Rob Colligan: Hey, and Doug, just to add a little color to that, you also asked about leverage. We do have the ability, if we see an opportunity, to take leverage up and then add to our capital base at a different time. I do think the market, given our performance, will give us opportunities to raise and grow. But sometimes it’s not exactly the right timing, right? Over time, you know, our price of book has gotten smaller, or you know, that gap has gotten smaller. The market is understanding our performance. We will have the ability to grow. But if it’s not exactly at the right time, we’ll temporarily take leverage up and backfill it with capital and be very judicious about that throughout the year and going forward.
Operator: Your next question will come from the line of Bose George with KBW. Please go ahead.
Bose George: Everyone, good morning. I just wanted to ask about hedging, just with the rotation more into pools versus TBAs. Does that change anything in terms of how you view the use of treasure use versus swaps or just thoughts on that?
Smriti Popenoe: Hi, Bose. Not really. We still see the capital cost of using interest rate swaps to be about twice as much as using [Indiscernible]. On a capital adjusted basis, those are really expensive hedges and they limit flexibility in times of stress. So our macro view really drives the selection of the hedges. Having us be in pools really doesn’t make a difference. Yes, you have a different type of financing that you’re hedging in the repo markets relative to the studio, but we still feel like we’re in the right hedge structure.
Bose George: So, okay, great. Thanks and then, Smriti, you mentioned the benefit of rates going down to your spread. Can you just go over that again, and is that a benefit to the economic return or to GAAP EPS, or yes, just kind of a little more detail and that would be great?
Smriti Popenoe: Yes, the long-term so, you know, how we think in total economic return [Technical Difficulty] right? And if you want to decompose that it’s really we think in terms of like the benefit to the financing cost. So all of the equal, if the financing costs go down by 25 basis points and nothing else changes, you’ll see the shape of the yield curve doesn’t change, you know, our investment mix doesn’t change. The positive benefit would be 2% in economic return. So you could just think of just financing costs going down is about 2% on the total economic return.
Bose George: Okay great thanks. And then just one last one just what are your expectations just for longer term mortgage spreads? You talked about spread tightening, just thoughts on where it goes and sort of the cadence?
Smriti Popenoe: Yes, look, I think there’s something very important happened in the fourth quarter, right? The Fed’s stance on monetary policy changed in December. You can call it a pivot, but once that happened, stocks, corporate bonds, and Agency MBS, they all benefit from that change in stance. So that’s the first one, right? Last year banks were a net seller, they sold about $250 billion in mortgages. The Fed net sold about $300 billion in mortgages. All of that is shifting because if the Fed now goes from being, you know, a tightening stance to a neutral stance and potentially even an easing stance, you have the possibility of banks starting to come back in, right? That’s already happened. If you looked at BofA’s results this past quarter, they were a net buyer of about $17 billion in mortgages.
All of that kind of shift the technicals in the mortgage market, right? and then you’ve also — we’ve also seen housing activity in terms of turnover is starting to pick back up again. We’ve seen that in existing home sales numbers. So turnover activity is starting to rise again. All of this to us points to you know equilibrium spreads more in sort of like the 100 to 140 basis point range over the seven-year treasury relative to the 140 to 190 basis points that we’re sitting in right now. Now, is it going to happen today, tomorrow? You know, and this all could happen, right, if you get a decline in front on yields, because the Fed is easing all of that. So we’re not saying it will happen. We’re saying there’s a real possibility that it could happen.
Those factors inflate now where the fundamentals and technicals have shifted. So the range of spread is actually lower, if you will, in the sense that instead of being from 140 to 190 basis points, maybe we’re sitting in the 120 to 160 basis points kind of range. So that’s kind of how we’re thinking about it. But in the long-term, as banks come back in, the CMO market gets active, the curve steepens. All of these things are supportive of tighter and lower spreads on an equilibrium basis.
Bose George: Okay, great. Thanks a lot.
Operator: Your next question comes from the line of Matthew Erdner with Jones Trading. Please go ahead.
Matthew Erdner: Hey, good morning, guys. Thanks for taking the question. Can you talk about the relative attractiveness of TBAs versus cash at the moment? And looking at the balance sheet you guys have a lower cash position since 2020, so can you talk about that and where you’ve been deploying that across the coupon stack?
Smriti Popenoe: Yes, I think so our TBAs versus pools, the relative attractiveness?
Matthew Erdner: Yes.
