Chris Kuehl: Yes. So, I mean just to reiterate Peter’s point, rolls are not a driving factor at this point. They are currently trading around flat to 10 basis points or so through repo depending on the coupon. But relative value across the coupon stack is still very much upward sloping with higher coupons trading at the wider spreads. But we will likely continue to maintain some exposure to the lowest coupons for diversification and liquidity and total return potential. To the extent that bond fund flows continue to accelerate, lower coupons, which are at tighter spreads can certainly gap much tighter from current levels as passive index-based funds need to add them. And most of the float is held by the Fed and tied up in bank HCM portfolios.
And moving up the stack, the belly coupons or the middle of the stack is also interesting. I mean it trades at marginally tighter spreads than production coupons, but it has a great convexity profile and very solid technical since they are out of the production window. And so we will likely continue to have exposure across the coupon stack, but with the distinct bias towards higher coupons.
Rick Shane: Got it. And with that in mind, when you look at the distribution of the coupon stack, if we move from a hawkish environment to either neutral or at some point, a more dovish environment, you are going to see significant divergence in terms of prepayment speeds. And again, this might €“ this isn’t tomorrow, this isn’t next month, but you are building a portfolio that’s got substantial durations, but how much are you thinking about the potential divergence and speeds as you look at some securities trading at significant discounts versus paying a premium up in the stack?
Chris Kuehl: Yes. It’s €“ just for a perspective, as of year-end, the weighted average coupon on our 30-year holdings was 4.2%. So, if you assume a note rate spread of, let’s just say, 80 basis points for round numbers, that’s a 5% note rate in a 6% primary rate market. And so from a prepaid risk perspective, it would take on our portfolio, on average, 150 basis point rally in primary rates from here for the portfolio to even have a 50 basis point incentive to refinance on average. Now, we do have holdings in 5.5s and 6s and a few 6.5s as well. And those positions, obviously, are more exposed and cuspy certainly to a 50 basis point rally from here, but they are priced for it. Higher coupons are trading at historically wide nominal spreads and we like that risk return trade-off.
In terms of prepayments, I think it is going to be interesting to see how some of these higher coupons perform over the next few months if we stay at these rate levels. I do think that it’s likely that we will see somewhat shifted refinancing response, flatter S-curve than what we experienced in 2020, in 2021. If house prices are down even modestly, call it, 3% to 5% over the next 12 months, that will have the effect of shifting the required incentive further out the curve for loans that were originated with high-70s LTVs that now find themselves in the low-80s and in need of mortgage insurance and also fall into higher costing buckets on the GSE LPA grids. And property inspection waivers are another factor that I think will be very different going forward into a more €“ a weaker housing outlook.
