lower right chart, funding via the dollar oil market for TBA securities has been attractive in the conventional 6.5% coupon, but largely unattractive elsewhere. Our rotation into 6.5% coupons during the first quarter capitalized on the attractiveness of the roll before rotating into specified pools in March. While we continue to prefer specified pools over TBA given their more predictable prepayment behavior, we will continue to take advantage of attractive alternatives in the dollar oil market as they become available. Slide six details our agency mortgage investments and summarizes investment portfolio changes during the quarter.
Brian Norris: Lastly, as shown in the lower right chart funding via the dollar roll market for TBA Securities has been attractive in the conventional six 5% coupon largely unattractive elsewhere, our rotation in the six 5% coupons during the first quarter capitalized on the attractive on the attractiveness of the role before rotating into.
Brian Norris: Five tools in March while we continued to prefer specified pools over TBA, given they're more predictable prepayment behavior. We will continue to take advantage of attractive alternatives in the dollar roll market as they become available.
Brian Norris: Slide six details our agency mortgage investments and summarizes the investment portfolio changes during the quarter, Our agency MBS portfolio increased 95% quarter over quarter as we invested proceeds from ATM issuance into 30 year, 5% grew six 5% coupons.
Brian Norris: Our agency RMES portfolio increased 9.5% quarter over quarter as we invested proceeds from ATM issuance into 30 or 5% through 6.5% coupons. In addition, we rotated our remaining allocation from the 4% coupon into higher coupons. As the relative value between coupons in the middle of the coupon stack and higher coupons became stressed. Overall, we remain focused in higher coupon agency RMVS, which should see greater benefit from a decline in interest rate volatility and demand from banks, overseas investors and mortgage We continue to focus our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environments, with our largest concentration in lower loan balance collateral given more predictable prepayments.
Brian Norris: In addition, we rotated our remaining allocation from the 4% coupon and to higher coupons as the relative value between coupons in the middle of the coupon stack and higher coupons became stretched.
Brian Norris: Overall, we remain focused on higher coupon agency, MBS, which should see greater benefit from a decline in interest rate volatility and demand from banks overseas investors and mortgage rates. We continue to focus our specified pool allocation on prepayment characteristics that are expected to perform well in both the premium end.
Brian Norris: Discount environments of our largest concentration in lower loan balance collateral given more predictable prepayments.
Brian Norris: We increased our allocation to specified pools consisting of loans with low credit score borrowers during the quarter, as the potential slowdown in economic activity should lead to slower prepayments from credit-constrained borrowers.
Brian Norris: We increased our allocation to specified pools, consisting of loans with low credit score borrowers during the quarter at the potential slowdown in economic activity should lead to slower prepayments from credit constrained borrowers.
Brian Norris: Although we anticipate interest rate volatility to remain elevated and are cautious on the sector overall in the near term, we believe levered gross ROEs in the low 20% represent a very attractive entry point for investors with longer investment horizons.
Brian Norris: Although we anticipate interest rate volatility to remain elevated and are cautious on the sector overall in the near term, we believe levered gross ROE in the low 20%.
Brian Norris: It presents a very attractive entry point for investors longer investment horizon.
Brian Norris: Slide 7 provides detail on our agency's CMDS portfolio. We purchased just $52 million at the beginning of the first quarter, and our exposure to the sector remained at approximately 15% of our total investment portfolio. We believe HSE CNVS offers many benefits, mainly through its prepayment protection and fixed maturities, which reduce our sensitivity to interest rate volatility.
Brian Norris: Slide seven provides detail on our agency MBS portfolio we.
Brian Norris: Purchased just $52 million at the beginning of the first quarter as our exposure to this sector remained at approximately 15% of our total investment portfolio.
Brian Norris: We believe agency MBS offers many benefits mainly through its prepayment protection and fixed maturities and reduce our sensitivity to interest rate volatility.
Brian Norris: Levered growth ROEs on our new purchases were in the low double digits, and we have been disciplined on adding exposure only when the relative value between agency CMBS and agency RMBS accurately reflects their different financing capacity has been robust. We have been able to finance our purchases with multiple counterparties at attractive level.
Brian Norris: Levered gross ROE on our new purchases were in the low double digits and we have been disciplined on adding exposure only when the relative value between agency MBS and agency RMB us accurately reflects their different risks.
Brian Norris: Financing capacity has been robust as we have been able to finance our purchases with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation as they become available recognizing the overall benefits to the portfolio at the sector diversified risks associated with the agency our test portfolio.
Brian Norris: We will continue to monitor the sector for opportunities to increase our allocation as they become available, recognizing the overall benefits to the portfolio as the sector diversifies risks associated with an agency or RPS portfolio.
Brian Norris: Slide 8 details our funding and hedging book at quarter end. Repurchase agreements kept collateralized by our agency RMBS and agency CMBS investments increased from $4.9 billion to $5.4 billion, consistent with the increase in our total assets, while the total notional of our hedges declined from $4.7 billion to $4.5 billion. The increase in our repo balance and decrease in hedge notional resulted in a lower hedge ratio for the quarter, from 95% to 85%, reflecting our expectation of a slowing economy and more substantial cuts in the Fed Fund's target rate in 2025.
Brian Norris: Slide eight details our funding and hedging book at quarter end.
Brian Norris: Repurchase agreements kept collateralized by our agency MBS and agency MBS investments increased from $4 9 billion to $5 4 billion consistent with the increase in our total assets. Although total notional of our hedges declined from $4 7 billion to $4 5 billion.
Brian Norris: The increase in our repo balance and decrease in hedge notional resulted in a lower hedge ratio for the quarter from 95% to 85%, reflecting our expectation of a slowing economy and more substantial cuts in the fed funds target rate in 2025.
Brian Norris: The table on the right provides further detail on our hedges at year end. The composition of our hedge portfolio shifted modestly towards interest rate swaps during the quarter. On a notional basis, our allocation to swaps increased from 70% at year-end to 80% at the end of March. While on a dollar duration basis, the allocation shifted from roughly 50% to 70%.
Brian Norris: The table on the right provides further detail on our hedges at year end.
Brian Norris: The composition of our hedge portfolio shifted modestly towards interest rate swaps during the quarter on a notional basis, our allocation to swaps increased from 70% at year end to 80% at the end of March following a dollar duration basis allocations shifted from roughly 50% to 70%.
Brian Norris: Slide nine provides an update on the portfolio as of April 30th. As previously discussed, the Liberation Day tariff announcement resulted in substantial market volatility in early April, as risk assets underperformed sharply and interest rate volatility spiked higher. Agency mortgages notably underperformed Treasuries during this time, as money managers liquidated positions to fund redemptions and asset earnings. In addition, swap spreads tightened significantly as hedge funds were forced to unwind carry trades amidst increased volatility, further negatively impacting our book value. We sought to reduce risk and maintain ample liquidity by selling assets to bring our leverage ratio back down to the mid-sixes from 7.1 times debt-to-equity at the end of March.
Brian Norris: Slide nine provides an update on the portfolio as of April 30.
Brian Norris: Previously discussed deliberation day tariff announcements resulted in substantial market volatility in early April as risk assets underperformed sharply and interest rate volatility spiked higher.
Brian Norris: Agency mortgages, notably underperformed treasuries during this time as money managers liquidated positions to fund redemptions in asset rotations.
Brian Norris: In addition, swap spreads tightened significantly as hedge funds were forced to unwind carry trades and that's increased volatility further negatively impacting our book value.
Brian Norris: We sought to reduce risk and maintain ample liquidity by selling assets to bring our leverage ratio back down to the mid sixes from seven one times debt to equity at the end of March sales were focused in higher coupons for a few reasons, most notably given their elevated exposure to interest rate volatility and also increased prepayment risk.
Brian Norris: Sales were focused in higher coupons for a few reasons, most notably given their elevated exposure to industry volatility and also increased prepayment risk given our expectation for eventual softening in economic growth and lower interest rates.
Brian Norris: Given our expectation for eventual softening and economic growth and lower interest rates.
Brian Norris: Slide 10 provides more detail on our capital structure and highlights the improvement made in recent quarters to reduce our cost of capital. Further improvement in the capital structure remains a focus of ours as we seek to maximize shareholder To conclude our prepared remarks, financial market volatility began to increase in the latter half of the first quarter as investors began to incorporate greater monetary and fiscal policy uncertainty in the valuation. But our focus in higher coupon age CRMBS and increased allocation to agency CMBS mitigated much of this impact and resulted in a positive economic return of $2.3 billion.
Brian Norris: Slide 10 provides more detail on our capital structure and highlights the improvement made in recent quarters to reduce our cost of capital further improvement in the capital structure remains a focus of ours as we seek to maximize shareholder returns.
Brian Norris: To conclude our prepared remarks financial market volatility began to increase in the latter half of the first quarter as investors began to incorporate greater monetary and fiscal policy uncertainty and evaluations.
Brian Norris: Our focus on higher coupon agency MBS and increased allocation to agency MBS mitigated much of this impact and resulted in a positive economic return of two 6%.
Brian Norris: Although increased volatility, swap spread tightening, and the HT Mortgage underperformance negatively impacted our book value in April, positively, financial markets have stabilized as the proposed tariffs have been postponed and negotiations began, with book value up approximately 1% so far in May. We believe IVR is well positioned to navigate current mortgage market volatility, given our recent reduction in leverage. We believe our liquidity position will provide substantial cushion for further potential market stress, while also providing capital to deploy into our target assets as the investment environment evolves. While near-term uncertainty warrants a somewhat cautious approach, we believe further easing of monetary policy will lead to a steeper yield curve and eventual decline in industry volatility, both of which provide a supportive backdrop for agency mortgages over the long term as they improve demand from commercial banks, overseas investors, money managers, and retailers.
Brian Norris: Although increased volatility swap spread tightening in the agency mortgage underperformance negatively impacted our book value at April positively financial markets have stabilized as the proposed tariffs had to postpone and negotiates negotiations began with book value of approximately 1% so far in bags.
Brian Norris: We believe <unk> is well positioned to navigate current mortgage market volatility given our recent reduction in leverage.
Brian Norris: We believe our liquidity position provides substantial cushion for further potential market stress.
Brian Norris: Also providing capital to deploy into our target assets at the investment environment occurs.
Brian Norris: While near term uncertainty warrants a cautious a somewhat cautious approach we believe further easing of monetary policy.
Brian Norris: He will lead to a steeper yield curve and eventual decline of interest rate volatility both of which provide a supportive backdrop for agency mortgages over the long term as they improved demand from commercial banks overseas investors money managers and rates.
Operator: Thank you for your continued support for Invesco Mortgage Capital, and now we will open the line. Thank you, gentlemen. If you would like to ask a question, please press star followed by the number one. Take a moment to unmute your phone and record your name clearly when prompted.
Brian Norris: For your continued support for Invesco mortgage capital and now we will open the line for Q&A.
Brian Norris: Thank you gentlemen, if you would like to ask a question. Please press star followed by the number one take a moment to mute your phone and record your name clearly when prompted that is needed. So you know when your line is open one.
Operator: That is needed so you know when your line One moment, please, for our first question.
Brian Norris: One moment please for our first question.
Doug Harder: And our first question is from Doug Harder with UBS. Your line is now open. Thanks. Appreciate the update on April.
Speaker Change: And our first question is from Doug Harter with UBS. Your line is now open.
Brian Norris: Thanks.
Brian Norris: Can you just talk through, you know, the decision to, you know, to take down leverage and kind of how you think about managing volatile periods as to whether you let, you know, kind of leverage float or, or you, you know, take portfolio actions, like you did? Yeah, hey, Doug. Thanks. It's Brian. Yeah. So in April, we essentially took leverage down about a half a turn where it began to launch. You know, and that just really reflects increased uncertainty regarding monetary, fiscal and trade policy, and how those So that uncertainty kind of impacts. I think, you know, bank buying was fairly light in the first quarter.
Speaker Change: The update on April can you just talk through.
Brian Norris: The decision to Ah.
Brian Norris: To take down leverage and kind of how you think about managing volatile periods as to whether you, let kind of leverage float or you take portfolio actions like you did.
Brian Norris: Yeah, Hey, Doug Thanks, It's Brian.
Brian Norris: Yeah.
Speaker Change: So in April we essentially took leverage down about a half a turn of acquired and began our bonds.
Speaker Change: And that just really reflects increase uncertainty regarding monetary fiscal and trade policy.
Speaker Change: And how.
Speaker Change:
Speaker Change: So that uncertainty kind of impacts the demand for mortgages.
Speaker Change: I think bank.
Speaker Change: Bank buying was fairly light in the first quarter.
Brian Norris: And, you know, I think the increased uncertainty will likely mean that that that gets delayed, that bank demand gets delayed into the second half of the year. And, you know, in the midst of higher supply coming. to the house. And certainly the increased trade policy uncertainty could lead to overseas demand being relatively quiet as well in the near term. So we just thought, you know, that mixed with monetary policy. led us to want to reduce leverage modestly, closer to the lower end of our You know, I think, you know, as You know, as mortgages were underperforming in early April, you know, leverage was certainly ticking higher given the decline in book value.
Speaker Change: And I think be increased uncertainty will likely mean that that gets delayed.
Speaker Change: Bank demand gets delayed into the second half of the year.
Speaker Change: And then in the midst of higher supply coming.
Speaker Change: Student housing seasonal.
Speaker Change: And certainly the increased trade policy uncertainty.
Speaker Change: It could lead to overseas demand being relatively quiet as well in the near term. So we just thought.
Speaker Change: That mixed with monetary policy, uncertainties led us to reduce our leverage modestly.
Speaker Change: Closer to the lower end of our range.
Speaker Change: Yes, I think.
Speaker Change: As.
Speaker Change: And mortgages were underperforming in early April leverage was certainly ticking higher given the decline in book value.
Brian Norris: And, you know, at a certain point, we do let it drift, but at a certain point, you know, it gets kind of to the high end of the range, and that's when we decided to take action to reduce. And, you know, it's not, you know, it's not something that we're doing all at once.
Speaker Change: And at a certain point, we do what we do let addressed but at certain point you know it gets kind of to the high end of the range and that's when we decided to take action.
Speaker Change: To reduce it.
Speaker Change: Not it's not something that we're doing.
Speaker Change: All at once but over the course of the month, we decided that we wanted to have leverage a little bit lower than where we started.
Brian Norris: But, you know, over the course of the month, we decided that we wanted to have leverage a little bit lower. Great, and appreciate it.
Speaker Change: Great I appreciate it and can you just talk about where you see.
Brian Norris: Can you just talk about where you see returns on an incremental basis today? Yeah, yes, spreads are very attractive, particularly versus versus swaps given tightening and swap spread still quarter to date. So, you know, levered ROEs are kind of in the low 20s on higher coupons.
Speaker Change: Returns on an incremental basis of it.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: <unk> are very attractive, particularly versus versus swaps given tightening in swap spreads still a quarter to date so levered.
Speaker Change: <unk> are kind of in the low twenties on higher coupons.
Brian Norris: Great, appreciate it. Thank you.
Speaker Change: Great I appreciate it thank you.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question is from Trevor Cranston with citizens J M. P. Your line is open.
Trevor Cranston: Our next question is from Trevor Cranston with Citizens JM. Hey, thanks. And thank you for the portfolio update on April 30. One question related to that. Can you comment on any changes to the hedge portfolio that were major made in April along with the portfolio reduction?
Speaker Change: Okay. Thanks.
Speaker Change: And thank you for the portfolio update on April 30.
Speaker Change: One question related to that.
Speaker Change: Can you comment on any changes to the hedge portfolio that were major made in April awkward.
Speaker Change: Portfolio reductions.
Brian Norris: Yeah, hey, Trevor, it's Brian again. Yeah, we did. You know, we did increase our, our hedge ratio. You know, just given Again, kind of uncertainty about near-term monetary policy. We decided to be a little bit closer to home as far as the hedge ratio goes. Now, as far as the mix between swaps and treasuries, I think that's still, you know, within the range that we've kind of been stating over the last couple of quarters, kind of in that 20 to 30% range of treasury futures relative to swaps. So there hasn't been a notable. Okay, got it.
Speaker Change: Yeah, Hey driver, it's Brian again, Yeah, we did we.
Speaker Change: We did increase our hedge ratio.
Speaker Change: Just given again kind of uncertainty about near term monetary policy, we decided to be a little bit closer to home.
Speaker Change: Far as the hedge ratio would go as far as the mix between.
Speaker Change: Swaps and treasuries I think that's still.
Speaker Change: Within the range that we've kind of been stating over the last couple of quarters kind of in that 20% to 30%.
Speaker Change: Range of our Treasury futures relative to swaps. So there hasn't been a notable shift away from that.
Speaker Change: Okay got it.
Trevor Cranston: Then, you know, with a with a smaller portfolio size, as of the end of April, does that have any impact on how you guys think about the right dividend level for the company? Or does the relatively, you know, wider spreads and somewhat positive intermediate turnout look sort of outweigh the reduction in the size of the portfolio?
Speaker Change: But with a smaller portfolio size.
Speaker Change: The end of April does that have any impact on how you guys pick about the.
Speaker Change: The right dividend level for the company or.
Speaker Change: Does the relatively <unk>.
Speaker Change: <unk> spreads.
Speaker Change: Positive intermediate term outlook sort of.
Speaker Change: Outweigh the reduction of the size of the portfolio.
John Ansblom: Yeah, hey, Trevor, it's John. Yeah. As far as the dividend goes, I mean, you know, we just reduced it in the last quarter. So, you know, still covering it. So that's, that's good. And I think, you know, to Brian's point about ROEs, I mean, you know, what we're seeing off the portfolio and what we're reinvesting are supportive also. So yeah, I don't have it, you know, um, concerns about that in these, you know, given where we are now. Yeah. Okay. Appreciate the comment. Thank you guys. Thank you.
John: Yeah, Hey, Trevor it's John Yeah.
John: As far as the dividend goes I mean, we just produced it last quarter. So scope comfortably cover I guess, so that's that's good and I think to Brian's point about Roe.
John: Overseeing office portfolio.
John: Reinvesting or supportive also.
John: So yeah I don't have it you don't have any.
John: Concerns about that at least.
John: Given where we are now for sure.
Speaker Change: Yeah, Okay I appreciate the color.
Speaker Change: Thank you. Our next question now from Jason Weaver with Jones trading and your line is open.
Jason Weaver: Our next question now is from Jason Weaver with Jones Trading and your line is open. Hey, good morning, guys. Thanks for taking my question.
Jason Weaver: Hey, good morning, guys. Thanks for taking my question.
Brian Norris: First, I wonder if can you discuss how you see the opportunity set in agency today compared to the prior peak and spreads in October of last year? Yeah, hey, Jason, it's Brian. Yeah, you know, I think You know, spreads are, you know, pretty consistent with previous widening episodes. So certainly the environment, or at least I'm sorry, the opportunity is attractive in mortgages. I do think that, you know, the reason that we feel a little less comfortable from a leverage perspective is that, you know, with the potential you know, reinvigoration of inflation, that, you know, it could cause further delays and monetary policy adjustments, which, you know, right now the market is pricing in I think it's, you know, close to three.
Jason Weaver: First I wonder if can you discuss how you see the opportunity set and agency today compared to the prior peak in spreads in October of last year.
Brian Norris: Yeah, Hey, Jason It's Brian Yeah, I think.
Brian Norris: Spreads are a.
Brian Norris: Pretty consistent with previous widening episodes, so certainly the fee environment.
Brian Norris: At least I'm sorry, the opportunity is attractive and mortgages I do think that the reason that we feel a little less comfortable from a leverage perspective debt.
Brian Norris: With.
Brian Norris: The potential a reinvigoration of of inflation.
Brian Norris: Debt.
Brian Norris: It could.
Brian Norris: Cause further delays in monetary policy adjustment, which right now the market is pricing in I think it's close to three.
Brian Norris: I know it just shifted a little bit yesterday after after the Fed meeting, but three cuts in 2025. You know, we do think that You know, there's a risk that there's fewer than that and mortgages may not respond. You know, all that well to shift into zero cuts or potentially even pricing and hikes. So, you know, we do think that being a little bit more conservative relative to where we were maybe last fall when you know, the prospect of hikes or zero cuts was much less.
Brian Norris: No it just shifted.
Brian Norris: Little bit yesterday after after the fed meeting but.
Speaker Change: Three cuts in 2025.
Brian Norris: We do think that.
Brian Norris: As you know there is a risk that there's fewer than that and mortgages may not respond.
Brian Norris: All of that well to have shipped into into zero cuts or potentially even pricing and types. So we.
Brian Norris: We do think that.
Brian Norris: Being a little bit more conservative.
Brian Norris: Relative to where we were maybe last fall when.
Brian Norris:
Brian Norris: The prospect of a hikes for or zero cuts what's in those spots.
Brian Norris: Got it. That's good color.
Brian Norris: Got it that's good color and just a follow up I see that you've been reality.
Brian Norris: And just a follow up. I see that you've been reallocating for three quarters now, you've been reallocating your spec pool exposure away from the low loan balance and into more credit constrained. Can you talk about how you see the relative value there? Is it just a function of pricing? Is there some other risks to loan balance pools that that you're seeing? Yeah, it's a couple of different things, Jason. It's You know, first of all, yes, I mean, loan balance pools are certainly kind of the premier spec pool story out there. So, you know, because of that, they tend to be pretty fully priced.
Brian Norris: For three quarters now you've been reallocating your spec pool exposure away from the low loan balance and into more credit constrained can you talk about how you see the relative value there or is it just a function of pricing is there some other risk the loan balance pools that that you're saying.
Brian Norris: Yeah, It's a couple of different things change that it's.
Speaker Change: First of all yes, I mean loan balance pools.
Speaker Change: Or certainly even kind of the premier respectful story out there so because of that they tend to be pretty fully priced.
Brian Norris: Now, you do get, you know, prepayment certainty out of that, so there is a benefit to paying up for that. But, you know, with, like I said, you know, with increased economic uncertainty and potential slowdown, we do think that, you know, kind of those lower FICO pool borrowers, we could see increased demand for that. and potentially, you know, slower housing. HBA as well. So, you know, LTV stories also kind of make sense from that perspective. But kind of the second portion of that is, you know, it's generally, you know, our rotation from lower coupons into higher coupons.
Speaker Change: Now you do get.
Speaker Change: Prepayment uncertainty out of that so there isn't benefits to paying up for that but.
Speaker Change: Like I said with increased economic uncertainty and potential slowdown, we do think that kind of those lower FICO.
Speaker Change: Our borrowers we could see increased demand for that.
Speaker Change: And potentially slower housing.
Speaker Change: H B, a as well so LTV stories.
Speaker Change: Also kind of makes sense from that perspective, but kind of the second portion of that is.
Speaker Change: It's generally our rotation from lower coupons into higher coupons.
Brian Norris: Most of our lower coupon holdings were in loan balance, as opposed to, you know, as we're rotating into higher coupons, you know, we want to have a little bit less Speck pool payout exposure. So, you know, it's it's part of it's partly just, you know, maintaining a little bit lower profile from a payout.
Speaker Change: <unk> of our lower coupon holdings were in.
Speaker Change: Loan balance as opposed to go as we're eroding into higher coupons, we wanted to have a little bit less.
Speaker Change:
Speaker Change: Spec pool pay up exposure so.
Speaker Change: Part of it is partly just.
Speaker Change: Maintaining a little bit lower profile from a payout perspective.
Brian Norris: Got it. That's actually very helpful.
Speaker Change: Got it that's actually very helpful. Thanks for the time guys.
Brian Norris: Thanks for your time, guys.
Jason Stewart: Our next question now is from Jason Stewart with Channy. Your line is open. Hey, thanks. Good morning. I wanted to follow up on your comments about the forward rate outlook. Are you in the camp where, you know, it's sort of either six or seven cuts if we have a recession, no cuts if we don't? Maybe like if you could give us some comments on how you're thinking about that, in relation to how you develop the hedge portfolio. That'd be helpful. Thanks.
Speaker Change: Our next question now is from Jason Stewart with Janney. Your line is open.
Jason Stewart: Hey, Thanks, Good morning, I wanted to follow up on your comments about the forward rate outlook are you in the camp, where you know it's sort of either six or seven cuts. If we have a recession no cuts if we don't maybe.
Jason Stewart: Maybe like if you could give us some comments on how youre thinking about that in relation to how you develop the hedge portfolio.
Jason Stewart: That'd be helpful. Thanks.
Brian Norris: Hey, Jason, it's Brian. Yeah, thanks. Yeah, you know, I think listening to Chair Powell yesterday, the takeaway was greater uncertainty about policy going forward. It's kind of a wait-and-see approach, whether, you know, we still see strength in hard data while soft data is certainly pretty weak. So it's just a matter of, you know, the timing on when those two converge and how they converge. You know, like I said, there's, there's about three cuts being priced in for 2025. You know, we see a fair amount of economists out there saying zero cuts and, and, you know, a fair amount saying that they're going to have to be pretty aggressive.
Jason Stewart: Hey, Jason its Brian Yeah. Thanks.
Jason Stewart: Yeah, I, you know I think listening to chair Powell yesterday.
Jason Stewart: The takeaway was.
Jason Stewart: Just greater uncertainty about Bob.
Jason Stewart: Policy going forward.
Jason Stewart: It's kind of a wait and see approach whether.
Jason Stewart: We still see strength in hard data, while salt data is it's certainly pretty weak.
Jason Stewart: So it's just a matter of the timing on when those two converge and how they converge.
Jason Stewart: So I think.
Jason Stewart: Yeah like I said, there's there's about three cuts being priced in for 2025.
Jason Stewart: We see a fair amount of economists out there, saying zero cuts in it and.
A fair about saying that theyre going to have to be pretty aggressive so.
Brian Norris: So I think in that environment, our goal is to just be conservative and keep things close to home, both from a hedge notional ratio perspective, as well as leverage, because, you know, if things were to swing in either direction, you know, I could You could be all set. Okay, that's fair enough. No strong view either way on which way we're headed. No, we don't we don't like to take interest rate risk in the REITs. So, you know, we try to keep duration gap pretty close to zero. You know, we may be leaning slightly towards a steeper curve, but not a not a significant gain there.
Jason Stewart: Think in that environment, our goal is to.
Jason Stewart: Just be conservative and keep things close to home both from a hedge notional ratio perspective, as well as leverage because.
Jason Stewart: If things were to swing.
Speaker Change: The direction, you know what I could tell you.
Jason Stewart: It could be offsets.
Jason Stewart: Yeah.
Jason Stewart: Okay. That's fair enough no strong view, either way on which way we're headed.
Speaker Change: No. We don't we don't like to take interest rate risk.
Jason Stewart: And the REIT, so we try to keep duration gap pretty close to zero.
Jason Stewart: We may be waiting slightly towards the steeper curve, but not not.
Jason Stewart: Okay.
Brian Norris: Okay. Got it. That's helpful.
Jason Stewart: Okay.
Jason Stewart: Got it that's helpful. And then in terms of the ATM activity I'm coming up with about 855, a share on issuance could you give us a sense for your estimate on the impact to book value and <unk> from ATM issuance, and where you're comfortable issuing going forward.
Brian Norris: And then in terms of ATM activity, I'm coming up with about $8.55 a share on issuance. Did you give us a sense for, you know, your estimate on the impact of both value and 1Q from ATM issuance and where you're comfortable issuing going forward? Yeah, you know, I think You know, I think given where spreads are, we feel like the investment environment is attractive enough. You know, I think that's probably about right from a from a share price perspective. So, you know, the the the impact would have been pretty modest. But again, you know, given where we're able to put money to work, we think overall, it's certainly improving the economics of the region.
Jason Stewart: Yeah.
Jason Stewart:
Jason Stewart: Yeah.
Jason Stewart: You know I think given where spreads are we feel like that.
Jason Stewart: The investment environment is attractive enough.
Jason Stewart: I think that's probably about right from a from a share price perspective so.
Jason Stewart: The impact would have been pretty modest.
But again, you know given where we are able to put money to work. We think overall, it's certainly improving the economics of the agreed then to.
Brian Norris: Shareholders and, you know, and also, you know, issuing through the ATM helps us reduce expenses. Okay, thanks. Appreciate the call and taking the question. Thank you.
Jason Stewart: Shareholders.
Jason Stewart: And also.
Jason Stewart: Issuing through the ATM helps us reduce our expenses.
Jason Stewart: Okay. Thanks I appreciate the.
Jason Stewart: All of them taking the questions.
Jason Stewart: Yeah.
Speaker Change: Thank you as a reminder to ask a question. Please press star one presently my last question now is from Eric Hagen with P. P. I G. In your line is open.
Operator: As a reminder, to ask a question, please press star 1.
Eric Hagen: Presently, my last question now is from Eric Hagen with PTIG, and your line is open. Hey, thanks. Good morning. Good discussion here around the Fed. I guess I have one follow up. You know, like our mental framework has typically been for mortgage spreads to tighten if the Fed cuts interest rates. And I feel like that's probably still the case. But do you think that's different or has the potential to be different in this environment because of the macro and its impact on, you know, just the flow of capital. And should we should we should we necessarily take a Fed cut as being a catalyst for spreads to tighten?
Eric Hagen: Hey, Thanks, Good morning, I'm good discussion here around the fed I guess I have one follow up.
Eric Hagen: Our mental framework has typically been for mortgage spreads to tighten if the fed cuts interest rates I feel like that's probably still the case, but do you think that's.
Speaker Change: Different or it has the potential to be different in this environment because of the macro and its impact on you.
Speaker Change: Just the flow of capital and so you shouldnt necessarily take fed cut is.
Speaker Change: Being a catalyst for spreads to tighten up or how do you think about that.
Brian Norris: Or how do you think about that?
Brian Norris: Yeah, hey, Eric. Thanks. It's Brian. Yeah. And hope that hope the conference is going well. Sorry, we couldn't there. But yeah, I think that You know, generally speaking, that's correct. You know, a flowing economy should lead to a steeper curve, which helps pay mortgage valuations. I also think, you know, in the near term here, you know, a Fed on hold isn't necessarily a bad thing for mortgages, you know, it does reduce short-term volatility, so mortgages could do okay here with the Fed kind of taking a latency approach. But no, I think, you know, a flowing economy does, it certainly helps mortgages versus other credit assets, and versus treasuries, I think they hold in just fine.
Brian Norris: Got her thanks, Brian Yeah and.
Speaker Change: Hope to hope the conference going well I'm sorry.
Speaker Change: Sorry, we couldn't couldn't be.
Brian Norris: Peter.
Brian Norris: But yeah I think.
Brian Norris: That.
Brian Norris: Generally speaking that's correct a slowing economy should lead to a steeper curve, which helps agency mortgage valuations I also think in the near term here a fed on hold isn't necessarily.
Brian Norris: A bad thing for mortgages, you know it does reduce our.
Brian Norris: Short term volatility some mortgages could do okay here, but.
Brian Norris: With the fed kind of taking a wait and see approach, but no I think yeah. It's slowing economy does it certainly helps mortgages versus other credit assets.
Brian Norris: And versus treasuries I think they hold in just fine and then Dr.
Brian Norris: And then, you know, are poised to do pretty well as kind of, you know, as other asset classes kind of start to catch up as the economy maybe comes off of the slowdown and start Right, right. All right.
Brian Norris: To do pretty well is kind of you know.
Brian Norris: As other asset classes kind of start to catch up is as the economy maybe comes off of.
Brian Norris: The slowdown and that starts in Virginia.
Brian Norris: Right right alright, thanks for the color.
Brian Norris: Thanks for the color.
Brian Norris: Are you guys seeing any opportunities in commercial credit? And maybe, you know, picking up some more share there and how you guys think about relative value versus RMBS right now. Thank you guys. I mean, we've been we've been relatively hesitant to to add credit exposure in this environment. You know, I think certainly, you know, we are not interested in You know, financing versus with market-to-market financing. So we haven't been looking to add. We've actually have sold our remaining credit investments that were, you know, pretty modest coming into the year, but we're completely out of those and found, you know, fairly decent levels to get out of those.
Brian Norris: Are you guys seeing any opportunities in commercial credit and maybe.
Brian Norris: Picking up some more share there and how you guys think about relative value versus.
Brian Norris: Our MBS.
Brian Norris: Thank you guys yet.
Brian Norris: I mean, we've been we've been relatively hasnt, yet too to add credit exposure in this environment you know I think certainly we.
Brian Norris: We are not interested in.
Brian Norris: Financing versus with Mark to market financing.
Brian Norris: So we haven't been looking to add we've actually.
Brian Norris: Have sold our remaining credit investments.
Brian Norris: Pretty modest coming into the year, but we're completely out of those and found fairly decent levels to get out of those so we're 100% agency at this point and we don't anticipate that changing in the near term.
Brian Norris: So, you know, we're 100% agency at this point, and we don't anticipate that that. Got you. Thank you guys. Thank you. Thank you both.
Speaker Change: Got you. Thank you guys.
Speaker Change: Thanks, Eric Thank you Ed.
Unknown Executive: As I have no further questions in queue, I would like to turn it back to management for any closing remarks.
Speaker Change: Thank you both as I have no further questions in queue I would like to turn it back to management for any closing remarks.
Unknown Executive: So we'd just like to thank everyone for joining us this morning and we look forward to getting together again next quarter. Thanks.
So it would just like to thank everyone for joining us this morning, and we look forward to.
Speaker Change: Getting together again next quarter. Thanks.
Operator: We are now concluded. Thank you again for your participation.
Speaker Change: We are now concluded. Thank you again for your participation. Please disconnect at this time.
Operator: Please disconnect at this time.