Q2 2019 Earnings Call
Good morning, and welcome to the A.G. and see investment Corp second quarter.
2009, 10 shareholder call.
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I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.
Thank you Alison and thank you all for joining EG and see investment Corp. second quarter 2019 earnings call before we begin I'd like to review the Safe Harbor statement.
This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical fact constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
All such forward looking statements are intended to be subject to the safe Harbor protection provided by the Reform Act.
Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AG on C.
All forward looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.
Certain factors that could cause actual results to differ materially from those contained in the forward. Looking statements are included in the risk factors section of Agncs periodic reports filed with the Securities and Exchange Commission.
Copies are available on the Fccs website at SCC Dot Gov.
We disclaim any obligation to update our forward looking statements unless required by law.
An archive of this presentation will be available on our website and the telephone recording can be accessed through August eight by dialing 87734475 to nine.
Or for 12317, 008, and the conference I'd number is 1013287 too.
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Participants on today's call include Gary Kain, Chief Executive Officer, Bernie Bell, Senior Vice President and Chief Financial Officer.
Chris Kill Executive Vice President.
Aaron Pas senior Vice President and Peter Federico President and Chief operating officer with that I'll turn the call over to Gary Kain.
Thanks, Katie and thanks to all of you for your interest in agency.
The rapidly changing interest rate environment, what's the key theme that dominated financial markets during the second quarter.
In response to continued global economic weakness ongoing trade on certainty and declining inflation expectations, almost all major central banks signaled a willingness to lower short term interest rates and in some cases potentially add further monetary policy accommodation through quantitative easing or other measures.
In response, the entire interest rate complex rallied significantly with the one to three year part of the swap curve, leading the way.
Two year swap rates dropped 57 basis points during the quarter, while 10 year swaps declined 45 basis points.
The treasury curve underperformed the move in swaps, but the yield on the two year Treasury still rallied 51 basis points, while the 10 year fell 40.
To just over 2%.
Risk assets performed reasonably well as expectations for central bank accommodation outweighed the weakness on the global growth front.
During the second quarter credit spreads tightened modestly and equities added to the gains achieved in Q1.
Agency MBS spreads on the other hand widened as growing prepayment concerns and the inversion in the front end of the yield curve.
Pushed.
Premium risk premiums higher.
The wider agency MBS spreads drove the decline in our book value during the quarter and the negative 0.9% economic return.
Additionally, our net spread and dollar roll income continued to face headwinds from elevated government repo rates relative to LIBOR.
As we look ahead. However, there is reason for optimism on a number of fronts.
First and foremost as Chris will discuss shortly our portfolio is very well positioned to navigate todays elevated prepayment environment.
Secondly by significantly increasing our short term swap hedges late in Q2, we were essentially able to lock in most of the economic benefit we would have achieved from 100 or more basis points in future fed rate cuts.
Peter will expand on this shortly but this action should minimize the earnings impact of the inverted curve over the next several quarters.
Lastly, while the underperformance of government and agency repo has been a significant headwind for us over the last three quarters.
Our funding relative to Ly bore has begun to improve from late Q2 levels and we are hopeful this momentum can be sustained during the second half of the year as the fed lowers rates and ends its balance sheet run off.
Furthermore, if we take a step back and look at the Big picture. There is another reason to be optimistic.
While a lower interest rate higher prepayment environment presents some risks. It also provides us with a substantial opportunity to generate excess returns.
This is especially true for an investor like agency with a proven track record managing the intricacies of asset selection and falling rate environments.
To this point, although future performance is uncertain. It is worth noting that our best returns have historically occurred in low rate faster prepayment environments.
Lastly, before I turn the call over to Bernie I do want to quickly mentioned that our board of directors approved up to 1 billion in share repurchases.
Our prior repurchase authority expired in December of 2017.
Given the recent volatility in the stock we decided to put the program back in place as a precautionary measure. So we are in a position to react.
If stock if share repurchases are accretive to stockholders.
At this point I will ask Bernie to review our financial results for the second quarter.
Thank you Gary.
Turning to slide four we had a total comprehensive loss of 15 cents per share for the quarter.
Net spread and dollar roll income excluding catch up Bam.
Was 49 cents per share or three cents lower than the first quarter as continuing elevated repo funding cost and faster prepayment expectations adversely impacted our earnings.
Given the decline in rates are forward looking CPR increased to 12.4% as of the end of the second quarter from 10.5% last quarter.
And drove a 2% decline in our net spread and dollar roll income from the resulting increase in premium amortization expense.
As Chris will discuss shortly.
On the funding side, our repo cost was largely unchanged from the prior quarter.
The higher than expected funding costs were somewhat offset by better carry on our swap position, but still resulted in a one cents decline in net interest spread and dollar roll income.
Tangible net book value decreased 3.8% to $16.58 per share at the at the end of the quarter due to wider mortgage spreads partly offset by the continued outperformance of our specified pool holdings.
Including 50 cents of dividends declared per common share we had a negative economic return a 0.9% for the second quarter.
Thus far in July our current estimate is that.
Our tangible net book value has improved 2% to 3%.
We ended the second quarter at 9.8 times leverage.
With that I'll turn the call over to Chris to discuss the agency market. Thanks, Bernie Let's turn to slide six the second quarter was a volatile period for the rates markets tenure treasury yields initially traded higher hitting 2.6% in the second week of April only to then rallies 60 basis points to end the quarter at 2% given the sharp move lower in rates and growing prepayment concerns agency MBS underperformed, both swap and treasury hedges during the quarter.
Specified pools underperform to a lesser degree with the weighted average pay up on our portfolio, increasing just over five eights of a point during the second quarter.
In contrast, as Gary mentioned residential credit high yield.
And investment grade corporate debt performed well benefiting from the abrupt shift in fed tone and market expectations for easier monetary policy.
Turning to slide seven you can see that the investment portfolio increased to 104 billion as of June 28.
During the quarter, we continued to reposition the portfolio to optimize performance in today's faster prepayment environment. We sold approximately 8 billion relatively generic 30 year, four and 4.5% pools and TV versus adding predominantly lower coupon 30 year MBS.
In the current rate environment holding positions in TV, a 30 year, four and 4.5% MBS generates negligible income as evidenced by dollar roll price drops trading close to zero given the combination of faster prepayment expectations and the inversion in the front end of the yield curve.
Turning to slide eight we havent table, highlighting the importance of asset selection in the current environment here, we provide a more detailed breakdown of our specified pool holdings by coupon with our most recent CPR compared with where lesser quality TV a deliverable pools are currently prepaying.
In today's environment, 30 year fours, and four and a half so clearly the biggest area of concern and as you can see from the table. The vast majority of our higher coupon holdings are in pools with characteristics that significantly mitigate prepayment risk.
In the case of 30 year fours in four and a half 79 and 91% of our holdings, respectively are in high quality specified pools.
Our goal with specified collateral is to protect the portfolio in areas that are most exposed to prepayment risk with respect to lower coupons, the benefits of high quality specs or less compelling.
As prepayment differences, assuming you avoid the absolute worst pools are relatively small roll financing is also more attractive and lower production coupons.
In the months ahead asset selection will be critical to strong performance and we view the current environment as an opportunity to take advantage of the substantial prepayment risk premiums that are priced into the market with the goal of translating them into excess returns as we have been able to do in past low rate environments.
I'll now turn the call over to Aaron to discuss the non agency sector. Thanks, Chris Please turn to slide nine and I'll provide a quick update on our credit investments.
Our credit portfolio totaled 1.7 billion roughly 4% of equity at the end of the second quarter down marginally from the first quarter.
The composition of our part of the portfolio is largely constant that we did sell our remaining jumbo 2.0, and re performing loan backed AAA securities spreads for those two AAA sectors tightened meaningfully in Q2, despite increased convexity concerns related to the underlying cash flows.
Despite a move wider and credit spreads and risk assets in may fed rate cut expectations lifted risk assets throughout the remainder of the quarter and generally closed the quarter at or near their tights.
Mortgage rates fell further in Q2, and while we don't expect a continued decline to drive year over year home price appreciation back into the upper single digits. The decline will serve to ease some affordability issues and ultimately lead to a better backdrop for the housing market.
As it relates to mortgage credit the tightening in corporate credit and structured products spreads coupled with much lower mortgage rates resulted in a relatively favorable backdrop.
Faster prepayment expectations on certain securities as materially reduce the amount of credit risk embedded in these cash flows through reduction in expected defaults.
Providing a further tailwind to the improved macro environment.
While CRT and other mortgage credit spreads are relatively tight at this point they are understandably so.
Lastly, the tables at the bottom of the slide help illustrate the bias we have in residential mortgage credit towards that have lower priced homes over jumbo that I mentioned on last quarter's call.
As you can see our CRT exposure is almost all below investment grade and while we have made some investments in new issue securitizations backed by jumbo and conforming loans, we generally had an up in credit bias.
With that I'll turn the call over to Peter to discuss funding and risk management.
Thanks Aaron.
I'll start with a review of our financing activity on slide 10.
Our average repo funding cost in the second quarter was 2.62% down just two basis points from the prior quarter.
This minimal decline is in sharp contrast to other short term money market rates like three month, LIBOR, which experienced a much more significant decline.
The elevated repo rates are a continuation of the pressure that showed up late last year.
And that has persisted now through the first two quarters of this year.
On slide 11, we provide two graphs that highlight the divergence.
Between our repo cost and other key interest rates.
Unlike our repo funding. These other rates did re price during the quarter to reflect the increased probability that the fed will soon begin to lower the federal funds rate.
First the graph on the left shows our average repo cost each day.
As we discussed last quarter this relationship which turned negative earlier this year.
As an important driver of our aggregate cost of funds.
This negative trend continued in the second quarter as evidenced by the divergence between these two lines with three month LIBOR being about 15 basis points below our average repo rate.
At the end of the quarter.
Also noteworthy on this graph is the repo line itself, which clearly shows the unusual tightness in the repo market and the corresponding rate spikes that have occurred over each month end.
Looking ahead, I expect our repo funding levels to improve further.
As the fed cuts rates and eventually ends its balance sheet run off.
The graph on the right side of the slide shows the dramatic repricing that took place in the swap market over the quarter relative to our repo cost.
The bar show, our average repo cost followed by quarter end swap rates across the curve.
The two lines across the top shows the swap curve at year end and again at the end of the first quarter.
As you can see swap rates in the one to five year range experienced the most dramatic repricing.
With a big piece of that move occurring in June as the market aggressively reset to the new short term rate outlook.
As we show in the table at the bottom by quarter end, two and three year swap rates reflected at least three rate cuts.
With the pay fixed rate on shorter term swaps well below 2%.
The carry profile on these swaps turned meaningfully positive in the second quarter and provided us the opportunity to lock in more attractive funding levels.
To take advantage of this opportunity we significantly increased our position in one to three year swaps during the quarter.
Because many of these swaps were added in June when the rates were at or near their lowest point. The benefit of these new swaps will not be fully reflected in our cost of funds until the third quarter.
This benefit coupled with the improvement we expect in repo levels should put downward pressure on our cost of funds in the third quarter.
Slide 12 highlights these changes to our swap portfolio in greater detail.
In aggregate, we increased our hedge portfolio to 88 billion and our hedge ratio to 91% of funding liabilities.
The biggest change as I mentioned came in our swap book.
The quarter over quarter increase was driven by the addition of about $30 billion of one to three year swaps.
Additionally, given the five to 10 basis point tightening in swap spreads across the curve.
We opportunistically shifted a greater share of our hedges from short treasury positions to pay fixed swaps.
On slide 13, we show our duration gap and duration gap sensitivity.
Our duration gap only shortened by about a quarter of the year.
As essentially all of the incremental negative duration of the new swaps was offset by reductions in our intermediate and longer term treasury and swap hedges.
Today, our duration gap is again slightly positive as we continue to believe that mortgage spreads are biased to widen in a rally as prepayment concerns continue to rise.
Against this backdrop, we believe the small long duration position is desirable from a risk management perspective.
That said with the aggregate.
Duration of our asset portfolio now less than three years. We also added some incremental optional protection as we need to be mindful of the growing extension risk in our portfolio and in the mortgage market as a whole.
With that I'll turn the call back over to Gary.
Thanks, Peter and at this point, we'll open up the call to questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone fan.
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Our first question today will come from Bose George of KBW. Please go ahead.
Hi, guys good morning.
Actually first just wanted to check on the spread on new investments.
Now and I guess towards the end of the quarter as you were sort of capturing the benefit of the lower swap rates.
Given.
Obviously, the shape of the curve and.
The the fact that short rates are somewhat in flux and obviously given the fact that prepayments.
Variability is greater I think there is more uncertainty realistically around.
The investment spreads its hard to quote a specific number so to speak.
That said I mean, I think there.
90 basis points is still a reasonable kind of starting point.
For that and obviously, there's also the variability in LIBOR versus repo that that plays into that.
Okay, and then I mean to the extent that the fed cuts.
One or two would have a two or three times I guess given the positioning of your portfolio now does that change things in terms of return or.
Given how much you've swapped give kind of I guess locked in a lot of your returns.
Yes to your point, we have locked in.
A lot of that now importantly, we didn't get any of or we got very very little of that benefit in Q2.
Because we we increased the swap portfolio very late in the quarter.
And the compelling kind of driver there was the significant decline in short our swap rates.
So at this point to given our high swap hedge ratio only like a quarter of that benefit in theory will will factor and in terms of what the fed actually does.
Monetize the expectations for Red hat for rate hikes.
And so there is less variability and for us in terms of what the fed actually does and importantly, exactly when they they pull the trigger on on the eases. So we feel good about that and felt like that was an opportunity.
You know that that we were supposed to take advantage of.
Okay. Thanks, and then just one on leverage you leverage ticked up a little bit mostly I guess on them and the mark to market can you just give us an just updated thoughts on leverage where we can see that in the back half of the year and into next year.
Yeah, I think at this point, we've talked a lot about leverage over the last couple of years I think our leverage at this point is kind of within the range that we would.
Likely expect it to be over.
You know, let's say over the next year.
I mean, certainly it could tick up from here I mean, I think we'd be very comfortable with leverage being in the nine and a half to 10 and a half kind of region.
On an ongoing basis, and we'd be comfortable with that outside of that range for a short period of time.
But I think at this point.
Most of the adjustment to leverage.
You know has been implemented so to speak.
Okay, great. Thanks.
Thank you.
You know being in a lower volatility environment and kind of a greater expectation of being able to achieve the kind of your your dividend yield as kind of an economic return obviously the world has gone through a bit of a change or the environment has gone through a bit of a change in the last quarter. So just wondering if you could update kind of on your thoughts around around that comment and kind of the achieve ability of economic returns.
So very good question and.
You know clearly as I said in my opening remarks.
The the mortgage market has priced in greater prepayment risk premiums, we have sort of a non standard yield curve at this point, but the yield curve is also a a temporary situation.
In that the curve is pricing in the expectation of relatively near term.
Yes fad.
Rate cuts, so I think that will.
Yeah, I think the the yield curve.
Component of uncertainty hopefully will be.
A lot of that will be kind of rectified over the remainder of this year and to the earlier question I think weve been able to largely insulate our portfolio going forward from a fair amount of the uncertainty there. So that leaves the the other kind of piece being the prepayment piece in terms of variability to our kind of true economic returns and that's an area that we feel really good about so what I had said last quarter was I thought we were looking at a world where potential returns were lower but the probability of kind of being able to reach you achieve that was higher we're I mean, if you look at our history, we seem to be entering a world where.
A lower rate faster prepayment environment, where if you look at our economic returns.
Overall, our over 10 year history, those have been the periods of our best realized returns and so honestly I do feel that the the prepayment risk quotient clearly has gone up.
I think that where we're not quite sure how this.
How quickly.
The fed will cut rates and to what extent, but I think what's really important and most important to not getting a negative surprise on the on the rate front is the inflation outlook and I think what I really think has solidified over the course of this year.
More so than a few rate cuts is that the the global.
Appreciation for the fact that inflation is not going to be a problem on the high side I think hey, so solidified that but a significant up rate shock.
Is highly unlikely and that makes managing the portfolio.
Much easier not to say that we have put on some.
Option hedges and we do need to be cognizant that rates can always go up but I think practically speaking the inflation picture is very benign. So that leaves a question about lower rates and prepayments and that's just something we feel very comfortable dealing with so big picture, yes, more volatility but also.
We we may be adding to an environment that historically has been very favorable for us.
I guess just on that could you just talk about kind of how the portfolio's position from.
A risk perspective from either you know kind of a further decline in rates or kind of a surprise increase in rates and kind of the relative risk positioning of those yeah.
Two scenarios.
Sure I mean, if you look at.
If you look at slide 13, it shows our duration gap sensitivity.
At the end of the quarter as Peter mentioned, our duration gap so little longer at this point, even though rates really haven't changed that much but realistically there is very variability in.
In the duration gap.
The other thing that we evaluate is what is likely to happen to spreads. If we were to get a 50 basis point rally or if we were to get a 50 basis point sell off I think clearly.
The the rally scenario, a further decline would put pressure on mortgage spreads relative to a 50 basis point increase which would.
Take which would alleviate basically all of the prepayment uncertainty.
Still a material possibility so big picture our bias is to protect.
A little more against the downside also keep in mind that.
It also matters, where your hedges are and not just the duration gap and I think it's important as we just talked about both on the in our prepared remarks and in answers to the prior questions. Most of our negative duration now is coming in the very front end of the curve.
Where what we've done is we've locked in kind of expectations for the fed funds rate over the next couple of years. So if it turns out that the fed cuts rates, a little faster than that we're likely going to end up with a steeper yield curve.
And and that's also a favorable situation for us. So it's not just the duration gap. It's also a function of where your hedges and I think with our hedges being in the front end of the curve.
Then that reduces kind of risk in terms of in a big rally.
Thanks, Gary.
Thank you.
Our next question will come from Trevor Cranston JMP Securities.
Please go ahead.
Hey, thanks.
I have a follow up related to the comments you just made Gary about.
The risk of rates going either down or up.
I guess first.
You made the comment that if rates were to say increased 50 basis points. It would alleviate a lot of the prepaid concerns and presumably be a positive for spreads.
I was wondering if you could comment on how you think your spec pools, specifically would perform.
And that type of environment, given given how far pay ups have increased.
And then second part of the question would be.
If we did get an incremental move down in rates.
If you guys could maybe provide some color on.
How much how much incrementally of the mortgage market would be refinancing will say rates rallied another 50, Bips and if you think.
The magnitude of widening in that scenario would be similar to what we got this quarter or maybe a little bit less given how far reaching already come down. Thanks.
Sure good questions. So first off if we did get the if 10, if the 10 year backed up to the 2.5% area.
Yes specified pay ups will drop of course, we build in incremental duration for specified pools.
But how would they would they underperform TB A's in that scenario, yes, they probably would.
But it would be sort of a.
It would be probably a little less of a reversal.
To what we have seen in other words, I think they'd still be valued better than they were the last time, we were at 250 because of both the scarcity of them and the kind of recent realization of how valuable they are in in certain coupons. So I think that's the best way to think about that I'll, let Chris talk to you about the the second part of your question.
Hey, Trevor so the the only thing I'd add to what Gary said about spec pools is that.
I think they would be more risk in the up 50 scenario to the extent that they were really overvalued, while they've done well year to date I'd say they are appropriately valued for the current environment. So.
The other thing I'd say is that a lot of our specified pool positions are lower loan balance pools, which.
Get a lot of their convexity benefit from call protection, but they also generally have faster turnover as well and so in the up rate scenarios that can help as well, but back to you know to your question on.
Just the percentage of the universe, that's refinance will today.
With a 4% primary mortgage rate, it's about 30%.
Down 25 that number goes to about 40 call. It mid Fortys and then down 50, it's probably mid Sixtys.
Percent of universe that would be exposed to.
A 50 basis point incentive to refinance.
And then in terms of I think the the last part of your question was around.
What kind of widening could we expect in mortgages.
And I think it's going to be very coupon dependent.
But I think it's logical to assume something on the order of.
10 to 15 basis points and.
In something like 50 basis point move, but it's going to depend on a lot of other factors curve and other things.
But again, it's going to be coupon.
Specific.
And.
So its hard just to throw a number out there.
Correct.
Okay I appreciate the comments thank you.
The next question will come from Rick Shane of JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions and now.
Looking at Peter slides on retail and live or.
It's clear and we've gone back and looked at this it's clear that there is some sort of beta or lag in those move or low beta or some sort of lagging this movement, but we'll look at the current trends. It does look like something structurally has shifted.
Do you think that will just be in a longer lag or do you think that theres behavior, that's going on it's going to cause that spread to be more persistent.
Yes, Thats a great question and.
I think you're right two to an extent too and I think thats really the fundamental thing thats going on is why the fed ultimately has changed its balance sheet runoff, which is understanding now better today that essentially the entire system needs more reserves and so it's ending its balance sheet run off to in a sense.
Limit the drain of supply out of the system and its making the system I think just tighter than it should otherwise be so thats one of the sort of macro factors that I think the fed now understand and it's one of the reasons why.
I think it is likely that the fed will introduce some sort of repo facility between now and the ended the year to help address this sort of.
Structural issue.
The other is that we have a lot of variability in treasury bills supply now the debt ceiling is another example of that where between now and the ended the year, we likely going to have about $200 billion worth of Treasury bills supply.
Which is going to put some incremental pressure on on all of the money market rates and then on repo level. So those are sort of the macro factors that said.
I do believe that this trend is not going to deteriorate further and I do believe over the longer term it is going to improve again.
Ill give you an example during the quarter. If you just looked at our three months, where you could fund three month repo each day versus the prevailing.
Three month LIBOR rate.
That relationship deteriorated by about 15 basis points, we started the quarter funding about five or six basis points through repo and ended the quarter at about 10, or so above repo. So there was about a 16 or 17 basis points deterioration and that shows up in that graph that I put on that page as well, but since quarter end, we've seen about a 10 basis point improvement in today. For example, if we were to go out and borrow in three months.
Repo, we wouldn't be doing so at around the three month LIBOR level. So.
There's a lot of variability there is a lot of big forces going on right now, but I do think we're trending in the right direction, but a lot can happen.
And it's going to be variable between now and ended the year.
Got it that's very helpful. Thank you sure good question.
And the next question will come from Jim Young with West family investments. Please go ahead.
Yes, hi, good little bit more of a macro question, but.
When you look at and thinking about your liquidity as being added into the overall.
For me again.
And would likely to cut rates next week and you've got.
Maybe we are dragging on occasion.
Good morning, saying, they're going to continue to lower rates when my question overall.
When you think about it over the next couple of years, what implications and ramifications have.
For the global economy or.
Overall, and address and Matt just alluding to recurring too.
Mortgage investments thanks, Peter.
Sure and good question I think we sometimes like.
Just take each week or months, new incremental news and and just build it and to kind of.
You know for the overall picture, but I think it is important sometimes to take a step back and say well what's going on.
I think there are two things one is that.
Inflation expectations, obviously have.
Have disappointed central bankers.
And honestly despite the actions that are likely to be taken this year I don't see that changing.
I think we're in a different environment and you know Ed hat globalization technology. There is a lot of factors.
That are going to make inflation really hard to come by and if we couldn't generate inflation with very low on employment and very accommodative monetary policy over the last five years.
It's it's hard to see that happening.
Over the next five so I think what you had I think what you're going to see is that we are in this very low rate environment for a while and central bankers are going to continue to be fighting.
What I think is a losing battle against inflation.
And so what is that mean I think first what it means is that when you when you look at.
The asset prices in the us. So they are going to continue to be supported they are going to be can supported because theres nothing to buy outside of the U.S., especially it's obvious obviously on the fixed income side.
Is the most striking.
Example of that but we when you think about some of the things like increased debt issuance in the United States, that's nothing compared to the lack of any positive returning safe instrument outside of the us So I think again financial instruments.
Are going to have a sort of continued support like what they've seen this quarter, where the assumption is the unit where central banks are supporting.
Risk, taking so to speak or almost forcing it that said we're in a long run you know we this expansion has gone on a long time and if you look outside of the US it appears to be ending and I don't think the central bank actions are going to change that.
And I don't and I also don't think its just.
China trade deal if it were to happen.
Changes that so I do think we are looking at a weaker economic environment.
At some point.
I mean, we've seen some weakness, but I think it gets much more noticeable maybe a year to two years from now.
And Unfortunately, I think central banks are sort of out of ammunition.
So when that occurs I think what you'll notice.
Is maybe not the sort of verity of it.
Early on but maybe its longevity.
I think that might be the difference going forward, but hopefully that answers. Your question I know, it's a you know.
It's a it's a topic we could talk about for a long time.
Okay. Thank you very much.
Our last question today will come from Matthew Howlett of Nomura. Please go ahead.
Thanks for taking my question and there was a lot of sort of moving parts with the with the NIM and looking just to Threeq and we are going to get some benefit clearly the funding side.
Yes, I mean, assuming that you've sort of model you account for the prepayments a little bit differently than some of the others is there sort of any color you can give us in terms of the trend in margin in threeq here with everything all the moving parts.
On prepayment outcomes arent likely to be a big driver on the other hand interest rate movements can change our our projected prepayment speed.
So thats kind of that variable on the funding side.
We expect.
Where we are hopeful that.
We are turning the corner I think we've talked about that but most importantly really comes from the other driver of cost of funds, which is the swap portfolio and the ability in a sense to lock in significant positive carry there and so that should be a tailwind in.
As you know.
Going forward that in the absence of something else kind of.
Negatively impacting things.
That tailwind should should help us.
Got it and then let me ask you sort of mentioned that.
You don't want to get pinned down to the 90 basis points, but let me ask it let me ask you. This.
What scenario could that that spread go lower to the new investments in other words, you think is in mortgages will widen if rates go down I guess, what's the scenario where that the spread even goes below 90 or goes a lot lower given sanofi on what the fed is going to increase rates. I mean does the tenure goes to 150 is that going to jeopardize that investment spread or do you think we sort of bottomed out here at at 90 Bips.
I think a further rally in rates won't.
Won't hurt that spread as Weve said I think mortgage spreads widened.
To the extent that the feds lowering interest rates would probably get rid of this inversion.
So I don't think it occurs there I think its mortgage spreads tightening in it with long rates sort of backing up a bit and prepayment fears sort of getting priced out of the market.
I mean again, just one of the things that one of the reasons why we.
We have historically done well in lower rate faster prepayment environments is because.
As a agency mortgage investor we get paid to take prepayment risk. That's our biggest source of income in a sense and so in an environment like today and in an environment where rates are continuing to fall the amount that we're going to get paid to take prepayment risk is going to continue to go up and as long as we make good decisions around what where we take that risk than our spread opportunities are probably larger again, I think going back to kind of the 250 everything flat world that we were looking at.
Three to six months ago that was an environment, where we were in a very we were in a low spread.
Environment and.
That's kind of if we went back there and we did and we didn't see an improvement in the funding front. Then then you could see.
The sub 90 type spreads.
These lessons and just last thing just any quick comments on the single security to going live I mean, you've talked a lot about prepayments just.
Any overall comments on that and the impact if any to agency.
I would say the end of the single security really was largely a non event.
Now it's interesting when you talk to people.
You, sometimes don't hear that because TB a quality has worsened.
Over the course of the end of last year and the beginning of this year, but those those things had happened to ready the other kind of material issue that has impacted kind of the way dollar rolls have traded and.
And.
The TB performance price performance.
Is the fact that the fed hasnt been buying mortgages, so that the tradable supply of kind of.
Of weak pools has been much greater than it was in in prior rallies. So some people.
You know will logically given the fact that this just happened a few months ago.
Will attribute some of those dynamics to the single security.
Big picture.
Friday prepayments have been a little faster than fannies or a couple little things to keep track of but the bulk of what we've seen in the market.
What's going to occur either way and it was a function of these other factors.
Not the single security so from our perspective.
Single security are you MBS.
It is not been a big picture factor.
And isn't likely to be going forward.
Really appreciate comments thank you.
Thank you.
We have now completed the question and answer session I'd like to turn the call back over to Gary Kain for concluding remarks.
I'd like to thank everyone for their participation in our Q2 earnings call and we look forward to speaking to you next quarter.
The conference has now concluded thank you for attending today's presentation.
You may now disconnect.