But it would have a long-term stabilizing effect on the mortgage market if they did choose a cap structure like that, they could still achieve their stated purpose of allowing mortgages to run off and be redeployed into treasuries. And ultimately, over a very long time horizon, they would be able to achieve their objective of having primarily treasuries. But this is – that would be a sort of transfer of mortgages to treasuries that would occur over multiple years. If they use a lower cap to allow that to happen, that could be a positive development for mortgages. We will have to wait and see how the Fed handles that. I don’t think we are going to get that level of detail right now, at this first initial move, but I think we will get that over time.
Jason Weaver: Alright. Thank you for that.
Peter Federico: Sure.
Operator: Our next question comes from the line of Merrill Ross with Compass Point. Please go ahead.
Merrill Ross: Good morning and thank you. You might not answer this, given what you have just said. But did you add to the portfolio into April’s volatility, particularly in the 5.5 and what is the current leverage given the decline – the 8% decline that Bernie referred to in book value?
Peter Federico: I am sorry, I didn’t hear this last part. We have a little bit of a bad connection. I think the first part was, did we add to the portfolio in April? What was the second?
Merrill Ross: The current leverage.
Peter Federico: Current leverage, yes, Chris could talk a little bit about mortgages in the current environment and where he is adding and seeing value. With respect to current leverage, it’s a little higher today. It’s actually around 7.4 given the backup in net asset value and portfolio activity to-date. Anything that’s particular about today’s market?
Chris Kuehl: Yes. With respect to – we haven’t had any material changes in the size of the portfolio quarter-to-date. With respect to relative value within the agency space, as I mentioned earlier, higher coupons significantly outperformed lower coupons during the quarter, in part, given concerns around bank sales and lower coupons related to some M&A balance sheet restructuring announcements that were made. But also in response to very favorable prepayment reports that showed considerably flatter refi responses in higher coupons compared with what we saw during the last refi wave during COVID with similar incentives to refinance. And so up in coupon benefited from that as well. And despite the higher coupons outperforming, I would say relative value is still generally upward sloping across the coupon stack.
Merrill Ross: Okay. I have one other unrelated question, if you don’t mind.
Peter Federico: Sure.
Merrill Ross: The Series C that’s callable. Wouldn’t you use some of your liquidity? I mean maybe on the margin, it’s not really material to you? I am just curious.
Peter Federico: Appreciate that question. We are constantly evaluating our capital structure. And you are right, that series is callable. But as I mentioned, even though it has reset higher and the coupon on that one is a little, 10.7%. It is certainly materially higher than our other fixed rate preferreds. Even at 10.7%, given where the returns are on our portfolio, that is still a lot of value that is accruing to the benefit of our common shareholders. So, we will look for always as we do, look for opportunities to optimize that cost of our capital. The preferred market has been relatively quiet right now. So, there is not a lot of activity going on in part because of the rate uncertainty. But I expect that to change over the remainder of the year, and there might be opportunities in the preferred market as we move forward. So, we will continue to evaluate that. But it does generate incremental value right now for our common shareholders.
Merrill Ross: I believe MSA refinanced a series at 9%, I am just curious, not that, that seems like a really huge relative value trade from 10% to 9%, but…
Peter Federico: And the other important part – the other important point about the floating rate preferred obviously is your – we are likely at the peak of that coupon. And obviously, coupon can change very, very rapidly. So, there is lot of option value in those series right now. The Fed obviously, a couple of quarters or a couple of months of positive inflation data, and the forward curve will be materially downward sloping and those coupons could look very attractive in a year or so.
Merrill Ross: Great. Thank you.
Peter Federico: Sure. I appreciate your question.
Operator: And our last question comes from the line of Eric Hagen with BTIG. Please go ahead.
Jake Katsikas: Good morning. This is actually Jake Katsikas on for Eric. Appreciate you guys taking my questions. First one, could you flesh out a little bit the outlook you have for prepayment speeds including how much room you might see for your forecast to change with mortgage rates kind of coming up recently. Do you think faster speeds would be a benefit or maybe a headwind on earnings or possible economic return? Thanks.
Peter Federico: Sure. Chris, do you want to talk about prepayment?
Chris Kuehl: Given our coupon composition, slower speeds, the prepay reports over the last two months have been some of the more interesting reports than we have had – that we have had over the last couple of years after spending December, sort of through the December mid-February timeframe. It’s sort of local lows and mortgage rates with rates around 6.5% to 6.75% after spending the second quarter and third quarter last year, originating pools with 7.5% to 8% note rates. And so we got a lot of insight into what the refi response was going to look like on a sizable population of loans with, call it, 75 basis points to 100 basis points of incentive to refinance. And what we learned was that speeds were quite a bit slower than what many had feared and slower than what we observed during COVID on loans with similar incentives to refinance.
And so this, as I mentioned, has provided a tailwind to higher coupons. It’s interesting. I think there are a number of factors that likely contributed to the slower response than what we saw during the last refi wave. So, slower speeds are favorable for our position. With respect to the lowest coupons, which are a very small percentage of our holdings, even there, I would say, turnover speeds have been over the last year, a little better or a little faster than what many had feared. So, hopefully, that gives you some insight into our outlook on speeds.
