Orchid Island Capital, Inc. (NYSE:ORC) Q1 2024 Earnings Call Transcript

Orchid Island Capital, Inc. (NYSE:ORC) Q1 2024 Earnings Call Transcript April 26, 2024

Orchid Island Capital, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the First Quarter 2024 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, April 26, 2024. At this time, the Company would like to remind the listeners that, statements made during today’s conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the management’s good faith, belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements.

Important factors that could cause such differences are described in the Company’s filings with the Securities and Exchange Commission including the Company’s most recent Annual Report on Form 10-K. The Company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. Now, I would like to turn the conference call over to the Company’s Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Robert Cauley: Thank you, operator, and good morning. I hope everybody’s had a chance to download the deck. As usual, I’ll be the centerpiece of today’s discussion. I’ll be walking you through the deck and then at the end of that, we’ll have a Q&A session. As usual, I’ll just give you a quick rundown of the agenda. First thing, we’ll do is go over our results for the quarter then we’ll talk about the market developments that shaped our results and provide our outlook for the future, and then we’ll dig into the details of the portfolio and our hedge position. Turning to Slide 5. For the first quarter of 2024, our net income was $0.38 versus $0.52 in Q4 of last year. Our book value increased slightly by $0.02 over the last quarter.

Total return was 4.18% versus 6.05% in Q4 and the dividend was unchanged for the quarter. The average MBS portfolio appears to have declined on Slide 6, but that’s somewhat misleading because in the fourth quarter of last year, early in the quarter, we had to delever when rates were peaking, so that calculation is just a simple average of the beginning and ending. It makes it look like was hard. But if you look at where we were at the end of Q4 versus where we were at the end of Q1, it was not a meaningful change. Our leverage increased slightly from 6.7 to 7. Speeds increased slightly, that’s probably more seasonal and just aging of the portfolio slightly. And then liquidity, slightly improved over where it was at the end of fourth quarter.

But again, right in the middle of our kind of target range. Slide 7 provides just our preliminary balance sheet income statement. We would expect to release our 10-Q sometime today, so you’ll get the final numbers. We do not expect these to change. With respect to Slide 8, this is what we call our adjusted economic income. I just kind of like to do kind of two things here. One is just walk you through these numbers on the top of the page and just show you where they come from and then in the bottom just show you on a per share basis and make a couple of comments about the dividend. With respect to the top, the interest income number that comes right off the balance sheet. That’s just interest or the income statement rather. That’s a GAAP number.

It is representative of the number we would report for tax. If you’re thinking in terms of our tax win coming with drives the dividend, that number is representative, although not exactly the same. We do calculate interest income slightly different for tax, but again, that’s representative. The next number is just the accretion or premium amortization. It’s down slightly this quarter, just reflecting the fact that, it’s calculated based on beginning of period prices and they’ve been marked up at the end of Q4. The discount was a little less than it had been. Again, this number is not exactly what we report for tax, but it is representative. The next item is interest expense. Not only is that a GAAP number, but that’s actual dollars paid in the interest expense.

That would be the same for tax. And then finally, the last two, the gain of the hedge number, that is a very close proxy to what we report for tax. That’s basically taking a change in the open interest of our hedge positions and allocating it, between the portion that pertains to the current period versus all future periods. And that’s similar to the process you would use for tax. That number is also representative. And then finally, just expenses, that’s just right off the income statement. That again is very close to tax. That’s kind of the long and the short of it. This number is a very good approximation of what we would call taxable income. It’s not exact, but it is at least representative. Just on a per share basis, you can see below $0.47 and $0.50 the last quarter above the dividend.

It appears that we’re comfortably earning the dividend and then we will reassess as we always do as we move through the year to see, if there’s a need for an adjustment to the dividend, kind of thinking about doing that after the second quarter as of now, so we’ll see. But for now, you never know, markets can change very dramatically. When we think of dividend policy, you’ve got to look backward, but you also have to look forward. We’ll be doing that, as I said in the near future. Turning now to market developments. The top left is an interesting slide. I want to kind of walk you through this. This is a Q1 discussion. The book end dates would be 12/31 and 3/31 and those are the two bottom numbers, but we’ve added these extra two just to give you some context.

The orange line represents the peak in rates last October. If you see what happened between then and the end of the year, we had this strong rally and we all know why that was. It appeared the Fed was about to pivot and the market rallied. Since then, we’ve kind of retraced. The green line is how we were at the end of the quarter and then the blue line is, where we were last Friday. We’ve been retracing the rally since that we saw last November, December. We, at Orchid, did thought that that rally was overdone and our hedging strategy and positioning reflected that. Again, if you look on the bottom, it’s just the inversion of the curve. As you can see, the most recent data point last Friday, we are off the lows, intending in a steepening direction, but still inverted and still fairly well inverted.

Onto the next Slide. This is just the current coupon spread. A couple of comments I want to make. If you look at where we were at the end of the quarter, there’s a range that had been in place since the end of really 2021, early mid-22 at least, which is when we were in the tightening cycle. We were kind of at the local lows. Mortgages did quite well in the first quarter. Since then, we’ve backed off some, but we’re still quite away from where we were last fall. Not quite as tight as we were, but still a long way from the wise. But then on a historical basis, if you look back since this data goes all the way back to 2010, we are still wide by historical standards. On the bottom left, you just see the absolute price change and these various coupons.

These prices, of course, have been normalized to 100 going back to the beginning of the year. If you look at where we were at the end of the quarter, they were all down in absolute terms, but most mortgages have done fairly well on a relative basis, relative to hedges. Since quarter end, they’ve widened. They’ve done in absolute price, but also versus hedges. With respect to roles, most roles are negative except for the production coupons. That, as you can see, has been the case for quite a long time. Turning to Slide 12 now. This is vol, obviously, volatility is a very important driver of mortgage performance. I just want to point out, if you look at where we were at the end of the year versus the end of the quarter, volatility came off meaningfully.

That’s very supportive of mortgage performance. But it’s not the only thing that helped. During the first quarter, we also are aware that it was quite a bit of inflows into money manager funds, presumably out of equities. Since you had inflows of cash, banks getting reengaged and ball off. It made for a good quarter. Today, it’s kind of reversed, but we’re still not in a bad place. If you look at where vol is on a very long-term historical basis, again going back 10 years, it’s still elevated. We’re well off the local highs, but on a historical basis, it’s still elevated. Slide 13 is just prepayment activity. It really hasn’t changed. The red line on the top left is the average rate. It’s probably up a little bit since then, but it’s still very, very elevated and the refi index is at extremely low levels going all the way back to the 90s.

With respect to primary secondary spreads, still somewhat elevated and still volatile. We still see volatility in there. That’s really driven more just by the originator community and their business decisions and where they want to try to price mortgages. We’ve had a lot of volatility in rates and so that’s somewhat probably is captured in these spreads. And then, the final slide before we move on to the portfolio, I’ll call this food for thought. Just threw this in there and I think it’s worthy of some discussion. I don’t want to draw any too strong of conclusions here. But what you see here, the top-line is goes back really to the end of the financial crisis. This is GDP, U.S. GDP just in dollar terms. Nominal dollar terms, not adjusted for inflation.

As you can see, it’s been increasing at an amazingly steady rate up until the pandemic. It’s interesting when you think about all the time and energy spent by economists and market participants, hashing overall the economic data and policy decisions, but yet, when you look at growth over this very long period of time up until the pandemic was amazingly steady. That’s an interesting point. Point two is, you can clearly see that it’s accelerated since the pandemic and it’s also become a little choppier. The red line just represents money supply. That’s M2. Most money aggregates are kind of been taboo for quite some time. They’ve been no longer really viewed as appropriate measures of looking at economic behavior or performance or forecasting.

But when you look at this, there’s no question that, this that M2 very closely tracks the growth of the economy. In fact, it’s the correlation is essentially one, it’s a dollar-for-dollar increase. That’s one interesting observation. Another one is, we put these lines in here, these are just kind of our trend lines. As you can see the red line M2 is clearly above its long-term growth trend. I guess, I don’t know if this is a bit of a stretch, but the relationship between growth in the money supply and the economy, which was so steady for so many years has changed. Now, it’s kind of out of kilter. Now, the money supply is growing much more rapidly than the economy, although the growth rate of the economy has picked up. Now, I don’t know if it’s appropriate, but if you were to say that, this growth in the money supply is a function of fiscal spending, we’ve had outsized fiscal deficits of late.

There’s been deficits, no question, by the government for years, but they’re very much outsized as we speak, starting with the CARES Act in response to COVID and the various follow-on programs and even today, when the government’s running $1.5 trillion to $2 trillion of deficits. I don’t know if this growth in the money supply is purely a function of that, but it’s the extent it is interesting to note how this is an impact on the growth rate. One thing I think and draw conclusion here is that, if you go back to the immediate aftermath of the financial crisis when Chairman Bernanke was the President Chairman of the Fed. He would talk when he spoke to Congress about monetary policy being basically as accommodative as they could. They had the funds rate at zero.

They were doing QE. They pretty much couldn’t do anything more. Fiscal policy was somewhat accommodative, but not that much. They were at least in line. They were doing the same thing, maybe not as much as the Fed had hoped. There was the sequester back then, but monetary and fiscal policy were more or less in alignment. If you look at today, monetary policy is very restrictive. The Fed has raised rates over 500 basis points. They’re doing QT. But fiscal policy coming out of Washington is not in alignment whatsoever. It’s very much stimulative, huge deficit. Monetary policy and fiscal policy are working at odds and that leads you to think well maybe that’s why the Fed’s not having the success that they had hoped. The growth is still fairly robust.

Inflation is still strong. The labor market is still strong. Anyway, food for thought, but I just thought this was an interesting picture I wanted to throw in here just for that reason. Now moving on to the portfolio and so forth. I kind of wanted to set the stage before we get into the details of the portfolio. If you want to understand, what happened in this quarter and what we’ve done, I think, you have to understand where we were coming into the year. And so, in the fourth quarter of ’23, the Fed had clearly appeared to pivot not long after we had hit the cycle highs in rates. The Chairman, various members of the Fed had spoken pretty openly about interest rate cuts on the horizon. In the market size, the Fed had pivoted. The market quickly moved the price in six cuts in 2024 and the market rallied.

We just discussed and saw that in pictures above. We actually didn’t buy that. We thought that a lot of that was overdone. It turns out as we enter 2024, what we’ve seen in the first quarter is the data has remained quite strong. Inflation has been strong every month so far. Payroll growth is strong. GDP even though was reported somewhat low yesterday, a lot of that was because of inventory and trade. I think it’s safe say that, pivot is on hold and noise is not on hold, but we don’t necessarily know when it’s going to happen or maybe even if it’s going to happen. That’s kind of the background. In our minds, what that means is, we’re looking at a status quo outcome where things don’t necessarily change, where monetary policy stays high, rates stay high, and we basically have to continue to exist in this environment for the foreseeable future.

The takeaway from us is that, it’s not a bad outcome. Our hedge positions, when as I mentioned in ’23 when the market rallied, we didn’t buy into that rally. We thought it was overdone. We kept our hedges at a very high level. As a result, we were very adequately hedged coming into this year and our NIM has been not only really decreased, it’s actually increased. We’re basically taking positions now to basically position for this condition existing for some time. What we did during the quarter going to the slide here on Slide 16, we’ve continued to increase the average coupon of the portfolio. It was up another 5 basis points. The realized yield on the portfolio increased from 4.71% to 5.03% for the quarter and inclusive of our hedge instruments, our economic net interest spread was 2.47% for the quarter versus 2.04% for the last quarter.

Now, next slide is really illustrated with what we’ve done. On the bottom right here, you see our portfolio has existed at the end of 2022. Now, keep in mind, at that point in time, a lot of the higher coupons that exist today really didn’t exist then. They hadn’t been produced and there were a lot of coupons outstanding even to the left of threes here, but that was the portfolio at the time. As you can see, as you move through time moving to the left at the end of last year and then the end of this quarter, we’ve continued to migrate the portfolio higher in coupon and the current basically target structure is more of a barbell construction, where we have overweight to lower coupons and higher coupons. We may add billing coupons opportunistically over time, but they’re not our ideal target holding long time.

We’re trying to increase the exposure. We’re trying to build this kind of a barbell. We are able to use pay downs and/or proceeds from our ATM offering over time. They’ve been relatively modest, but still a source of funds we can use to do so. Basically, that’s kind of the direction we’re heading. The belly has been very directional, belly, I mean, coupons. Those coupons have been moving with interest rates. When we sell off, they tend to perform poorly. When we rally, they tend to perform well. We make it a construction using the wings, if you will, of that strategy makes more sense. Now turning to Slide 18, kind of focus more on our funding and hedging side. As I said, we were very aggressive in maintaining our hedges going into the end of the year and even with the expansion of funding that we saw that through a period, we’ve been able to protect we’ve been able to protect as you see in this graph on the right-hand side, the red line is our cost of funds.

The gray line is SOFR and you saw that rapid expansion. But you can see our economic cost of funds has been very flat for some period of time. That’s a result of our hedging strategy. In fact, if you look, the economic cost of funds actually decreased this quarter from 2.67% to 2.56%. The reason that happens is as the market is sold off and is priced cuts out of the future. If you think about for instance in a swap, where you have a pay fixed receipt floating, the fixed rate is very much fixed. You pay a prescribed fixed rate on a known notional balance and so the present value of those cash flows is absolutely known. The floating leg is where you’re receiving a floating rate on the same notional balance, and as the market prices out cuts in the future, the present value of those cash flows on that side become higher, just because your projected funding rates in the future are higher.

And so, as a result, our NIM has actually expanded in this quarter and that means that, for instance, if we move into the future and the market prices out even more, it will go up and eventually, if they start to price in hikes, it would go up even more. Of course, if they did actually hike, then the repo side would actually be higher as well. But in any event, we can stay in this position for some time and our NIM appears very, very solid. Just moving on to Slide 19. This is more of a bigger picture hedge focus here. But basically, we have 91% of our repo funding is hedged excluding our TBA shorts and interest rate swaps. But at the same time, the migration up into higher coupons, lower duration assets in conjunction with our lower coupon positions, which are well hedged, really helps to protect our book value as well.

I do just want to re-emphasize this point. In Q4, when we did have the rally. We did not extend our duration. We kept our hedges very high and that’s worked very well for us in first quarter and into second quarter. Slide 20 just gives you our hedge positions in greater detail. Our interest rate futures positions are unchanged for the quarter. TBA positions were increased slightly. We actually added some TBA shorts at the very beginning of this quarter as the market tried to sell off or started to sell off. Just yesterday after the number, when the market sold off very much, we actually took that kind of back off. The position now is at about $400 million short versus $370 million at the end of the quarter. We kind of round tripped there. It worked very well for the first, whatever, 20-odd days of the quarter.

But we think we’ve moved off quite a bit in short time, so we’ve taken some of that off. With respect to the swaps, we added slightly to our swap positions. Otherwise, the changes there are just the passage of time. Some of the swaps that were greater than five years, longer than five or less until it appears that have moved. We did add what is called a dual digital option on the bottom right. That is a hedge strategy that basically is binary. We pay a premium and if certain conditions are met, there has to be two. You get a very nice payout and those payouts are tied to both the level of rates and the S&P 500. The idea being that if rates are much higher for longer that, that would probably cause the stock market to sell off. If both of those conditions are met, we have a very nice payday.

Now let’s just turn to Slide 21. This is really what’s driving a lot of what we’re doing here. These numbers, we look at on a regular basis. These are the various coupons in the coupon stack. Using yield book, we can project the effective duration, convexity, and then returns under these different scenarios. I want to point out a couple of things. First off, while we look at this very regularly, we also look at empirical or observed results and we factor in both in decision making. But when you look at the convexity column, if you look at the what we call the belly coupons, 5%, 5.5% and 6%, very clearly the worst convexity. In our world, very negative convexity means very hard to hedge. And so, while, for instance, if you look at the lower coupons, that very low negative convexity makes it easy to hedge.

Even if you look at these securities in a rally, you can see they have very great returns. In a sell off, it’s of course equally bad, but they’re easy to hedge. We can use swaps or futures and fairly effectively hedge those and then the lack of negative convexity really helps with that process. When you look at the higher coupons, again, very low negative convexity and they do very well in a sell off. That’s kind of what’s driving what we’re doing here. We’re looking at a situation where we think we could be here for a long time, but if we do move in either direction, this kind of barbell strategy, I think it’s going to be very effective, and we don’t have to deal with trying to hedge the belly, which can be very expensive and very challenging.

For instance, if you look at some of those belly coupons in a meaningful sell off, they could extend and underperform hedges meaningfully. And again, in the big rally, the same thing can happen. This construction allows us to position ourselves to do well if nothing changes, but at the same time do pretty well, if we move meaningfully in either direction. That’s kind of what we’re focused the strategy on. Slide 22. This is just our interest rate shocks, on duration gap. Just want to point out the bottom right two numbers there. Those are basically the changes in equity given these plus or minus 50 basis point rate shocks. Ideally, you want those numbers as low as possible. Again, it’s only models, you don’t necessarily know that you realize that, but we’re comfortable with that positioning.

Slide 23 is just our speeds for the portfolio. We showed January, February, March as well as Q1 and Q4 speeds have picked up somewhat over the course of March. That’s really just coming out of the seasonal trough. That’s why we were kind of faster in March. I suspect with the backup in April, even though we’re still moving towards the seasonal peak, which is around June, the net effect would be probably an uptick in speeds, but not as much as you might have seen otherwise. Finally, just to kind of sum up and provides our outlook, I think, if you look back at where we’ve come from, the market very much got ahead of itself with the pivot, basically didn’t work out. The developments I just described have driven rates higher in Q1 and early in Q2.

Vol is much higher. Really, there’s even uncertainty in the market about what the Fed is going to do. Current market pricing is one cut this year and there’s some who think the next move actually could be increased. I think that’s a very, very low probability, but it just points to the uncertainty in the market and in sharp contrast to the outlook at the end of the last year, where everybody was assuming significant cutting. As a result of all this, mortgage valuations have cheapened and are attractive. That’s very good for us. Looking forward, all of these developments are not bad for us. They’re actually quite nice. Investment opportunities are very attractive. Our funding costs have been very well contained to our hedging strategy. We’re in a position where we can protect book value absent some extreme moves higher.

We’ve have been maintaining very good protection of book value and we have potential upside through our exposure to lower coupons to the extent we rally back. That’s kind of what we’ve done and where we are and what we look at going forward. Operator, that is it. I guess, I will say, just before we conclude our book value, I’m sure everybody wants to know where book is. As of last Friday, we were down about 5%. As of yesterday, about 5.5%. Market rallied hard on Tuesday when we had a very soft PMI number and risk assets rallied, but Wednesday Thursday, we gave some of that back. Down about 5.5% is our best estimate as of last night and about 5% last Friday. With that, I will turn the call over to questions, operator.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Your first question comes from the line of Matthew Erdner with Jones Trading. Your line is open.

Matthew Erdner: Good morning. Thanks for taking the question. Can you talk about the repo markets and the overall health and just how they’re functioning right now?

Robert Cauley: We see no signs of the stress. We’ve actually added some counterparties and we have a few more in the works. We’re looking at some, both sponsored rate co and it’s going through straight street. Again, they got a term. But anyway, no, I don’t see any stress in the repo markets. We have more than adequate funding, haven’t seen changes in haircuts. No, I mean, I will say this that, like I said that, maybe some people are thinking Fed is going to raise rates. I mean, the repo market will be very quick to jump on that. They love to price that into term repo. Even if you go out six months, there’s almost no cuts priced into it. But other than that, I don’t see any signs of distress. Occasionally, we’ll get some weird money movements around month and quarter ends, but which might drive rates up a few bps.

But in general, we’ve been able to really diversify our funding book across 25-ish lenders and are actively having conversations about adding new counterparties. Haircuts have on average come down a little bit. There are a few counterparties have been willing to decrease haircuts, from fives to fours. It seems pretty healthy, but as you know, that can change in a moment’s notice.

Matthew Erdner: Yes. That’s helpful color there. And then I see the move up slightly in coupon, kind of hitting the lows and the highs there in the stack. Have you continued to add, I guess, higher coupons in the second quarter consistent with the strategy that’s been laid out?

Robert Cauley: ot yet. But that’s on the media horizon. Haven’t been able to use the ATM in the quarters because we didn’t want blackout and we did get paid off the labor very modest. But the plan is to continue to do that in the immediate future. When we talk at the end of the second quarter, hopefully there’ll be much more progress to discuss in that regard. It’s been — I think there was a slide at the beginning of the deck that showed, how pronounced the rate movements have been from October to December and then back to where we are today. Not yet, but that’s on the media horizon. I’ll be able to use ATM in the quarter just because we’re going on flat curve and we did pay out very modest but the plan is to continue to do that and the media future.

So, when we talk at the end of the second quarter hopefully, there will be a much more progress to discuss in that regards. It’s been I think there was a slide at the beginning of the deck that showed how pronounced the great movements have been from October to December and then back to where we are today. Back then, 5.5s and 6s were consistent with that barbell strategy we discussed. It may stick out that we have some — we are exposed to some belly coupons, but we’ll continue to maintain the strategy of trying to own low negative convexity, fully extended, deep discount securities that are easy to hedge, along with higher coupons, that have lower duration and less convexity because they’re just not right in the middle of the stack where the extension gets the worst.

Operator: Your next question comes from the line of Mikhail Goberman with Citizens JMP. Your line is open.

Mikhail Goberman: Good morning, guys. I hope you guys are doing well. Thanks again for the slide deck. I didn’t know it was possible to make. I always tell people it’s the best agency mortgage REIT slide deck for like a crash course in agency MBS investing and somehow you guys made it even better. Congrats on that.

Robert Cauley: Thank you.

Mikhail Goberman: It’s really good stuff, especially Slide 16 and 17. Disclosure is very nice. Thank you for that. Just if you could perhaps flush out your comments on the dividend early in the call, Bob. I believe you mentioned something about the second quarter. I don’t know, if I heard that correctly, but maybe just flush out your comments about the dividend going forward.

Robert Cauley: Sure. It’s obviously $0.12. If you look at that slide, whatever it is, where we show the Slide 8, we’re running above our proxy for taxable income is running above the dividend. We will reevaluate it if there’s a need for adjustment. The obvious adjustment there would be higher. But as I said, you have to look backward and forward. We don’t like to change the dividend all the time. If conditions are changing in the market the at the time and it looks like there might be downward pressure on that, that’s going to very much affect our decision making. But we do intend to revisit midyear after the end of second quarter. What we’ll do is we’ll update more precisely our taxable income estimate year-to-date and then see if there’s a need and then weigh that against, what we see on the ground at the time of the outlook going forward for the balance of the year and into next.

Mikhail Goberman: I guess is that adjusted economic income per share line, the one for Q2 that you will report in July, August, is that, sort of what’s going to drive any sort of decision?

Robert Cauley: Yes, I think so. Again, it will be a discussion we’ll weigh that, but we’ll also weigh the outlook from that point forward, whether we think it’s going to be stay at that level, go up or go down. As I said, you don’t like to change the dividend frequently. And so, you try to pick a level that is going to be the most appropriate for the medium-term. If that means you over or under earn at any given month, that’s okay. We don’t earn exactly what we pay every month, but that’s going to have the thinking that goes into that decision.

Operator: Your next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is open.

Christopher Nolan: Hey, guys. Deck was great and I followed your comments. I thought your stuff on the M2 money supply was really interesting, food for thought.

Robert Cauley: It is. That’s right off of Bloomberg, by the way. You can pull that up.

Matthew Erdner: Anyhow, I mean, you’re dealing with a lot of cross currency here in the macro level. It sounds that, you’re basically pursuing the same strategy of going to more high coupon stuff. They have a barbell portfolio. Going forward, assuming that the economy continues to muddle along and the Fed doesn’t really do anything, what do you see benefiting more earnings or book value or neither? I mean, a little clarification on that might be helpful.

Robert Cauley: Yes. That’s a good outcome. I mean, as long as we don’t get a violent sell off on the long end. If we start heading north of 5% or 10% or something, we stay around here, the curve stays inverted, book should be stable and we can earn the dividend. I think the question is, the curve has been inverted longer now than it’s ever been inverted. I used to always say on, road trips way back when, what happens when the curve inverts? How are you going to pay dividend? I used to say, well, if the curve inverts, that means that, the market thinks that the Fed is going to be easing in the future and either the Fed is wrong and they do ease or the market is wrong and they don’t and long-term rates go up and then you get a normal curve shape.

We’ve been like this for a long time. Today, the yield on the two year is still well below Fed funds. The market still saying, we think the Fed is going to ease. We’ll see what happens, but eventually, you would think the curve should be going back to a more normal shape. Now, the question is when and how? Does that mean short rates rally or does that mean long rates go up? When you look, you referenced my M2 slide, that tells me that with fiscal policy the way it is, that’s stimulative. They’re pumping money into the economy. If you look at that surge in M2 as a proxy for deficit spending, excessive deficit spending, that would tell you that, inflation is probably not coming down anytime soon and well it’s going to stay fairly high, which might lead you to believe that longer-term rates should be higher.

But the market still thinks the opposite. The market still thinks, they’re going to be easy. It’s just a question of how much. So, unknown, we don’t know. We’ll have to watch like everybody else. But the point is, for now, if nothing really changes meaningfully, book should be pretty stable and the dividend is pretty well covered. That’s not a bad outcome for us at all. think that’s the environment where volatility comes off both into a rally as well as just sort of staying here and being range bound. Certainly, the last 6 months have been extremely volatile. I think as the market processes, what exactly is going to happen when the Fed is going to be involved, we have a lot of hedges on the front end of the curve. In December, we took strides to lock in as many of these anticipated rate cuts as we could.

We started and traded euro dollar or SOFR futures for a very long time, but we started locking in some of those cuts. I think we’re in a good position. Again, it’s not going to be fun to be a levered mortgage investor, if more hikes start getting priced in and the market has been trading, the mortgages have been trading very long over the course of the last few weeks. We’ll see big green days whenever we rally and days that are greater-than-expected just based purely on rate moves, on days when we have big sell off and the thought of easing or the prospect of even tightening starts getting battered

Hunter Haas: I think that’s the environment where volatility comes off both in the rally as well as just sort of the staying here and being range found. Certainly, the last six months have been extremely volatile, and so, I think as to market processes what exactly is going to happen when the Fed’s going to be involved. We had a lot of hedges on the frontend of the curve. In December, we took strides to lock in as many of these anticipated rate cuts as we could. We sort of traded dollars so futures for the very long time, but we started locking in some of those cuts, and so, I think we’re in a good position. Again, it’s not going to be fun to be levered mortgage investor, if more hikes start getting priced in and the market has been trading very — mortgage has been trading long over the course of the last few weeks.

And so, we’ll see big green days whenever we rally and days that are greater than expected just based on purely on great moves on days when we have big sell off and the thought of easing or the prospect of even tightening start getting battered around, mortgage basis really slips in that environment. So, that’ll continue to be the case. But if we’re just muddling around here and the tightening cycle is almost over, we don’t have to pause or pivot right into an immediate easing cycle to benefit from this environment. Just one of a little bit of stability is also an attractive environment for us.

Matthew Erdner: Great. Thank you for the word. See you guys later.

Operator: [Operator Instructions] There are no further questions at this time. I’ll turn the call to Mr. Cauley for closing remarks.

Robert Cauley: Thank you, operator. Thank you, everybody. As always, to the extent, other questions come up or you don’t listen to the call live, only the replay and you have a question, feel free to call us at the office. The number is 772-231-1400. Otherwise, we look forward to speaking to you at the end of the second quarter. Thank you.

Operator: This concludes today’s conference call. Thank you for joining. You may now disconnect.