We have sold off over 80 basis points on the long end this year, and it’s been warranted, given the much stronger data that we’ve seen and the surprise uptick in inflation. But when we look out the horizon and think about longer term rates, five year rates, five years forward in treasuries is at $465, which we think looks perfectly reasonable. 10 year real rates are roughly 2.25%. And then globally, rates are quite competitive with the nominal 10 years, 150 basis points over the rest of the G7. So the rates market looks to have priced in the stronger growth and the higher inflation that we’ve recently seen. And another point to note with respect to rates markets relative to the Fed, for example, is the market is priced in a much higher neutral rate than the Fed’s long-run average.
We’re over 4% now when we look out the curve on very short rates. And so the market is reasonably well priced for uncertainty associated with the potential for longer or even hikes. And the way we would position ourselves if we did anticipate hikes is we maintain a conservative approach with respect to interest rate risk. We’re already at the lowest leverage we’ve been at since 2014, and so we feel good about that and we’re prepared for it. And the positive aspect of it, as I mentioned in our prepared remarks, is that we’re able to earn returns that support a 13% yield on book. And so we feel really good about it and we’re prepared for that type of uncertainty. Now, on the other hand, if all of a sudden higher rate and the trajectory of policy does create unintended consequences in interest rate sensitive sectors, for example, whether it’s regional banks or CRE and housing, the Fed does have to react in a way that’s much more accommodated much quicker.
We’re going to have plenty of opportunity to position the portfolio in a more aggressive fashion as that materializes. So we’re not worried about missing anything. Right now, our leverage is at where it’s at because candidly, the range of outcomes has increased to the intent of your question. And we need to get through this bout of volatility. And so we’re going to remain relatively conservative, but we’re prepared for downside and we can easily react if the policy becomes much more accommodative and all of sudden rates are improved quite a bit. Does that help?
Rick Shane: It does and I apologize for asking such an open-ended question but I really, I have to say enjoyed the answer it’s very helpful and thank you.
Operator: The next question is from Jason Weaver with Jones Trading.
Jason Weaver: Hey, good morning. I was wondering can you give us a ballpark on the incremental NIM you’re targeting for the whole loans going into the Onflow Bay securitizations? And what you think your capacity is there in what might be a weaker origination environment?
Mike Fania: Hey, Jason, this is Mike. When you say NIM you’re talking about some form of projected gain on sale in terms of where we are at –
Jason Weaver: If you had any internal target for that, yes.
Mike Fania: Yes, that’s not a metric that we’ve given out historically, but I will say in terms of when we’re actually pricing our loans, when we’re putting out our rate sheet, we are targeting close to mid-teens ROEs based upon retaining, call it 10% market value, and then maybe a small amount of recourse leverage. So you’re looking at 6% to 7% dedicated deployed capital on those whole loans at mid-teens ROEs in terms of where we’re setting the risk and the rate sheet.
David Finkelstein: Yes, Jason, just to add, as I talked about in my prepared comments, as we added OBX securities to the balance sheet, we reduced our third-party securities. The way Mike is able to organically create assets, it’s much cheaper than we think than third-party securities, and credit has done quite well, as I’m sure you’re aware. And so we’ve reduced that component, the third-party component of balance sheet to make room for what is candidly much more attractive with priced OBX securities, and we’ll continue to do that.
Jason Weaver: All right. Thank you. That’s helpful. And then David, maybe expanding on your earlier prepared remarks a little bit, what do you think about the impact of QT curtailment on your agency portfolio strategy? Does it change the approach at all?
David Finkelstein: It gives us more confidence in the near-term horizon, and it’s very incremental what the Fed would do, and I think everybody’s aware they’re likely to begin the taper either in May or in June, and they’ll reduce the runoff of their treasury portfolio by roughly 50%. And what that will do is it will help provide comfort to private market participants that there’s less treasury supply coming to the market. It’ll help banks in so far as deposit growth we will be able to be deployed into fixed income in terms of their liquidity, and ultimately that’ll help Agency MBS. Banks did reemerge as buyers, both Treasuries and Agency MBS in the first quarter, and we’re hopeful that will continue, and reduced Treasury supply from the Fed will help fixed income markets overall and indirectly the Agency MBS market.
But we don’t expect them to reduce their runoff in Agency MBS. We don’t expect them to buy Agency MBS in any event other than a crisis type period for the foreseeable future, but the reduced Treasury supply would be helpful for all fixed income markets.
Operator: Our next question is from Trevor Cranston with JMP Securities.
Trevor Cranston: Hi. Thanks. On the MSR business, as that continues to grow and gain scale, can you talk about how you would think about potentially bringing the servicing function in-house and kind of generally how you think about the trade-offs between using sub-services and having an in-house servicing function, right?
