Trevor Cranston: You’ve talked about the sort of new trading range you’re seeing for spreads. Can you maybe talk about sort of how much conviction you have in the upper range of spreads given the sort of weak demand picture, in particular for MBS at the moment. And if we were to see, for example, like another significant move higher in the 10-year, who do you think the buyer could be that steps into sort of contain additional widening? Thanks.
Peter Federico: Yes, I appreciate the question. And you’re right, I do have growing conviction that the upper end of the range can hold, but that doesn’t mean that it’s not going to be breached. What we’re seeing as you point out is that when — particularly — the events of the third quarter were not a mortgage-related event. It was a follow-on effect coming from all of the challenges that the treasury market was facing when it came to supply, when it came to runoff, when it came to bank constraints, government — potential government shutdown. There was a lot of challenges that the treasury market had to contend with. And those can come back, and we can have more of those challenges and that could lead to further weakness in Agency MBS.
So there’s certainly the possibility that mortgage spreads could widen from here. The flip side of that, though, is that I don’t think even a widening would be sustainable, meaning that when you think about the fact that the agency MBS security today post great financial crisis, has the full support of the US government. It just doesn’t make sense to me why that credit quality security is trading 200 basis points over the US Treasury. And I think over time, investors will rotate into that security, particularly on an unlevered basis and I think this gets to your question, the marginal demand for Agency MBS over the foreseeable future and particularly now with the 10-year being close to 5% and Agency MBS being close to 7%, the rotation in fixed income is going to come from unlevered money coming out of other fixed income products like investment-grade corporate debt that gives you a lower yield and more risk.
The rotation will come from corporates and the rotation will come from equities as we enter a period where the economy is slowing. And ultimately, that’s going to be the marginal demand for US treasuries and Agency MBS securities and agency MBS securities, in particular, will benefit that. The challenge is that does take time to happen. People have to physically move money from one security to another the agency MBS market is a little more difficult for investors to access. But ultimately, that’s why I think the upper end of the spread range will hold. And ultimately, I think at 200 basis points, that’s excessive incremental return for Agency MBS.
Trevor Cranston: Got it. Okay. That makes lot of sense. Thank you.
Peter Federico: Appreciate the question, Trevor.
Operator: Our next question will come from Bose George with KBW. You may now go ahead.
Bose George: Hi, everyone. Good morning.
Peter Federico: Good morning, Bose.
Bose George: Peter, thanks for the comments on the dividend. In terms of the ROE that you noted there, I mean, is it another way to kind of think about it is by look for us to look at the leverage on the common. So if you do the math of the 180 basis points or whatever the spread is, we should be thinking really about not the 7.9% at risk leverage, but sort of adding the leverage as given by our preferred and that kind of gets us to more like a higher high-teens ROE on your invested capital.
