Peter Federico: Sure.
Operator: And our next question will come from Eric Hagen with BTIG. Please go ahead with your question.
Peter Federico: Good morning, Eric.
Eric Hagen: Hey, thanks. Good morning, guys. Quick follow-up, I think, on the hedges. It looks like mortgages could be cheap versus interest rates, but also other fixed income assets like corporate bonds. And in the past, you guys have explored opportunities to extract value from those conditions. Is there any appetite to reintroduce those types of hedges, diversify your hedging?
Peter Federico: Yeah, Eric, there is. We actually have a small position on in that hedge right now that IG CDX exposure, it’s not particularly meaningful, it’s a little less than $500 million, but there could be an opportunity to do more of that, particularly given what Chris and Aaron both talked about, which is the fact that agencies really have widened considerably relative to other fixed income spread product. And that’s one of the things that makes us so compelling. That’s one of the reasons why we’ve reduced our non-Agency portfolio and increased our allocation to the Agency market. So, there could be some opportunities there.
Eric Hagen: Yes, that’s good to hear. With spreads being as wide as they are, there’s still being this uncertainty around the market with spreads already being this wide. Does that — you feel like that creates any limitations to operating with more leverage versus when spreads have been, call it, tighter than they are today? And on top of that, is there an estimate for how much liquidity or margin you might need to post for a given move in spreads?
Peter Federico: Sure. What I would say is I sort of take your point that we’re operating near, call it, the post-great financial wides and is there a risk that they could be materially wider. And one of the things that I take as a positive and this is why I refer to it sort of as a new range is emerging. I think when you go back and you look now from September to now we’re five, six, seven months, I think the market is establishing that the upper bound that we’ve experienced sort of a couple of times and we’re not far from it now is sufficient to attract fixed income buyers to the Agency MBS market. I think that’s the key. We’ve seen it both just broadly with fixed income, but in particular the rotation into Agency MBS. And we see it in the bond fund inflows.
They were close to $60 billion in January and February. They’ve slowed, but they’re still positive in March. That’s going to continue. I think that helps to stabilize spreads at these levels. I think that’s sufficient amount of incremental income. So, we have to position for that risk. We got to be careful about that. There’s no doubt in our liquidity position and in our leverage position. But when you — I’ll sort of answer your question about the capacity. We have about 25 basis points of price movement would be equal to, from a price sensitivity, around 12% of our (ph). Today or at the end of the quarter, we had $4.1 billion of liquidity or about 57% of our unencumbered. So, we have a lot of unencumbered capacity to withstand an adverse spread move.
And we also have a lot of unencumbered capacity to absorb higher leverage if we wanted to operate that. When you think about each turn of leverage is worth probably something in the neighborhood of around 6% of unencumbered capacity. So, we have — when you think about it from that perspective, we have a lot of capacity. If we were to operate — said another way, if we were to operate one turn higher in leverage, our unencumbered would only go down about 6%. We’d still have about 50% of capacity to withstand additional spread moves from here.
Eric Hagen: That is really helpful detail. Thank you, guys. Thank you very much.
Peter Federico: All righty.
Operator: And our last question will come from Vilas Abraham with UBS. Please go ahead with your question.
Vilas Abraham: Hey, everyone. Thanks for taking the question. It looks like specialness has all but disappeared. I just wanted to get your thoughts on your outlook there. And just on the quarter, in Q1, on the cadence of how you manage the TBA book, just curious there because you did see that the end of period was a bit lower than the average.
Peter Federico: Yes. So, your question — just to make sure I heard it correctly, your question was on TBA specialness in the size of the TBA book?
Vilas Abraham: Yes.
Peter Federico: Okay, great. Chris?
Chris Kuehl: So, rolls generally traded weaker in Q1, which really isn’t all that surprising given the lack of a going away bid, lower REMIC activity and what’s likely to be a pretty small short base in Agency MBS right now just given how wide spreads are relative to pretty much every other asset class. Implied financing rates will vary with (ph) and our rolls didn’t add much value versus repo in Q1. They traded fine. I think it’s likely that over the longer run, they’ll average around 5 basis points to 10 basis points through repo consistent with historical norms. And so, it’s likely we’ll continue to carry a significant TBA position, but smaller than what we’ve averaged over the last couple of years given current levels of specialness.
In the quarter, we had some good opportunities to add specified pools versus our TBA position. We added, as I mentioned, a little over $5 billion. Again in a quarter like the first — it was an incredibly volatile quarter. And so that tends to reduce investor activity and participation in origination list. And so, specified pool pay-ups generally traded weaker relative to their duration implied expected values. And so, we’re able to take advantage of that and add pools with good convexity characteristics versus TBA. The TBA position, the size of it, it’s an opportunistic position, difficult to project, but hopefully that gives you some insight into the trade-offs that we think about.
Vilas Abraham: That’s helpful. Thanks. And then, just one more. So, you guys are constructive on the return opportunity here. I think spreads could kind of remain at these levels for a little while, given you a sustained opportunity. And your stock multiple is favorable right now obviously above book. So, as you think about your appetite for just equity raising, how do you think about that here? And why not be more aggressive than less given that valuation of your stock is probably a little bit more unpredictable than where other dynamic spread and that kind of thing may go? So, just any thoughts there would be helpful.
Peter Federico: Yeah, you raise a good point and we have consistently traded at a premium to our book value. And I expect that to continue and I think it’s consistent with the environment that we’re in because it’s such a favorable earnings environment. If you think about our portfolio on a go-forward basis, if you’re buying into our portfolio today, you’re buying in at a fully mark-to-market portfolio at really attractive valuation levels. So, the earnings expectation of the portfolio on a go-forward basis is really strong. As I talked about, it’s mid-teens. It can support our dividend. And that’s obviously encouraging from a price-to-book perspective. The way I would describe our appetite for capital is just sort of going back to the principles that I laid out before.
We’re not trying to raise capital for the sake of being larger. We feel like we have great scale, great operating efficiency. We don’t want to lose our flexibility by being too large. But at the same time, we also want to be tactical with our use of the capital markets if we’re able to raise capital accretively and it’s consistent with our leverage — desired leverage profile and we actually used it in the context of managing our leverage in the first quarter. If it’s consistent with that, we will consider it. But there’s no need simply raise capital and buy assets for the sake of being larger. But we will certainly try to use it opportunistically as long as it’s accretive for our existing shareholders.
Vilas Abraham: Got it. Thank you.
