Q2 2025 Invesco Mortgage Capital Inc Earnings Call
Well 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.
Speaker Change: As a reminder, this call is being recorded now I would like to turn the call over to Greg seals in Investor Relations. Mr. Seals, you may begin the call.
Greg Seals: Thanks, operator and to all of you joining us on the Invesco mortgage capitals quarterly earnings call.
Greg Seals: In today's press release, we have provided a presentation that covers the topics we plan to address today.
Greg Seals: Press release and presentation are available on our website invesco mortgage capital Dot Com. This information can be found by going to the Investor Relations section of the website presentation. Today will include forward looking statements and certain non-GAAP financial measures. Please review the disclosure on slide two of the presentation regarding these statements.
Greg Seals: Measures as well as the appendix for the appropriate reconciliations to GAAP finally, invesco mortgage capital's top responsible for it it's not added toward guarantee the accuracy of our 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.
Jonathan: I'll turn the call over to invest because IPR CEO, Jonathan it's a long shot.
Greg Seals: Thank you and good.
Speaker Change: And welcome to Invesco mortgage capital second 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 in more detail.
Speaker Change: Also joining us on the call this morning for Q&A.
Speaker Change: Kevin Collins, our COO, Dave, while and our CFO Marc Greg.
Speaker Change: Financial conditions were quite volatile during the second quarter initially driven by sharply negative reactions to tariff announcements on April 2nd which triggered a spike in interest rate volatility and a broad repricing of risk assets.
Speaker Change: Despite the early turbulence financial conditions ended the quarter modestly accommodated.
Speaker Change: Interest rate volatility declined in most risk asset valuations rebounded following the announcement of a delay in tariff implementation.
Speaker Change: Even with relatively stable inflation data during the quarter and the potential impact of higher tariffs.
Speaker Change: Mr expectations for inflation has moderated as reflected in lower breakeven rates on treasury inflation protected securities.
Speaker Change: Shift partly reflective growing concerns about the long term effects of trade policies and economic growth. Meanwhile, labor market data continued to Sigma resilience as he can.
Speaker Change: <unk> added about 150000 jobs per month during Q2, and the unemployment rate held steady at four 1%.
Speaker Change: As the quarter progressed stable employment data and declining recession or mix led to a moderation in market expectations for near term monetary policy actions.
Speaker Change: Federal funds futures market expectations now reflects approximately two rate cuts by year end, an additional two to three cuts in 2026 interest.
Speaker Change: Interest rates declined across the front end of the yield curve of the treasury yield curve during the second quarter, while long end rates moved higher.
Speaker Change: I think expectations for accommodative policy from the epilepsy alongside concerns about potential increases in treasury issuance over the coming years.
Speaker Change: As a result of the spike in interest rate volatility and broad selloff in risk assets agency mortgages sharply underperformed treasuries in April.
Speaker Change: However, following the announced delay in Paris interest rate volatility subsequently declined in May and June and in the quarter modestly below its starting level for.
Speaker Change: Performance in agency mortgages and agency MBS, along with broader risk assets following a similar trajectory.
Speaker Change: Covering meaningfully by quarter end after a weak start in April.
Speaker Change: Finally valuations at our interest rate swap hedges were negatively impacted as trade policy related volatility combined with fiscal policy concerns to drive swap spreads noticeably tighter.
Speaker Change: These factors resulted in an economic return for the quarter of negative four 8% consisting of our 34.
Speaker Change: Dividend per common share and a 76% decline in our book value per common share.
Speaker Change: Our debt to equity ratio decreased from seven one times at the end of March to six five times at the end of June reflecting our belief that elevated near term uncertainty regarding trade and monetary policy warrants a modestly more defensive posture.
Speaker Change: Quarter end, our $5 $2 billion investment portfolio consisted of $4 3 billion of agency mortgages and <unk>.
Speaker Change: <unk> 900 million agency, MBS and maintained a sizable balance of unrestricted cash and unencumbered investments totaling $362 million.
Speaker Change: As of July 18, 2025, we estimate book value per common share to be between $7 99, and $8 31.
Speaker Change: Agency mortgages and agency MBS, both performed well in the beginning of the third quarter.
Speaker Change: Our near term outlook remains cautious our long term outlook for agency mortgages is favorable as we expect demand to improve in higher coupons given attractive valuations continued stabilization in interest rate volatility and a steeper yield curve. In addition, we remain positive on agency MBS as limited issuance strong.
Speaker Change: Rental performance and stable cash flow profile should provide favorable support for the sector now I'll turn the call over to Brian for more details.
Brian Norris: Thank you John and good morning to everyone on the call I'll begin on slide four which provides an overview of the interest rates in agency mortgage markets over the past year.
Brian Norris: During the second quarter the U S treasury yield curve steepened, it's financial markets adjusted to increased uncertainty regarding trade monetary and fiscal policy features markets priced an additional monetary policy easing a bit softening U S economic growth expectations and persistent trade policy uncertainty, especially in short term yields lower.
Brian Norris: In contrast expectations for a sizeable physical package and potential tariff driven inflation pressures lifted long term yields.
Brian Norris: While the 10 year Treasury yields is little changed over the quarter to two year yields declined 16 basis points and a 30 year yield increased 30 bps or 20 basis points. This steepening brought the twos.
Brian Norris: 30 spread to its deepest level nearly three and a half years.
Brian Norris: As depicted in the chart on the bottom left as of June 30th Fed funds futures now anticipate five to six cuts by the end of 2026, one more cut than they were pricing and as of March 31, nearly four more cuts been more price than a year ago.
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 remained relatively stable through the volatility in April with financing capacity robust haircuts unchanged and one month repo spreads remaining between silver plus 15 to 18 basis points.
Brian Norris: Lastly, the bottom right chart details the agency mortgage holdings by the Federal Reserve and U S banks as announced by the epilepsy at its March meeting the Federal reserve began reducing the pace of balance sheet runoff in April Treasury runoff declined from 25 billion to $5 billion per month, while the cap on agency RBS runoff.
Brian Norris: Made unchanged at 35 billion per month.
Brian Norris: However, actual agency RBS runoff has consistently range between $15 million to $20 million per month since early 2023, well below the stated cap.
Brian Norris: Given the reduced pace of treasury runoff quantitative tightening is now expected to conclude in 2026, a year later than previously expected.
Brian Norris: U S banks, essentially reinvested paid outs in the second quarter, but we expect bank demand for HR MBS to increase in the second half of the year of deregulation, a steeper yield curve and further easing of monetary policy provides an attractive environment for deployment of deposits into securities.
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 second quarter and Greg.
Brian Norris: The quarter began with a sharp decline in valuations just interest rate volatility spiked higher to the response to trade policy developments, leading to a broad sell off in financial markets.
Outside the U F O B got its March meeting the Federal reserve began reducing the pace of balance sheet runoff in April treasury, but all declined from 25 billion $5 billion per month.
Brian Norris: However, interest rate volatility declined notably after the 90 day pause in Caribbean sensation and trended lower through the end of the quarter, providing an attractive environment for risk assets as the uncertainty regarding trade and fiscal policy is diminished.
On the agency arms.
That's great.
At 5 billion Vermont.
Brian Norris: Performance across the 30 year coupon stack rebounded with most coupons ultimately outperforming treasury hedges by a modest 20 to 30 basis points for the quarter.
Brian Norris: However, carry trade unwinds and fiscal uncertainty resulted in significantly tighter swap spreads on the quarter, resulting in negative hedge returns for agency mortgages versus swaps despite their modest outperformance relative to treasuries.
Brian Norris: Positively specified pool pay ups rebounded from April's performance to end the quarter, largely where they began.
Brian Norris: <unk> via the dollar roll market for TBA Securities remained largely unattractive for most 30 year coupons.
Brian Norris: Overall, we prefer specified pools over TBA, given more attractive and stable funding and a more predictable prepayment behavior and we will continue to take advantage of attractive alternatives. It's the dollar roll market when available.
Operator: 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 1 on your telephone.
Correct.
The quarter began with a sharp decline in valuations and interest rate volatility spiked higher in response to trade policy developments.
So a broad sell off in financial markets.
Operator: As a reminder, this call is being recorded.
Brian Norris: Slide six details our agency MBS investments and summarizes the investment portfolio changes during the quarter.
Greg Seals: Now I would like to turn the call over to Greg Seals in Investor Relations.
Over interest rate volatility declined notably after the 90 day pause and terrapin sensation and trended lower through the end of the quarter, providing an attractive environment for risk assets as the uncertainty regarding trade and physical policy diminished.
Brian Norris: Our agency arm portfolio decreased 15% quarter over quarter, as we managed risk and the beginning of April as markets navigate to trade policy uncertainty.
Greg Seals: Mr. Seals, you may begin the call. Operator, and 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 in certain non-GAAP fields. Please review the disclosures on slide two of the presentation regarding these statements and measures, as well as the appendix for the appropriate reconciliations to GAAP.
Brian Norris: We sold higher coupons and low pay up specified pools, given their elevated sensitivity to potential increases in interest rate volatility.
Performance across the 30 year coupon stack rebounded.
Coupons, ultimately outperforming treasury hedges by a modest 20 to 30 basis points for the quarter.
Brian Norris: Despite the sales in April we remained focused on higher coupon agency, MBS, which benefit from more attractive valuations and an expected further decline in interest rate volatility on <unk>.
However, carry trade unwinds and fiscal uncertainty resulted in significantly tighter swap spreads on the quarter, resulting in negative hedge returns for agency mortgages versus swaps despite their modest outperformance relative to treasuries.
Brian Norris: <unk> from banks overseas investors and mortgage rates should offset supply through year end.
Positively.
Specified pool pay ups rebounded from peoples for performance to end the quarter, largely where they began all funding via the dollar roll market for TBA Securities remained largely unattractive for most 30 year coupons.
Brian Norris: We continue to focus our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environment.
Greg Seals: Finally, Invesco Mortgage Capital is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website.
Brian Norris: Our largest concentration in lower loan balance collateral given the more predictable prepayments relative to lower pay up pools.
Overall, we prefer specified pools over TBA, given more attractive and stable funding and they're more predictable prepayment behavior and we will continue to take advantage of attractive alternatives. It's the dollar roll market unveil.
Greg Seals: Again, welcome and thank you for joining us today.
Brian Norris: Although we are cautious on agency MBS overall in the near term given recent outperformance and the potential for a modest reversal of the trend of lower interest rate volatility, we believe lever to gross Roes in the low twenties on higher coupons represent a very attractive entry point for agency mortgage investors with longer investment grades.
John Anzalone: I'll now turn the call over to Invesco's I'd be our CEO, John Anzalone. Thank you and good morning and welcome to Invesco Mortgage Capital's second quarter earnings call. I'll provide some brief comments before turning the call over to our Chief Investment Officer Brian Norris to discuss our portfolio in more detail. Also joining us on the call this morning for Q&A is our President Kevin Collins, our COO Dave Lyle, and our CFO Mark Gregg. Financial conditions were quite volatile during the second quarter, initially driven by a sharply negative reaction to tariff announcements on April 2nd, which triggered a spike in interest rate volatility and a broad repricing of risk assets.
Slide six details our HCR MBS investments and summarizes the investment portfolio changes during the quarter.
Our agency arm portfolio decreased 15% quarter over quarter, because we managed risk in the beginning of April as markets navigate to trade policy uncertainty.
Brian Norris: Slide seven provides detail on our agency MBS portfolio, given the sharp underperformance in agency MBS in April for relative value between agency MBS and agency RBS became unattractive.
We sold higher coupons and low pay up specified pools, given their elevated sensitivity to potential increases in interest rate volatility.
Despite the sales in April we remain focused on higher coupon agency, MBS, which benefit from more attractive valuations and an expected further decline in interest rate volatility on demand from banks overseas investors and mortgage rates should offset supply through year end.
Brian Norris: As noted in no new purchases for the quarter.
Brian Norris: However, despite the lack of new purchases to a decline in our agency MBS portfolio caused a modest increase in our allocation to agency MBS.
John Anzalone: Despite the early turbulence, financial conditions ended the quarter modestly accommodative as interest rate volatility declined and most risk asset valuations rebounded following the announcement of a delay in tariff instrumentation. Even with relatively stable inflation data during the quarter, and a potential impact of higher tariffs, investor expectations for inflation have moderated, as reflected in lower breakeven rates on Treasury Inflation Protected Securities. This shift partly reflected growing concerns about the long-term effects of trade policies and economic growth. Meanwhile, labor market data continues to signal resilience, as the economy added about 150,000 jobs per month during Q2, and the unemployment rate held steady at 4.1%.
Brian Norris: Overall portfolio, which increased from 15% at the end of the first quarter to just over 17% as of June 30th.
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 the more predictable prepayments relative to lower pay up pools.
Brian Norris: Believe agency MBS offers many benefits mainly through the prepayment protection and fixed maturities, which reduced our sensitivity to interest rate volatility levered gross roes are in the low to mid teens.
Although we are cautious on agency Army us overall in the near term given recent outperformance and the potential for a modest reversal in the trend of lower interest rate volatility. We believe levered gross ROE is in the low twenties on higher coupons represent a very attractive entry point for aged two mortgage investors with Walter investment classes.
Brian Norris: And we have been disciplined on adding exposure only when the relative value between agency MBS and agency RBS accurately reflects our unique risk profiles.
Brian Norris: Financing capacity has been robust we continue to finance our purchases with multiple counterparties at attractive levels.
Brian Norris: We will continue to monitor the sector for opportunities to increase our allocation is the relative value becomes attractive.
Yeah.
Slide seven provides detail on our agency MBS portfolio, given the sharp underperformance in agency MBS in April relative value between agency MBS and agency RBS became unattractive, which resulted in no new purchases for the quarter.
John Anzalone: As the quarter progressed, stable employment data and declining recessionary risk led to a moderation in market expectations for near-term monetary policy action. Federal funds futures market expectations now reflect approximately two rate cuts by year end, an additional two to three cuts in 2026. Interest rates declined across the front end of the treasury yield curve during the second quarter, while long-end rates moved higher, reflecting expectations for accommodative policy from the FOMC, alongside concerns about potential increases in treasury issuance over the coming years. As a result of the spike in interest rate volatility and broad sell-off in risk assets, agency mortgages sharply underperformed treasuries in April.
Brian Norris: Recognizing the overall benefits the portfolio as this sector diversifies risk associated with the agency MBS portfolio.
Brian Norris: Slide eight details our funding and hedge book at quarter end.
Brian Norris: Repurchase agreements collateralized buttressed by our agency MBS and agency MBS investments declined from $5 4 billion to $4 6 billion consistent with the decrease in our total assets, while the notional of our hedges declined from $4 5 billion to $4 3 billion as we actively increased our hedge ratio.
Never.
The lack of new purchases.
The decline in our agency MBS portfolio caused a modest increase in our allocation to agency MBS for the overall portfolio, which increased from 15% at the end of the first quarter to just over 17% as of June 30th.
We believe agency MBS offers many benefits mainly through the prepayment protection and fixed maturities.
Brian Norris: From 85% to 94% the.
Brian Norris: The table on the right provides further detail on our hedges at quarter end.
Our sensitivity to interest rate volatility.
Brian Norris: Our composition of hedges remained largely unchanged quarter over quarter, approximately 80% of our hedges consisting of interest rate swaps on a notional basis on a dollar duration basis allocation remained near 70% given a higher allocation to interest rate swaps at the front end of the yield curve.
Gross Roe or in the low to mid teens.
And we have been disciplined on adding exposure only when the relative value between agency MBS and agency RBS accurately reflect their unique risk profiles.
John Anzalone: However, following the announced delay in tariffs, interest rate volatility subsequently declined in May and June, ending the quarter modestly below its starting level. Performance in agency mortgages and agency CMVS along with broader risk assets followed a similar trajectory.
Financing capacity has been robust, but we continue to finance our purchases with multiple counterparties at attractive levels.
Brian Norris: Our allocation of interest rate swaps negatively impacted book value during the second quarter as carry trade unwind and heightened concerns over fiscal policy led to sharply tighter swap spreads ranging from six basis points tighter than the front end to 10 to 12 basis points tighter than the long end.
We will continue to monitor the sector for opportunities to increase our allocation is the relative value becomes attractive.
John Anzalone: recovery meaningfully by quarter and after a week starting April. Finally, valuations that are interest rate swap hedges were negatively impacted as trade policy related volatility combined with fiscal policy concerns to drive swap spreads noticeably tighter. These factors resulted in an economic return for the quarter of negative 4.8% consisting of our $0.34 dividend per common share and a $0.76 decline in our proof value per common share. Our debt to equity ratio decreased from 7.1 times at the end of March to 6.5 times at the end of June, reflecting our belief that elevated near-term uncertainty regarding trade and monetary policy warrants a modestly more defensive posture.
Recognizing the overall benefits the portfolio as the sector diversifies risk associated with agency MBS portfolio.
Slide eight details our funding and hedge book.
Brian Norris: Slide nine provides detail on our capital capital structure and highlights the improvements we've made in recent quarters to reduce our cost of capital further.
Right.
Collateralized buttressed by our agency MBS and agency MBS investments declined from $5 4 billion to $4 6 billion consistent with the decrease in our total assets.
Brian Norris: Further improvement in the capital structure remains a focus of our management team as we seek to maximize shareholder returns.
While the notional of our hedges declined from $4 5 billion to $4 3 billion as we actively increased our hedge ratio from 85% to 94%.
Brian Norris: To conclude our prepared remarks financial market volatility increased sharply at the beginning of the second quarter amidst heightened trade policy uncertainty, but declined notably after the 90 day pause in tariff implementation on April nine.
The table on the right provides further detail on our hedges at quarter end.
Brian Norris: From that point volatility generally trended lower through quarter end, providing a supportive backdrop for risk assets, which rebounded after a sharp underperformance in early April.
Our composition of hedges remain largely unchanged quarter over quarter, approximately 80% of our hedges consisting of interest rate swaps on a notional basis on a dollar duration basis allocation remained near 70% given a higher allocation to interest rate swaps at the front end of the yield curve.
John Anzalone: A quarter and our $5.2 billion investment portfolio consisted of 4.3 billion in agency mortgages and 900 million agency CMDS, and we maintain a sizable balance of unrestricted cash and unencumbered investments totaling 360. As of July 18th, 2025, we estimate book value for common share to be between $7.99 and $8.31 cents, as agency mortgages and agency CMDS both perform well into the beginning of the third quarter. While our near-term outlook remains cautious, our long-term outlook for agency mortgages is favorable as we expect demand to improve in higher coupons given attractive valuations, continued stabilization in interest rate volatility, and a speed renewal curve.
Brian Norris: D C RMB us ultimately modestly outperformed treasury hedges on the quarter underperformed swap hedges given significant tightening of swap spreads.
Our allocation of interest rate swaps negatively impacted book value during the second quarter as carry trade unwind and heightened concerns over fiscal policy under sharply tighter swap spreads ranging from six basis points tighter than the front end to 10 to 12 basis points tighter than the long end.
Brian Norris: Although increased volatility swap spread tightening and agency mortgage underperformance negatively impacted our book value in April.
Brian Norris: Financial markets have since stabilized and as of July 18th we estimate our book value per share to be up a little more than 1% since the end of the second quarter.
Brian Norris: We believe our liquidity position provides substantial cushion for further potential market stress.
Slide nine provides detail on our capital capital structure and highlights the improvements we've made in recent quarters to reduce our cost of capital further.
Brian Norris: So provided capital to deploy into our target assets as the investment environment improves.
Further improvement in the capital structure remains a focus of our management team as we seek to maximize shareholder returns.
Brian Norris: While near term uncertainty once a somewhat cautious approach. We believe further easing of monetary policy will be to a steeper yield curve and then eventual further decline in interest rate volatility both of which will provide a supportive backdrop for agency mortgages over the long term as they should result in increased demand from commercial banks.
To conclude our prepared remarks financial market volatility increased sharply at the beginning of the second quarter amidst heightened trade policy uncertainty, but declined notably after the 90 day pause of tariff implementation on April nine.
John Anzalone: In addition, we remain positive on agency CMES as limited issuance, strong fundamental performance, and stable cash flow profiles should provide favorable support for this sector.
Brian Norris: And I'll turn the call over to Brian for more details. Thanks John and good morning to everyone on the call. I'll begin on slide four, which provides an overview of the interest rate and agency mortgage markets over the past year. During the second quarter, the U.S. Treasury yield curve steepened as financial markets adjusted to increased uncertainty regarding trade, monetary, and fiscal policy. Futures markets priced in additional monetary policy easing amid softening U.S. economic growth expectations.
From that point volatility generally trended lower through quarter end, providing a supportive backdrop for risk assets, which rebounded after a sharp underperformance in early April.
Brian Norris: Overseas investors money managers and mortgage rates.
Brian Norris: Thank you for your continued support for Invesco mortgage capital and now we will open the line for Q&A.
Agency RMB us ultimately modestly outperformed treasury hedges on the quarter underperformed swap hedges given the significant tightening of swap spreads.
Speaker Change: Thank you so very much as we're now opening for question and answers. If you would like to ask a question. Please press star one please on mute your phone and record your name clearly when prompted your name is needed to introduce your question.
Although increased volatility swap spread tightening and agency mortgage underperformance negatively impacted our book value in April positively financial markets have since stabilized and as of July 18th we estimate our book value per share to be up a little more than 1% since the end of the second quarter.
Speaker Change: If you care to withdraw your request press star two.
Speaker Change: Now our first question is from Jason Weaver with Jones trading and your line is open now.
Brian Norris: Transcribed by Transcription Outsourcing, LLC. While the 10-year treasury yield was little changed over the quarter, the 2-year yield declined 16 basis points. and the 30-year yield increased 20 bits. This steepening brought the $2.30 spread to its deepest level in nearly three and a half years. As depicted in the chart on the bottom left, as of June 30th, Fed Funds futures now anticipate five to six cuts by the end of 2026, one more cut than they were pricing in as of March 31st, and nearly four more cuts than were priced in a year ago. The chart in the upper right reflects changes in short-term funding rates over the past year.
We believe our liquidity position provides substantial cushion for further potential market stress, while also providing capital to deploy towards credit assets as the investment environment improves.
Jason Weaver: Hey, guys good morning.
Speaker Change: Good morning.
Brian Norris: Hey, Brian maybe for you first I'm, taking your comments into account on the preference for high coupon. Our MBS here, how do you think about the relative risk versus reward just due to the possible lower rates prepayment exposure and I think stickers have TBA six without without pointing up.
While near term uncertainty warrants a somewhat cautious approach. We believe further easing of monetary policy will be to a steeper yield curve and then eventual further decline in interest rate volatility both of which will provide a supportive backdrop for agency board is just over the long term. They should result in increased demand from commercial banks.
Speaker Change: Premium six and a half about three points.
Brian Norris: So yeah.
Speaker Change: How do you think about relative value here.
Overseas investors money managers and mortgage rates.
Speaker Change: Yeah. Thanks, Jason.
Thank you for your continued support for Invesco mortgage capital and now we will open the line for Q&A.
Speaker Change: No I think you know the spreads accurately kind of reflect that risk and so we see notably wider spreads are nominal spreads and higher coupons and we think that that will help kind of cushion.
Brian Norris: Positively, the funding market for our assets remained relatively stable through the volatility in April, with financing capacity robust, haircuts unchanged, and one-month repo spreads remaining between SOFR plus 15 to 18 basis. Lastly, the bottom right chart details agency mortgage holdings by the Federal Reserve and U.S. banks. As announced by the FOMC at its March meeting, the Federal Reserve began reducing the pace of balance sheet runoff in April. Treasury runoff declined from $25 billion to $5 billion per month, while the cap on agency RMBS runoff remained unchanged at $35 billion per month. However, actual agency RMBS runoff has consistently ranged between $15 to $20 per month since early 2023, well below the stated cap.
Thank you so very much as we're now opening for question and answers. If you would like to ask a question. Please press star one please on mute your phone and record your name clearly when prompted your name is needed to introduce to your question.
Speaker Change: Any potential increases we did reduce our 30 year six and a half exposure during the quarter.
If you care to withdraw your request press star two.
Speaker Change: And that's largely reflected reflective of kind of what you're talking about there you know I think six and a half that fire.
Jason Weaver: Now our first question is from Jason Weaver with Jones trading and your line is open now.
Speaker Change: Are probably Ah.
Speaker Change: Bit more exposed than the rest of our coupon stack. So I think.
Jason Weaver: Hey, guys good morning.
Jason Weaver: Good morning.
Speaker Change: Our allocation to specified pools, certainly address that as well so we have a fair amount of Av.
Jason Weaver: Hey, Brian maybe for you first I'm, taking your comments into account on the preference for high coupon R. M. B S. Here, how do you think about the relative risk versus reward just due to the possible you know lower rates prepayment exposure and I think fixes have TBA fixes have about pointing up.
Speaker Change: Low balance our exposure in those coupons as.
Speaker Change: As well as some of the other stories that help protect so yeah. We are.
Speaker Change: We don't own any tpa as of quarter end.
Brian Norris: Given the reduced pace of treasury runoff, quantitative tightening is now expected to conclude in 2026, a year later than previously expected. U.S. banks essentially reinvested payouts in the second quarter, but we expect bank demand for H2RMVS to increase in the second half of the year as deregulation, a steeper yield curve, and further easing of monetary policy provides an attractive environment for deployment of deposits into security.
Speaker Change: So you know I feel like we're pretty well protected.
Jason Weaver: Premium a six and a half about three points.
Speaker Change: To the extent that we do see a notably lower rates.
Jason Weaver: So yeah.
Speaker Change: How do you think about relative value here.
Speaker Change: Our expectation is that it.
Speaker Change: Yeah. Thanks, Jason you know I think you know the spreads accurately kind of reflect that risk and so we see notably wider spreads are nominal spreads and higher coupons and we think that that will help kind of Cushing.
Speaker Change: At least our house view is that the fed will.
Speaker Change: A couple of times here at the end of 2025.
Speaker Change: And then a few more times at 2026, but really I think we think that that would result in just a notably steeper curve and not necessarily a significant decline in tenure, which is where kind of the market traders is keyed off of so you know we're not anticipating.
Brian Norris: Slide 5 provides more detail on the age to mortgage market. In the upper left chart, we show 30-year current coupon performance versus U.S. Treasuries over the past year, highlighting the second quarter in gray. The quarter began with a sharp decline in valuations as interest rate volatility spiked higher in response to trade policy developments, leading to a broad sell-off in financial markets. However, industry volatility declined notably after the 90-day pause in tariff implementation contended lower through the end of the quarter, providing an attractive environment for risk assets as the uncertainty regarding trade and fiscal policy diminished.
Speaker Change: Any potential increases you know, we did reduce our 30 year six and a half exposure during the quarter.
Speaker Change: And that's largely reflected.
Speaker Change: A significant decline in mortgage rates here. So how do you think that you know.
Speaker Change: <unk> kind of what you're talking about there you know I think six and a half and fire.
Speaker Change: Certainly five five ads and fixes are still are pretty well insulated.
Speaker Change: Our probably.
Speaker Change: Bit more exposed than the rest of our coupon stack. So yeah I think.
Speaker Change: Given the prepayment protection that we own enough to hospitals.
Speaker Change: Our allocation to specified pools, certainly address that as well so we have a fair amount of Av.
Speaker Change: Got it thank you for that and I mean, you mentioned a lot of sort of.
Speaker Change: Low balance our exposure in those coupons as.
Speaker Change: Risk events are seemingly behind this obviously the amount of monetary easing it's still very much in question here.
Speaker Change: As well as some of the other stories that help protect so yeah. We are.
Brian Norris: Performance across the 30-year coupon stack rebounded, with most coupons ultimately outperforming Treasury hedges by a modest 20 to 30 basis points per quarter. However, carry trade unwinds and fiscal uncertainty resulted in significantly tighter swap spreads on the corner, resulting in negative hedge returns for agency mortgages versus swaps, despite their modest outperformance relative to treasury. Positively, specified pool payouts rebounded from April's poor performance to end the quarter largely where they began, while funding via the dollar oil market for TBA securities remained largely unattractive for most 30-year coupons.
Speaker Change: Yeah, we don't own any tpa as of quarter end.
Speaker Change: What's your view right now what's your comfort zone on leverage and any sort of events upcoming that may affect your ability to take that higher.
Speaker Change: So I feel like we're pretty well protected.
Speaker Change: You know to the extent that we do see a notably lower rates.
Speaker Change: Yeah, our expectation is that at least our our house view is that.
Speaker Change: Yeah, I mean, we're certainly pretty comfortable you know I think.
Speaker Change: Well a couple of times here at the end of 2025, and then a few more times at 2026, but really I think we think that that will result in just the notably steeper curve and not necessarily a significant decline.
Speaker Change: We're about a half a turn lower than where we were during the first quarter.
Speaker Change: And the good news is that with spreads as wide as they are particularly versus swaps.
Speaker Change: <unk> are very attractive.
Speaker Change: And tenure, which is where kind of the mortgage rate is just keyed off those so you know we're not anticipating.
Speaker Change: Certainly.
Brian Norris: Overall, we prefer specified pools over TBA given more attractive and stable funding and a more predictable prepayment behavior, but we will continue to take advantage of attractive alternatives in the dollar rule market when available. Slide 6 details our agency's RMBS investments and summarizes investment portfolio changes during the year. Our agency RMDS portfolio decreased 15% quarter over quarter as we managed risk in the beginning of April as markets navigated trade policy uncertainty. We sold higher coupons, low pay specified goals, given their elevated sensitivity to potential increases in interest rate volatility. Despite the sales in April, we remain focused on higher coupon age CRBS, which benefit from more attractive valuations and an expected further decline in interest rate volatility, while demand from banks, overseas investors, and mortgage rates should offset supply through year-end.
Speaker Change: Able to cover the dividend.
Speaker Change: From an earnings perspective, and so we don't feel like we need to take.
Speaker Change: A significant decline in mortgage rates here. So we think that's.
Speaker Change: Certainly five thought that fixes are still are pretty well insulated.
Speaker Change: Leverage higher in order to meet kind of our goals from a from a return perspective, and so we're very comfortable with where we are right now.
Speaker Change: Given the prepayment protection that we own enough capitals.
Speaker Change: Certainly tail risky bets.
Speaker Change: Got it. Thank you for that and I mean, you mentioned there are a lot of sort of.
Speaker Change: Declined.
Speaker Change: Are the potential for tail risk has declined over the course of the second quarter.
Speaker Change: Risk events are seemingly behind this obviously the amount of monetary easing it's still very much in question here or whats your right now what's your comfort zone on leverage and any sort of events upcoming that may affect your ability to take that higher.
Speaker Change: As we move into the third quarter, we still think that there are there's still a fair amount of uncertainty about monetary policy.
Kevin: And ultimately Kevin.
Kevin: As tariffs are starting to kind of hit the economy here in the third quarter are more substantially the impact that that will have on on inflation and the direction of monetary policy as well so.
Speaker Change: Yeah, I mean, we're certainly pretty comfortable you know I think.
Kevin: We're pretty comfortable with where we are you know as you know I think you know as the.
Speaker Change: We're about a half a turn lower than where we were during the first quarter.
Kevin: The fed starts to cut.
Brian Norris: 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 relative to lower payout.
Speaker Change: And the good news is that with spreads as wide as they are particularly versus swaps.
Kevin: And that debt.
Kevin: That path becomes a bit more certain.
Kevin: But we will probably see us great ball will come down mortgage spreads will tighten a little bit and then that would provide.
Speaker Change: Gross ROE these are very attractive.
Speaker Change: Certainly.
Speaker Change: Well to cover the dividend.
Kevin: Cut more of an environment that we could potentially take leverage little bit higher.
Speaker Change: From an earnings perspective, and so we don't feel like we need to take.
Brian Norris: Although we are cautious on H2RMVS overall in the near term, given recent outperformance and the potential for a modest reversal in the trend of lower interest rate volatility, we believe levered gross ROEs in the low 20s on higher coupons represent a very attractive entry point for H2 mortgage investors with longer investment horizons.
Speaker Change: Thank you that's helpful. Appreciate the time.
Speaker Change: Leverage higher in order to meet kind of our goals from a from a return perspective, and so we're very comfortable with where we are right now certainly tail risk events have declined.
Kevin: Okay.
Speaker Change: Thank you. Our next question now is from Trevor Cranston with citizens J M. P and your line is now open.
Trevor Cranston: Hi, Thanks, good morning.
Speaker Change: Are the potential for tail risk has declined over the course of the second quarter. So as we move into the third quarter. We still think that there are there's still a fair amount of uncertainty about monetary policy.
Trevor Cranston: Good morning, you talked you talked about the the impact of swap spreads obviously in the second quarter could you give us an update on your sort of outlook for how you think swap spreads are likely to behave going forward and how that relates to your comfort level around kind of the mix of hedges you guys currently have.
Brian Norris: Slide seven provides detail on our agency CMBS portfolio. Given the sharp underperformance in agency RMBS in April, the relative value between agency CMBS and agency RMBS came unattractive, which resulted in no new purchases for the quarter. However, despite the lack of new purchases, the decline in our agency RMBS portfolio caused a modest increase in our allocation to agency CMBS for the overall portfolio, which increased from 15% at the end of the first quarter to just over 17% as of June 30. We believe agency CMBS offers many benefits, mainly through its prepayment protection and fixed maturities, which reduce our sensitivity to interest rate policy.
Speaker Change: And ultimately as tariffs are starting to kind of hit the economy here in the third quarter are more substantially you know what the impact that that will have on inflation and the direction of monetary policy as well so we're.
Trevor Cranston: Thanks.
Trevor Cranston: Hey, Trevor its Brian Yeah.
Trevor Cranston: I think that's certainly I mentioned.
Speaker Change: We're pretty comfortable where we are you know as I think you know as the fed starts to cut.
Speaker Change: 80% notional on interest rate swaps relative to Treasury futures.
Speaker Change: And that.
Speaker Change: That path becomes a bit more certain.
Speaker Change: And I think thats reflective of kind of our stance on where swap spreads are right now I think that that.
Speaker Change: Yes.
Speaker Change: You'll probably see us break ball will come down mortgage spreads will tighten a little bit and then that would provide.
Speaker Change: Certainly from an ROE perspective, it's very attractive to hedge with swaps at this point and.
Brian Norris: Levered Groves ROEs are in the low to mid-teens. We have been disciplined on adding exposure only when the relative value between the agency CMVS and agency RMVS accurately reflects their unique risk profile. financing capacity has been robust. We continue to finance our purchases with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation as the relative value becomes attractive.
Speaker Change: <unk> got more of an environment that we could potentially take leverage a bit higher.
Speaker Change: And we think that the ultimate direction.
Speaker Change: Thank you that's helpful. Appreciate the time.
Speaker Change: <unk>, a swap spreads will be wider which which will be beneficial as well so.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question now is from Trevor Cranston with citizens J M. P and your line is now open.
Speaker Change: We're probably at.
Speaker Change: You know the Max kind of allocation to interest rate swaps and as we see the environment start to normalize and we would move more into treasury futures.
Trevor Cranston: Hi, Thanks, good morning good.
Trevor Cranston: Morning, you talk you talked about the the impact of swap spreads obviously in the second quarter could you give us an update on your see your sort of outlook for how you think swap spreads are likely to behave going forward and.
Speaker Change: You know what that ultimate level looks like.
Brian Norris: Recognizing the overall benefits of the portfolio as the sector diversifies risks associated with the agency R&D.
Speaker Change: It's a bit uncertain at this point, but we kind of think that.
Speaker Change: Roes are very attractive now hedging swaps and the direction.
Brian Norris: Slide 8 details our funding and hedge book recorder ends. Repurchase agreements collateralized by our agency RMBS and agency CMBS investments declined from $5.4 billion to $4.6 billion, consistent with a decrease in our total assets. While the notional of our hedges declined from $4.5 billion to $4.3 billion as we actively increased our hedge ratio from 85% to 95%. The table on the right provides further detail on our hedges at quarter end. Our composition of hedges remain largely unchanged quarter over quarter, approximately 80% of our hedges consisting of interest rate swaps on a notional basis, while on a dollar duration basis the allocation remained near 70% given a higher allocation to interest rate swaps at the front end of the year.
Trevor Cranston: How that relates to your comfort level around kind of the mix of hedges you guys currently have in place. Thanks.
Speaker Change: The anticipated direction of swap spreads wider so that's also beneficial so we're kind of at our.
Speaker Change: Max allocation to swaps and then.
Brian: Hey, Trevor its Brian Yeah.
Trevor Cranston: I think yeah. That's certainly I mentioned, you know where we're going.
Speaker Change: As that changes, even rotated a little bit more in the futures.
Speaker Change: 80% notional on interest rate swaps relative to treasury futures and.
Speaker Change: Got it okay. That's helpful. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question now is from Doug Harter with UBS and your line is open.
Speaker Change: And I think that's reflective of kind of our stance on where swap spreads are right now I think that that.
Speaker Change: Hi, Good morning. Thank you, it's ethylene the rest a little on for Doug.
Speaker Change: Certainly from an ROE perspective, it's very attractive hedged with swaps at this point and.
Speaker Change: I was hoping you could speak to your views on the trajectory of core earnings and what it means for the dividend.
Speaker Change: And we think that there.
Speaker Change: Ultimate direction of swap spreads will be wider which which will be beneficial as well. So we're probably at.
Speaker Change: Yeah.
Speaker Change: Yeah like I said, you know what I mean, I think Roes are are very attractive.
Speaker Change: At this at this moment so.
Speaker Change: Max kind of allocation to interest rate swaps and as we see the environment start to normalize and we would move more into treasury futures.
Brian Norris: Our allocation interest rate swaps negatively impacted book value during the second quarter, as carry trade unwinds and heightened concerns over fiscal policy led to sharply tighter swaps. ranging from six basis points tighter in the front end to 10 to 12 basis points tighter in the long end.
Speaker Change: No we don't really.
Speaker Change: Anticipate.
Speaker Change: <unk>.
Speaker Change: Mortgage spreads are generally speaking have been wide for a while and that's been very supportive of it.
Speaker Change: You know what that ultimate level looks like.
Speaker Change: A bit uncertain at this point, but we kind of think that.
Speaker Change: The earnings of the portfolio and there's a lot of different reasons for that Theres not theres technical reasons clearly the fed has been running off their portfolio.
Speaker Change: Roes are very attractive now hedging swaps and the direction.
Brian Norris: Slide 9 provides detail on our capital structure and highlights the improvements we've made in recent quarters to reduce our cost of capital.
Speaker Change: We anticipate a direction of swap spreads wider so that's also beneficial so we're kind of at our Max.
Speaker Change: For a couple of years now our banks have been notably quiet over the last couple of years as well and so we don't anticipate.
Speaker Change: Max allocation to swaps and then.
John Anzalone: Further improvement in the capital structure remains a focus of our management team as we seek to maximize shareholder To conclude our prepared remarks, financial market volatility increased sharply at the beginning of the second quarter amidst heightened trade policy uncertainty, but declined notably after the 90-day pause in tariff implementation on April 9th. From that point, volatility generally trended lower through quarter end, providing a supportive backdrop for risk assets, which rebounded after sharp underperformance in early April. Agency RMBS ultimately modestly outperformed Treasury hedges on the quarter, but underperformed swap hedges, given significant tightening of swap spreads.
Speaker Change: As that changes.
Speaker Change: Rotate a little bit more into futures.
Speaker Change: That dynamic changing considerably you know batesville will likely start to add here, but the fed is going to continue to roll off.
Speaker Change: Got it okay. That's helpful. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question now is from Doug Harter with UBS and your line is open.
Speaker Change: And money managers have been overweight.
Speaker Change: For a while now as well.
Speaker Change: Hi, Good morning. Thank you, it's actually in the rest of our onsite that I.
Speaker Change: So they are really dependent on undisclosed so we kind of think that you know.
Speaker Change: I was hoping you could speak to your views on the trajectory of core earnings and what it means for the dividend.
Speaker Change: Spreads should be relatively attractive.
Speaker Change: Four four.
Speaker Change: Quite a quite a long period and so we anticipate.
Speaker Change: Yeah.
Speaker Change: Like I said.
Speaker Change: Yeah like I said, you know what I mean, I think Roes are are very attractive at this at this moment so.
Speaker Change: <unk> is where it needs to be in order to produce the earnings that we.
Speaker Change: Are comfortable with and so we don't really anticipate that that changing in the near term.
John Anzalone: Although increased volatility, swath threat tightening, and agency mortgage underperformance negatively impacted our book value in April, positively financial markets have since stabilized, and as of July 18th, we have made our book value per share to be up a little more than 1% since the end of the second quarter. We believe our liquidity position provides substantial cushion for further potential market stress, while also providing capital to deploy to our target assets as the investment environment While near-term uncertainty warrants a somewhat cautious approach, we believe further easing of monetary policy will lead to a steeper yield curve and an eventual further decline in interest rate volatility, both of which will provide a supportive backdrop for HTC mortgages over the long term, as they should result in increased demand from commercial banks, overseas investors, money managers, and mortgages.
Speaker Change: We don't really.
Speaker Change: Anticipate.
Speaker Change: Thank God.
Speaker Change: Got it that's helpful. Thank you.
Speaker Change: Spreads are generally speaking have been wide for a while and that's been very supportive.
Jason Stewart: Thank you. Our next question now from Jason Stewart with Janney Montgomery Scott Your line is open Sir.
Speaker Change: The earnings of the portfolio and there's a lot of different reasons for that.
Jason Stewart: Alright, thanks, good morning.
Speaker Change: Technical reasons clearly the fed has been running off the portfolio.
Speaker Change: So conceptual question here in terms of leverage and total return.
Speaker Change: For a couple of years now our banks have been notably quiet over the last couple of years as well and so we don't anticipate.
Speaker Change: I think from my perspective, I would expect.
Speaker Change: Leverage to move higher when the return opportunities are the highest but it kind of it sounds like you're managing this to cover the dividend and mitigate risk.
Speaker Change: That dynamic changing considerably you know batesville will likely start to add here, but the fed is going to continue to roll off.
Speaker Change: Is that am I thinking about that the right way I mean, otherwise would you not want to increase leverage when total return opportunities are the highest in reduce it the opposite way.
Speaker Change: And money managers have been overweight.
Speaker Change: For a while now as well.
Brian Norris: Yeah, Hey, Jason It's Brian Yeah, I mean, it's it's certainly.
Speaker Change: So they're really dependent on on disclosed so we kind of think that.
Speaker Change: Spreads should be relatively attractive.
Speaker Change: Every environment is different.
Speaker Change: Or.
Operator: Thank you for your continued support for Invesco Mortgage Capital and now we will open the line for questions. Thank you so very much. As we're now opening for questions and answers, if you would like to ask a question, please press star one. Please unmute your phone and record your name clearly when prompted. Your name is needed to introduce your question.
Brian Norris: And so it is challenging.
Speaker Change: For a quite a quite a long period and so we.
Brian Norris: Challenging to kind of make a blanket statement like that you know I think you know.
Speaker Change: We anticipate like I said.
Brian Norris: Ultimately when when spreads are.
Speaker Change: Average is where it needs to be in order to produce the earnings that we are.
Brian Norris: The widest and Roes are the most attractive you know that it's also there's reasons for that right. There's.
Speaker Change: We're comfortable with and so we don't really anticipate that changing in the near term.
Brian Norris: Heightened uncertainty heightened interest rate volatility.
Speaker Change: Got it that's helpful. Thank you.
Brian Norris: And so it's really just kind of managing.
Operator: care to withdraw your request, press start.
Speaker Change: Thank you. Our next question now from Jason Stewart with Janney Montgomery Scott Your line is open Sir.
Brian Norris: Within that environment as it as it comes up you know I think you're right I mean as as are.
Jason Weaver: Now our first question is from Jason Weaver with Jones Trading and your line is open now. Hey guys, good morning. Morning, Brian, maybe for you first, you know, taking your comments into account on the preference for, you know, high coupon RMBS here, how do you think about the relative risk versus reward? Just do the possible, you know, lower rates, pre payment exposure, and I think sixes have, you know, TBA sixes have about point of premium, six and a half, about three points. So, you know, how do you think about relative value?
Jason Stewart: Hi, Thanks, good morning.
Brian Norris: ROE has become even more attractive than it would behoove us to increase our leverage in that scenario.
Speaker Change: So conceptual question here in terms of leverage and total return.
Jason Stewart: I think from my perspective, I would expect.
Brian Norris: But also what happens is that spreads are widening.
Jason Stewart: Our leverage to move higher when the return opportunities are the highest but it kind of it sounds like you're managing this to cover the dividend and mitigate risk is that am I thinking about that the right way I mean, otherwise would you not want to increase leverage when total return opportunities are the highest in reduce it the opposite way.
Brian Norris: Values, its likely declining in and leverages increasing on its own.
Brian Norris: So it's really just a kind of a it's a fine line, but its a balancing act between trying.
Brian Norris: Trying to take advantage of opportunities as they arise without taking.
Brian Norris: Taking risk.
Yeah, Hey, Jason It's Brian Yeah, I mean, it's it's certainly.
Brian Norris: <unk>.
Brian Norris: We're comfortable right and it's not all leverage either I mean because as.
Jason: You know every environment is different.
Brian Norris: Yeah, thanks, Jason. Um, you know, I think, you know, the spreads accurately kind of reflect that risk. And so, you know, we see notably wider spreads, nominal spreads in higher coupons. And we think that that will help kind of cushion any potential increases, you know, we did reduce our 30 or six and a half exposure during the quarter. And that's largely reflected, reflective of kind of what you're talking about there, you know, I think six and a half and higher are probably a bit more exposed than the rest of our coupon stack. So, you know, I think, you know, our allocation to specified pools certainly addresses that as well.
Speaker Change: As Brian mentioned, we are you know.
Jason: So it is challenging to kind of make a blanket statement like that you know I think you know old.
Speaker Change: More exposed to swap spreads now because spreads are very wide. So there's places to do that without necessarily increasing leverage.
Jason: Similarly when.
Jason: When spreads are.
Jason: The widest and <unk> are the most attractive that is also there is reasons for that right. There's there's heightened uncertainty heightened interest rate volatility.
Speaker Change: Yeah.
Speaker Change: Okay, and then just bring on your body.
Speaker Change: I missed part of this Levered gross are always was that based on a coupon or on a blended on a portfolio basis, you said low twenties, but I missed it was blended around it.
And so it's really just kind of managing.
Jason: Within that environment as it as it comes up you know I think you're right I mean as as.
Speaker Change: Higher on higher coupons.
Speaker Change: You know kind of probably five out and fix it fast.
Jason: Are we has become even more attractive than it.
Speaker Change: Okay and then so your point is with leverage where it is today in higher coupons given your swap book you feel comfortable on a carried basis, earning the dividend so I get that.
Jason: It would behoove us.
Jason: US to increase our leverage in that scenario.
Brian Norris: So we have a fair amount of, you know, low balance exposure in those coupons, as well as some of the other stories that help protect us. So, you know, we don't own any TBA at the quarter end. So, you know, I feel like we're pretty well protected, you know, to the extent that we do see notably lower rates, you know, our expectation is that at least our house view is that, you know, the Fed will cut a couple of times here at the end of 2025 and then a few more times in 2026. But really, I think we think that that will result in just a notably steeper curve and not necessarily a significant decline in 10 year, which is where kind of the mortgage rate is is keyed off of.
Jason: But also what happens is that spreads are widening.
Speaker Change: And then from a just another conceptual question from a total return versus carry standpoint.
Jason: Book value is likely declining and leverages increasing on its own.
Jason: So it's really just a kind of a it's a fine line, but its a balancing act between.
Speaker Change: Is it is it fair to say that you are leaning more towards carry rather than total return at this point is that the driving factor of how youre allocating.
Jason: Tried to take advantage of opportunities as they arise without taking.
Speaker Change: On the asset and the liability side besides.
Jason: Taking risk beyond where we are right.
Speaker Change: Yeah, I think that.
Jason: And it's not all leverage either I mean, because it's.
Speaker Change: Mortgage spreads.
Jason: Brian.
Speaker Change: Mortgages have performed pretty well you know certainly since since April.
Jason: We are.
Speaker Change: You know more exposed to swap spreads now because its far spreads are very wide. So there's places to do that without necessarily increasing leverage.
Speaker Change: And that's because interest rate volatility has trended lower during that time and so.
Speaker Change: At this point without banks coming back which.
Jason: Yeah.
Jason: Okay and then just finally on your Oh I missed part of it is levered gross how are we suppose that based on a coupon or on a blended on a portfolio basis, you said low twenties, but I missed it was blended are on it.
Speaker Change: Doesn't appear to be a real near term you bet.
Speaker Change: Think a notable tightening from here is limited so that also kind of plays into us.
Brian Norris: So, you know, we're not anticipating a significant decline in mortgage rates here. So we think that, you know, certainly, you know, five, five and a half and six are still. pretty well inflated, just given the preventive protection that we own in uptown. Yeah, I mean, we're certainly pretty comfortable. You know, I think, you know, we're about a half a turn lower than where we were during the first quarter. And the good news is that, you know, what spreads as wide as they are, particularly versus swaps, you know, gross ROEs are very attractive, you know, certainly, you know, able to cover the dividend.
Jason: Higher on higher coupons.
Speaker Change: Looking at this more as a carry trade at this point.
Jason: You know kind of probably find out and fix it fast.
Speaker Change: Until we get a little bit more clarity on the path of monetary policy and the impact of tariffs.
Jason: Okay and then so your point is with leverage where it is today and higher coupons given your swap book you feel comfortable on a carried basis, earning the dividend so I get that.
Speaker Change: Okay got it that makes sense alright, thanks, everybody appreciate it.
Jason: Thanks, Jason.
Speaker Change: Thank you gentlemen, now our last question today is from Eric Hagen with <unk>. Your line is now open.
Jason: And then from a just another conceptual question from a total return versus carry standpoint.
Jason: Hum.
Jason: Is it is it fair to say that you're leaning more towards carry rather than total return at this point is that the driving factor of how you're allocating.
Eric Hagen: Hey, Thanks, Good morning, actually I have a question on the sea MBS position I mean, how do you guys feel like see MBS spreads could behave when the fed cuts rates.
Jason: On the asset and the liability side.
Speaker Change: I think there's a lot of room for spreads to tighten that market anymore.
Jason: Yeah, I think that.
Speaker Change: And do you feel like conditions in the repo market are stable enough to handle a spread widening event, let's say MBS market. Thank you.
Jason: Mortgage spreads.
Jason: Mortgages have performed pretty well you know certainly since since April.
Jason: And that's because interest rate volatility has trended lower during that time and so at.
Speaker Change: Sure Yeah, I'll I'll take the last one first I think.
Speaker Change: Financing markets for that for agency MBS have been.
Jason: At this point without banks coming back which.
Speaker Change: Robust, even probably better than what we initially anticipated when we started investing in so we have no real concerns about.
Jason: It doesn't appear to be a real near term you bet.
Jason: A notable tightening from here is limited so that also kind of plays into us.
Speaker Change: That market deteriorating in.
Brian Norris: from an earnings perspective. And so we don't feel like we need to take leverage higher in order to meet kind of our goals from a return perspective. And so we're very comfortable with where we are right now. Certainly, you know, tail risk events have declined, or the potential for tail risk has declined over the course of the second quarter. So as we move into the third quarter, we still think that, you know, there are, there's still a fair amount of uncertainty about monetary policy. And ultimately, kind of, you know, tail risks are starting to kind of hit the economy here in the third quarter, more substantially, you know, the impact that that will have on on inflation and the direction of monetary policy as well.
Speaker Change: And a widening of that.
Jason: Looking at this more of a carry trade at this point.
Speaker Change: It did not in early April so.
Jason:
Jason: Until we get a little bit more clarity on the path of monetary policy and the impact of tariffs.
Speaker Change: So we feel very very comfortable about that and the first question agency MBS spreads you know I think.
Speaker Change: For the most part they kind of follow lower coupon agency rguest spreads but.
Jason: Okay got it that makes sense alright, thanks, everybody appreciate it.
Jason: Thanks, Jason.
With a lower beta so weak.
Speaker Change: Thank you gentlemen, now our last question today is from Eric Hagen with B T. I G. Your line is now open.
Speaker Change: We feel again pretty comfortable there, we do think that as the fed starts to cut and agency RBS.
Eric Hagen: Hey, Thanks, Good morning, actually I have a question on the sea MBS position I mean, how do you guys feel like see MBS spreads could behave when the fed cuts rates.
Speaker Change: The Titans.
Speaker Change: As a result of that that we will see agency MBS follow suit as well.
Speaker Change: There's a lot of room for spreads to tighten that market anymore, and do you feel like conditions in the repo market are stable enough to handle.
Speaker Change: Got it.
Speaker Change: Is it C M B S position of fully Levered position or is there any liquidity that you can draw from that position at this point.
Speaker Change: Spread widening event with the MBS market. Thank you.
Jason Weaver: So, you know, we're pretty comfortable with where we are, you know, as, you know, I think, you know, as the Fed starts to cut, and that, you know, that path becomes a bit more certain, you know, what we'll probably see is, is great fall will come down, mortgage spreads will tighten a little bit. And then that would provide kind of more of an environment that we could potentially take leverage a little bit higher. Thank you.
Speaker Change: Yeah, I mean, it's it's levered to the extent that the rest of our book.
Speaker Change: Sure Yeah, I'll I'll take the last one first I think.
Speaker Change: The financing market for that for agency seem yes has been.
Speaker Change: Okay.
Speaker Change: Hey, guys. Thank you.
Speaker Change: Robust, even probably better than what we initially anticipated when we started investing in so we have no real concerns about.
Speaker Change: Yep.
Speaker Change: Thank you and that was our last question I now would like to turn it back to management for any closing remarks.
Speaker Change: That market deteriorating in.
Speaker Change: Yeah, just thank everyone for joining us on the call and we look forward to talking to you again next quarter. Thanks.
Speaker Change: In a widening of that.
Speaker Change: It did not in early April so.
Unknown Executive: That's helpful.
Unknown Executive: Appreciate the time.
Speaker Change: So we feel very very comfortable about that and the first question agency MBS spreads you know I think for the most part they kind of follow lower coupon agency rguest spreads but.
Unknown Executive: Thank you.
Trevor Cranston: Our next question now is from Trevor Cranston with Citizens JMP and your line is now open. Hey, thanks. Good morning. You talked, you talked about the, the impact of swap spreads, obviously, in the second quarter. Could you give us an update on your, your sort of outlook for how you think swap spreads are likely to behave going forward? And, you know, how that relates to your comfort level around the mix of hedges you guys currently have in place?
Speaker Change: With a lower beta.
So we.
Speaker Change: We feel again pretty comfortable there we do think that you know at the fed.
Speaker Change: Start with HUD and agency RBS.
Speaker Change: The Titans.
Speaker Change: As a result of that that we will see agency MBS follow suit as well.
Speaker Change: Got it.
Speaker Change: Is it C M B S position of fully Levered position or is there any liquidity that you can draw from that position at this point.
Brian Norris: Yeah, hey, Trevor. It's Brian. Yeah, you know, I think Certainly, I mentioned, you know, we're kind of 80% notional on interest rate swaps relative to treasury futures. And I think that's reflective of kind of our stance on where, you know, swap spreads are right now. You know, I think that that, you know, certainly from an ROE perspective, it's very attractive to hedge with swaps at this point. And we think that the ultimate direction of swap spreads will be wider, which will be beneficial as well. And so, you know, we're probably at, you know, max kind of allocation to interest rate swaps.
Speaker Change: Yeah, I mean, it's it's levered to the extent that the rest of our book.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Yep.
Speaker Change: Thank you and that was our last question I now would like to turn it back to management for any closing remarks.
Speaker Change: Well yeah. It does.
Speaker Change: Thank everyone for joining us on the call and we look forward to talking again next quarter. Thanks.
Speaker Change: That concludes today's event. Thank you for your participation you may please disconnect at this time.
Brian Norris: And as we see the environment start to normalize, then we would move more into treasury futures. You know, what that ultimate level looks like is a bit uncertain at this point. But we kind of think that, you know, ROEs are very attractive now hedging swaps and the direction. The anticipated direction of SWOT spreads is wider. So that's also beneficial. So we're kind of at our max allocation to SWOTs. And then. As that changes, we would rotate a little bit. Got it. Okay, that's helpful. Thank you.
Doug Harter: Our next question now is from Doug Harter with UBS and your line is open. Hi, good morning. Thank you.
Bethany Marissa Lobel: It's Bethany Marissa Lobel on for Doug. I'm hoping you could speak to your views on the trajectory of current earnings and what it means for the dividend. Uh, yeah, like I said, you know, I mean, I think ROEs are very attractive at this at this moment. So, You know, we don't really anticipate, you know, I think, you know, mortgage spreads, generally speaking, have been wide for a while. And that's been very supportive of the, you know, the earnings of the portfolio. And there's a lot of different reasons for that. There's, you know, there's technical reasons, clearly, the Fed has been running off their portfolio for a couple of years now, banks have been notably quiet over the last couple of years as well.
Brian Norris: And so, you know, we don't anticipate that dynamic changing considerably, you know, banks will, will likely start to add here, but the Fed is going to continue to roll off. And money managers have been overweight for a while now as well. And so they're really dependent on on flows. So we kind of think that, you know, spreads should be relatively attractive for for a quite a quite a long period. And so we, you know, we anticipate, you know, like I said, leverage is where it needs to be in order to produce the earnings that we are comfortable with.
Bethany Marissa Lobel: And so we don't really anticipate that that changing near That's helpful. Thank you.
Jason Stewart: Our next question now is from Jason Stewart with Janie Montgomery Scott. Your line is open. All right, thanks. Good morning. So contextual question here in terms of leverage and total return. I think from my perspective, I would expect you know, leverage to move higher when the return opportunities are the highest. But it kind of sounds like you're managing this to cover the dividend and mitigate risk. Is that my thinking about that the right way? I mean, otherwise, would you not want to increase leverage when total return opportunities are the highest and reduce it the opposite way?
Brian Norris: Yeah, hey, Jason, it's Brian. Yeah, I mean, it's it's certainly You know, every environment is different. And so it's challenging to kind of make a blanket statement like that, you know, I think, you know, ultimately, when, when spreads are the widest, and ROEs are the most attractive, you know, that it's also there's reasons for that, right? There's heightened uncertainty, heightened interest rate volatility. And so it's really just kind of managing within that environment as it comes up. You know, I think you're right. You know, I mean, as ROEs become even more attractive, then, you know, it would us to increase our leverage in that scenario.
Brian Norris: But also what happens is, you know, as spreads are widening, you know, book value is likely declining and leverage is increasing on its own. So it's really just a kind of a, you know, it's a fine line, but it's a balancing act. You know, trying to take advantage of opportunities as they arise without, you know, taking risk beyond where we're comfortable. Right.
Brian Norris: And it's not all leverage either. I mean, because we, as Brian mentioned, we are, you know, more exposed to swap spreads now because swap spreads are very wide. So there's places to do that without necessarily increasing leverage. Yeah, okay.
Brian Norris: And then just Brian on your I missed part of this levered gross ROEs. Was that based on a coupon or on a blended on a portfolio basis? You said low 20s, but I missed if it was blended or on higher on higher coupons, you know, kind of probably five Okay, and then so your point is, you know, with leverage worded today, in higher coupons, given your swap book, you feel comfortable on a carry basis earning the dividends, I get that. And then from a you know, just another conceptual question from a total return versus carry standpoint.
Brian Norris: You know, is it is it fair to say that you're leaning more towards carry rather than total return at this point? Is that the driving factor of how you're allocating on the asset and the liability side, hedge side? Yeah, I think that, you know, mortgage spreads And mortgages have performed pretty well, you know, certainly since April. And that's because interest rate volatility has trended lower during that time. And so, you know, at this point, without banks coming back, which, you know, doesn't appear to be a real near term event, you know, I think notable tightening from here is limited.
Brian Norris: So that also kind of plays into us, you know, looking at this more as a carry trade at this point. Okay. you know, until we get a little bit more clarity on the path of monetary policy and the impact of tariffs. Okay, got it. That makes sense.
Jason Stewart: All right. Thanks, everybody. Appreciate it.
Unknown Executive: Thank you, gentlemen.
Eric Hagen: Now our last question today is from Eric Hagen with BTIG. Your line is now open. Hey, thanks. Good morning. I have a question on the CNBS position. I mean, how do you guys feel like CNBS spreads could behave when the Fed cuts rates? Do you think there's a lot of room for spreads to tighten in that market anymore? And do you feel like conditions in the repo market are stable enough to handle a spread widening event? The CNBS market? Thank you.
Brian Norris: Sure, yeah, I'll take the last one first. I think, you know, financing market for that for agency CMBS has been robust, even probably better than what we initially anticipated when we started investing. And so we have no real concerns about, you know, that market, you know, deteriorating in a widening event. It, you know, it did not in early April. So we feel very, very comfortable about that, you know, and the first question, agency CMBS spreads, you know, I think, you know, for the most part, they kind of follow lower coupon agency RBS spreads, but, you know, with a lower beta.
Brian Norris: So, you know, we feel again, pretty comfortable there, we do think that, you know, as the Fed starts to cut and agency RBS likely, you know, tightens, as a result of that, that we'll see agency CMBS fall suit as well. Got it.
Brian Norris: Is the CMBS position a fully levered position or is there any liquidity that you can draw from that position at this point? Uh, yeah, I mean, it's levered to the extent that the rest of our I appreciate you guys. Thank you.
Unknown Executive: As that was our last question, I now would like to turn it back to management for any closing remarks. Well, yeah, thank everyone for joining us on the call and we look forward to talking again next quarter.