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spk02: Good morning and welcome to the first quarter 2021 earnings conference call for Orchid Island Capital. This call is being recorded today, April 30th, 2021. At this time, the company would like to remind the listeners that the 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 over to the company's chairman and chief executive officer. Mr. Robert Culley, please go ahead, sir. Thank you, operator, and good morning, everyone. I hope everybody, as usual, has had a chance to download our slide deck, which we put up on our website last night. And I'll give you a second to get ready, and then we will, as always, walk you through the slide deck. As usual, I'll start on page three, just kind of go over the table of comments, in other words, set the agenda for today's call. The first thing we'll do, as usual, is just go through some of our results for the quarter, spend some time talking about market developments that occur throughout the quarter, then go through our financial results, and then spend the bulk of the time talking about our portfolio characteristics, hedge positions, both with respect to what happened during the quarter, what has happened since quarter end, if anything, which in this case is we did do some things. Let me just give you some comments on how we see things going forward and just some more high-level comments on the performance of the company for the quarter. So with that, I'll turn to page four. For the quarter ended March 31st, 2021, Orkin recorded a net loss per share of $0.34. Net earnings per share of $0.26, excluding realized and unrealized gains and losses on our RMBS and derivative instruments, including net interest expense on our interest rate swaps. We had a loss of $0.60 per share for net realized and unrealized losses on our RMBS assets and derivative instruments, again, including net interest expense on our interest rate swaps. Book value per share was $4.94 at March 31st, a decrease of 52%. or 52 cents, or 9.52% from $5.46 at December 31st of 2020. In the first quarter of 2021, the company declared and subsequently paid 19.5 cents per share in dividends. And since our initial public offering, the company has declared $11.91 and a half cents in dividends per share, including the dividend declared in April of 2021. Total economic loss for the quarter was 32.5 cents per share, or 6%. 23.81% annualized. On slides five and six, we present our results versus our peer group. The peer group is defined at the bottom of the page. The first page is as of March 31, which is using stock and dividends to calculate total rate of return. As usual, we present this both from a look-back date as of 3-31, so one year back from 3-31, two years, et cetera, and then, of course, each calendar year as well. Slide six does the same thing for book value, as is always the case. We do not know all of the book value numbers for our peers, so this data is presented with a one-quarter lag, so it would be through the fourth quarter of 2020. Now, with respect to market developments, I think by this point, some of this news is somewhat old, so I am just going to summarize. most of this, but I will make some comments with respect to anything that's germane for purposes of Q2 and beyond. With respect to slide 8, as you can see, the difference between the blue line and the red line on either graph here is the change in rates that occurred during the quarter, so a very substantial move and a substantial steepening of the curve. Since quarter end rates have backed off, This green line you see there is as of last Friday. Actually, today that line would be slightly closer to the red line, so we have seen rates back up somewhat more. But noteworthy in the magnitude of the steepening of the curve here, in the case of the 10-year cash note, almost 80 basis point moving rates over the course of the quarter. Slide 9 just presents the same kind of data, only looking at certain points on the curve, the 10-year treasury and the 10-year swap rate. There's really nothing more to be said about that. With respect to slide 10, note that even though the curve has flattened somewhat in Q2, in the case of the 530 curves, it's only been a couple basis points in Q10's curve. about 10, the curve still remains very, very steep and well off the trough that we saw back in 2018. With respect to the mortgage market on slide 11, what we show on the top left of the page is a slight different approach than we've done in the past. We've basically normalized the prices of all the securities so you can see the relative performance. So in this case, what we're doing is we're taking the price at the beginning of the quarter and setting it at 100, not that they were priced at par. This is just 100% of the beginning price. And as you can see, the red and the blue lines there, which represent the lower coupons, have declined the most in price. In the case of twos, down 117 ticks. Two and a half were down 94 and a quarter ticks. But as you can see, a clear differentiation between those lower coupons and the higher coupons, coupons that are materially more in the money but also not the ones that the Fed purchases. Those were relatively unchanged. In fact, in the case of fours, we're actually up in price almost 17 ticks. With respect to the role market, this story remains the same. The Fed is aggressively buying lower coupon production. Coupons in those roles do very well, and all the rest are at or near negative levels. With respect to spec payups, very meaningful developments this quarter. As you can see in the top right, in our case here, we're showing representative pulls. These are $85K low loan balance, threes, three-and-a-halves, and fours. And as you can see, those payups have dropped dramatically. They're actually back to the levels that we observed before the pandemic, in some cases slightly lower, mirroring what we've seen in the 10-year Treasury. New coupons still command relatively substantial payups. So that really is relevant with respect to ORCID. On slide 13, or 12 rather, you can see using this proxy for volatility in the market, as is typically the case when we have a sudden substantial movement in rates, vol increases, obviously very high levels here, almost as high as it was back in March when the pandemic first hit the market. Since quarter end, ball has come off some, but still remains just at the bottom end of this range that's been established since middle of the second quarter. One final point here, which is very, very important with respect to the mortgage market on slide 13. We show here the OAS, LIBOR OAS of the various TBA coupons. And note how tight they are. These numbers are, in many cases, negative numbers. And we see that in a lot of securities that trade in the market with negative LIBOR OAS numbers. The mortgage market is very tight and for obvious reasons. You know, we have the very substantial support of the Fed buying on a daily basis. And as we heard this week, the Fed has no intention of papering those purchases anytime soon. And as a result, the market remains well bid. And we also have large other investors, non-fed buyers, in this case banks, who are also very supportive of the market. So one takeaway from this slide is that the mortgage market is trading at very tight levels on a historical basis. Slide 14 just kind of gives you a snapshot of what happened with respect to fixed income sectors. This is all of the aggregate index components, as you can see. All fixed income components were down, with the exception of high yield. And high yield always has kind of an equity component to it. It's not purely a bond-like instrument. And of course, equities did very, very well. Mortgages were, on a relative basis, somewhat better than most other fixed income instruments, but still negative for the return. And this is absolute, by the way, on an excess return versus either Treasury or LIBOR swaps, it was negative as well, negative 30 basis points. With respect to 15, Slide 15, a few important points I want to make here. First, if you look at the bottom of the page, the refi index, which is the blue line versus the percentage of the mortgage market that's in the money, very substantial move over the course of the quarter. We went from being in a situation where approximately 80% of the market was refinanceable. Now we're down close to 40%, a very substantial move. One of the things that's offsetting that, though, if you look at the top right, this primary-secondary spread. We've talked about this before on our earnings calls. It's very important. This is basically the spread between a mortgage available to a borrower and a theoretical current coupon mortgage. It has gotten to very wide levels, and it's been tightening for some time now. As you can see, it continued to tighten even in the first quarter. So the significance of this is it tends to mute the impact of higher rates on prepayments. And put differently, as rates have moved higher over the course of the first quarter, rates available to borrowers increased but much less so as a result. The rates available to borrowers are still not that unattractive. They're still quite attractive. In fact, the various proxies, the Freddie Mac survey rate or the mortgage bankers rate are still in the very low threes. So on a historical basis, still quite attractive. As you can see on the top left, the refi index, of course, has come off. versus its mortgage rates, but it really only moved from the mid-4,000 range to the low threes. It's still at a fairly high level. So refinancing activity has come off, no question, but not off a cliff for sure. Turning now to our financial results, slide 17. On the left-hand side, we disaggregate our results, basically showing you the mark-to-market effect on our earnings. As you all know, we use fair value accounting, so all fluctuations in market value of any instrument shows up in our earnings. And you can see, just looking at that center column, the realized and unrealized losses on the assets exceeded those of our hedges. And that was because of the positioning of the hedges we had in place at the beginning of the quarter, obviously. And as you can see, there's a substantial underperformance as we gave rise to the quarterly loss. Absent those, you can see that we still generated an income of $0.26 per share. I'm going to say about that in a second. With respect to the sector allocation of the portfolio between pass-throughs and IOs and inverse IOs, as you can see, much unsurprisingly, the pass-through portfolio had a fairly meaningful negative return of 9.4%, using average capital allocation, and the IOs and inverse IOs had a very strong positive return of nearly 30%. Again, not surprising given the movements in rates. Now, with respect to kind of a historical perspective on page 18, at the top of the page, we show these same three lines that we've shown for many years. Now, the blue line is the yield on our assets. As you can see, it's at 2.66%. The red line represents our economic cost of interest. It's down to $0.62. And then the difference between them two is the green line, which was at 2.04%. It appears now, given the events of the first quarter of 2021 and now we move into the second quarter, that both the yield on the portfolio and the economic cost of interest are probably at or near a trough. And so we would expect those to level off and potentially rise in the future. But importantly, the net of the tube has remained quite stable now for several quarters, and it's stayed in around that 2% range. And that's, of course, meaningful from the perspective of our earnings and dividends. That's also reflected on slide 19, where you can see the blue line, which is the actual reported earnings per share versus the earnings per share excluding those mark-to-market gains and losses. You can see it's been very stable. And so, you know, and then looking at the 26 cents report for this quarter, it's very much in line with results we've generated over the last several quarters. Turning to slide 20. The allocation of capital on the left-hand side, there was a slight uptick in the allocation to structured securities from 6.7% to 10.1%. We'll get into this in a little more detail in a moment. But since quarter end, that number has continued to increase and, in fact, is close to double what it was at the end of the quarter. So we are increasing our allocation of capital towards IOs and away from pass-throughs. The right-hand side just kind of walks you through the changes to the respective portfolios that occurred over the course of the quarter. As you can see, there was one add. We did add one in Versailles. That represented the bulk of the increase in the allocation to that sector. Otherwise, you can see our paydowns, which we'll speak to in a moment, with respect to pastures was a very subdued number. Again, representing, reflecting the asset allocation that we continue to employ. Now I'm going to walk you through kind of what I generally consider the more needed conversation, the portfolio positioning. The first thing I'm going to do is go over the steps that were taken, the changes that were made in the quarter. Then we're going to talk a little bit about what transpired since quarter end. And then, as I said, I'll make some more general comments about the results for the quarter, and then how we see things going forward. So first on the asset side here, I'll get to the hedges in a moment, but just want to focus on the top of the page. As you can see here, The portfolio is still heavily concentrated in 30-year securities. We did not make a meaningful change in that regard either during the quarter or since quarter end. We did add somewhat to our 15-year positions. They increased fairly substantially in absolute terms. but still only represent less than 6% of the portfolio. We also increased our allocation to 20-year securities, but again, not meaningful enough to change the overall characterization of the portfolio. The more meaningful changes occurred within the 30-year coupons, The 20-year allocation increased slightly, but recall at the end of last year, we had a fairly substantial long position in TBAs in those coupons. That was taken off during the quarter. So now the exposure of that coupon is strictly in pull form, and as I'll say in a few moments, we've actually reduced that since then. The biggest change was to the capital allocated to the 30-year three coupon. We did raise capital during the quarter on two occasions, and most of that was deployed in that coupon. So the allocation to threes increased by approximately a billion dollars. We did sell some 30 or 3.5s. What we were doing there was just reducing exposure to very high coupon spec polls, mostly New York 3.5s. With respect to higher coupons, they're more or less unchanged. The change over the quarter just reflects runoff. And as I mentioned, we did add to the IO portfolio. and we did reduce the TBA long. Since quarter end, we've continued some of these same trends. We reduced our exposure to the 30 or 2.5 coupon, allocating most of the proceeds into threes, although on a net basis, it was a reduction in outstanding by about $150 million. And then we did add a few higher coupon low-balance pulls in more recent auctions. So now I'll just kind of walk you through the balance of the slides in this section. Then I'll come back and talk about the hedges. Slide 23, this is a slide that we've been using quite a bit lately. It was very germane during 2020 when prepays were at such a high level. The red line is our allocation to high-quality spec pulls. And as you can see, it's come down dramatically. And the reason is simply the fact that we no longer need those assets because prepayments have come off with a certainly different rate environment. And that's reflected in the rate available to bar the refi index has come down. With respect to slide 34, we are about generating income and earnings, and therefore we're very much focused on minimizing our premium amortization, and that's reflected here. The thrust of our efforts are in security selection. We tend to use more spec polls than TBAs, as opposed to, say, some of our peers, but we do focus on security selection, and we had very good results. As you can see just by the bar charts, for each of the respective months and the quarters, but also with respect to the pass-through portfolio in the first quarter, prepaid in the aggregate just under 10 CPR, and the overall speeds of the portfolio were down a little over 40% for the quarter. This is also reflected on slide 25. As you can see, with rates backing up, we've maintained our paydowns as a percentage of our outstanding principal balance within a very low range. And again, this is still lower than the levels we were at in 2019. Finally, before we get into our hedges, leverage is running at about 9.1 at quarter end. There may be some changes to that slightly in the horizon. I'll get into that in a moment. But I just want to point out, if you look at this slide, you can see the last few quarters, the range is around between, say, 8.8 and 9.9. We've remained near the low end of that range. With respect to our hedges, this is where the more substantial changes occurred during the quarter. With respect to our swap book, it was increased. With the movement in rates and how we're positioning going forward kind of drove our decision-making. We had some older five-year swaps that had been on the books for a while and rolled down the curve. They were less than a four-year, so we actually terminated those swaps and added approximately $800 million of five-year swaps. And I'll get into the rationale for that in a moment. And we also added about $200 million of 10-year ultra swaps. We've also changed the TBA position. We were only short $328 million at the end of the last year, and that's now $1.3 billion. We've added over the course of the quarter, a short in two and a half, and then the rest of the increase was in threes. Then with respect to swaps, there was one that rolled off, and we've added or refreshed the levels on several pair spreads that we have on. These are designed to allow us to economically put on protection against movements in either the belly or the lung into the curve by using the combination of long and short positions. And then from time to time, we refresh those levels as the market moves just for efficiency purposes. And then we've also added a curve floor, as you can see. Since the quarter end, we have covered the two-and-a-half short that's no longer on. Some of these hedges that we put on were somewhat expensive, and we're trying to reposition those to make them more economical. The three short has been reduced by possibly half. And we've actually added and replaced that with some shorts in the futures market, combination of five-year or the FV future or ultras. And then also we did put on another five-year payer spread. So that's kind of the gist of what we've done in the portfolio. And now, as I said, I want to make a few general comments just about our results and how we kind of see things going forward. Well, the first thing is, you know, let's take the obvious. Obviously, we had a very large book value change. That's not something we're happy with. But at the same time, keep in mind that the way we run the portfolio has been very consistent since our inception. There's not been any meaningful deviation at all over that period. We tend to run, certainly with respect to our peers, at the high end of the highest end of the yield range in a higher leverage ratio than our peers. And that's been applied very consistently. And as a result, when we have episodes like we did in the first quarter, we have a huge movement rate, you know, we tend to be exposed to that. And that was the case in this quarter, and it was also the case in the fourth quarter of 2016. But outside of that, the results are very good. In fact, if you look at the slide deck at the beginning of the book that I mentioned earlier, you can see our relative results are very strong versus our peers. So while we occasionally have this quarter, and it's unfortunate, over long periods of time, the results and the strategy are very, very good, very positive. And as a result, we do not have any intention of changing those. Now, with respect to our positioning, as I mentioned, we did make some changes, especially on the hedge side. Some of these hedges are somewhat costly, but we were able to do them very quickly and efficiently at the time. Going forward, we did suffer some negative mark-to-markets on the portfolio, but most of those are unrealized, very few realized. As a result, what's left in the portfolio has been marked down which means that going forward with respect to premium amortization, we're amortizing a lower premium amount. And given that we expect speeds to remain below the levels we observed last year, this means we should have slower premium amortization. And the second thing we've been doing, I mentioned, alluded to earlier, and we've continued to do so since the end of the quarter, is replace several of these hedges with IOs. IOs that may have less desirable yields now, but in the event of any kind of a sell-off, will actually be very attractive and positive carry, in some cases, meaningfully so. So in balance, while the hedge costs are higher based on our repositioning, we think that these are offset substantially, if not entirely, by slower amortization and the IOs that we've added to the portfolio. And we will also be replacing some of the dollar rolls that I mentioned that we took off, simply because those rules are very attractive and should be supported by the Fed going forward, at least until they ultimately taper. Kind of in sum, I would say that the portfolio is positioned defensively. It's positioned for higher rates. Since the rates have rallied modestly since quarter end, our book value is down modestly, probably a percent or two. But we, as I said, we think going forward that the path of rates is going to generally be higher. So to the extent that rates surpass the levels that we observed at the end of the quarter, you would assume that we would recoup some of that book value. And the implications of that for our leverage ratio, obviously that would be beneficial since it would be lowering our leverage ratio. It just all is equal. But even if that doesn't occur, we view our leverage ratio differently. at an acceptable level, as I've mentioned before. We're around 9.1%. Now, with respect to the future, how we see things going forward, obviously the economy is recovering at a very rapid rate. And since they're not going to do so any time in the near future, I think it's pretty safe to say that whatever your horizon is, whether it's the balance of the year or next year or even into 2023, that eventually the Fed is going to taper their quantitative easing. And mortgages are going to widen. It's hard to argue that that's priced into the mortgage market giving where they trade today. So we certainly see room for mortgages to widen over the course of the next year or two. And that's some of the rationale for adding to our IOs. because we think IOs will be much less susceptible to that widening. And that's why, in addition to replacing some of the hedges with IOs, just because they're more cost-effective, but also because we want to try to avoid some of that widening. So you will probably see in the Q2 results a much greater allocation to IOs. And if that continues, that will probably ultimately reflect in our leverage ratio since we apply leverage to the passions and little to the IOs just to monetize them for cash purposes. So you should probably see the leverage ratio remain on the low end of the range. And then the second thing is the fact that we think that eventually, even after the Fed tapers, they will raise rates. And the consequence of that will be a flattening of the curve. And I mentioned that we had put on a lot of hedges, especially in the five-year part of the curve, either with respect to swaps or futures. And that's the reason. We expect the next major move in the curve to be in the belly, the five-year area, and we want to be positioned for that. We also put on some curve floors, again, to protect earnings when this occurs. So we feel, in sum, very well positioned going forward. Our income has Our ability to generate income is being preserved. And the IOs, we expect greater allocation of those to behave very well when and if we see widening in the pass-through portfolio. And that's pretty much it. Operator, that's the end of my prepared remarks. We can open the call up to questions. At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jason Stewart from Jones Trading. Your line is open.
spk01: Hey, thank you. Hey, thanks, Bob. How are you? Thanks for the, as always, comprehensive overview. Two questions with regard to net economic spread. Could you give us a sense of where that ended, the quarter? And just remind us how hedges like futures or TBAs would roll into that number that's being reported.
spk02: Yeah, but it was probably not meaningfully different than what I just discussed with respect to how those affected. And obviously, I'll just go through the laundry list, and I'll turn it over to Hunter, because he'll have more to say. With respect to paying fixed on swaps, obviously, that's pretty straightforward. You're just paying whatever that rate is. In the case of the 10-year swap, obviously, it's much higher than the five-year point of the curve, given how steep the curve was. With respect to futures, as you roll through time, remember, futures are March, June, September, and December, as you roll from contract to contract, there's a drop, and we use that component as an expense. With respect to TBAs, it's the drop. We have used the threes because the drop was negative. That's no longer the case. That's why we reduced those. And swaptions is basically the premium you pay. I would just add, we didn't add a meaningful amount of what I would characterize as expensive long-end rate hedges, so it was a modest increase to 10-year part of the curve, both through paying fixed on swap in the 10-year part of the curve, as well as putting on a handful of ultras, which do have a rather large negative carry component to them when you're shorting them just because of the shape the curve is so steep. But we've subsequently, as we've increased our allocation to IOs, we have pulled back some of that hedge and done so at levels where we're not going to really earn out that negative carry, so to speak. With respect to the TBA position, most of what we rolled into April and May was done at negative levels, right? So the TBA performed poor over the last several months that just because the cheapest to deliver, the quality of the cheapest to deliver collateral in that coupon bucket has been so bad that you actually can short the coupon and clip a little bit of carry in a positive manner. So we've taken advantage of that where we can. It's justifiable to do so because we own a lot of 3% coupon specified pools. And in fact, a lot of times we own a fairly large position of what we would characterize as low payout pools. So to the extent that their performance, you know, decreases over time and they become more like the cheapest to deliver, we can always just cover those shorts by delivering pools into them and clipping the carry on the specified pools, you know, while they're still available. superior asset. So I think for those reasons, I agree with what Bob said about not being materially different at the quarter end than it was in the presentation.
spk01: Got it. Thank you. That's helpful. And then on the capital raises during 1Q, can you give us a sense for how much those were either accretive to book value or the approximate book at the time of the raises? Just trying to get a sense for how that impacted book value per share?
spk02: The first one was slightly dilutive, and the second one was right at book. Okay, great. Thank you. At the time, yeah. Got it. Most of the deterioration in the quarter came in the last three weeks of March. So, We had a small decrease in book up to that point, but... Yeah. Yeah, I would just... I mean, I'm sure you're thinking about this. Book value for the month of January was probably up very modestly. February probably hung in until mid-month, then we started to go negative, maybe slightly negative by the end of February, and I would say at least 75% of the decline in the quarter occurred in March, and really after... I forget what day it was. Whatever the day non-farm payrolls was released, I want to say it was around March 5th. It was really after that. I mean, one of the big drivers of that was also, as you may recall, was when Powell made it clear that he was, you know, comfortable with higher rates. That kind of, like, green-lighted the markets and put a rate to go much higher. And we kind of crested right at the end of the quarter at 331 for short of 175, 110s.
spk01: Yeah, okay, that's helpful, caller. Last one for me, and then I'll jump out. Would you just tie the – give us a reminder on the metric, the KPI you look at to set the dividend, and remind us how that interplays is moving through with all the changes that were made in the portfolio towards the end of 1Q and then as you're continuing to evolve in 2Q. That would be helpful. Thanks.
spk02: Sure. Well, we look at – Just to start, dividends are obviously an artifact of taxable income, but we don't really look at taxable income. It's basically what we call economic income, which looks a lot like GAAP with two minor adjustments. One, we look at more of our economic cost of interest expense, which therefore reflects hedge costs because we don't use hedge accounting for purposes of Gaps of all of the changes in the market value of our hedges are reflected in our earnings, but not all of that would necessarily be attributable to the current period if we were using hedge accounting. And then the second one is just to try to capture premium amortization The one thing that's unusual about the fair value option that contrasts sharply with available for sale. Available for sale, you buy an asset, and at the time, you book a yield, and you use that yield assumption, the amortized premium. Every quarter, you may refresh that level. They call that the retrospective adjustment. But in contrast to what we do, when we use fair value, every quarter, we mark the portfolio to market, and that resets the the level you use for premium memorization. So we report in our earnings release something called premium loss due to paydowns. But remember, that's reflective of the levels that exist at the beginning of the quarter. So if you have a year like 2020, when asset prices are very elevated it's going to make it appear like you're advertising a lot more premium that actually existed maybe at the time you bought the asset so that is just one nuance of our accounting but otherwise uh those are the two adjustments that we make to look at um for the purposes of adjustment. Now, I will say that I mentioned we took off some of our PBA longs. We intend to put those back on. There were some adjustments to the hedge book and then subsequent adjustments to that and through replacing IOs. So, there's a lot of fluidity here. And the net interest margin, if you will, somehow calculated on a daily basis, you would probably see fairly meaningful fluctuations as we go through this process. But we expect when we come through the process, when we're done and we're almost there, that it should look pretty much as it did for the average of the quarter. As I said, taking off some of these hedges, putting on the IOs and so forth, we still think the net of all of this is going to be about a wash. The unknown as it relates to the way we look at dividend policy is really going to be how much speed slowdown over the next month, two, three. And we'll observe that. We're pretty bullish about the outlook for higher coupon mortgages and the IOs that we own, which tend to be off of slightly cuspier assets, or at least the ones we've been adding are off of cuspier coupons. And then we own... another slug of high negative duration in the money loans, which we also expect to slow down. So we really are just positioned to, I think, the street is really just to the point where it's expecting a slowdown in speeds, maybe next print, but certainly over the next couple. And we'll see how we settle in with respect to the slowdown in speeds as a result of higher rates. Your next question comes from the line of Christopher Nolan from Leidenberg Thalmann. Your line is open.
spk00: Hey, Hunter, on your comments just now on bullish on speed, is that for the market in general or for Orchid Island specifically?
spk02: For Orchid specifically. I think, you know, all the models we use and look at in all the street research, you know, shows significant slowdowns in speeds, especially for higher coupon collateral that would be a big part of our portfolio. So 3s, 3.5s, 4s. I mean, we have loan balance 4s that are paying in the mid-20s, and I think the expectation is for those to slow down into the mid-teens over the course of the next few months. So that's not an enormous position for us, but I think it's a good example of developments that have not fully played out yet.
spk00: And can you share with us what the allocation of capital is to IOs in the second quarter so far?
spk02: We added about $46 million in market value. So at quarter end, Chris, it was just over $40 million, which was 10%. So we've added 46%. So it's approached probably 20%. So it's 86%. Whatever 86 divided by 460 is. Or 465, close to 20%. But it's probably going to go higher still.
spk00: Great. And Bob, in your comments in terms of steeper curve, I mean higher rates, do you mean by that a steeper curve?
spk02: Well, the curve's steepening now, and the Fed keeps doing a very effective job of talking the market down whenever it starts to price in any form of policy removal in the near term. They certainly did it this week. But I think, so the curve will stay fairly steep. As I mentioned, this quarter to date, you know, we've kind of backed off the highs and rates, and we've flattened really modestly. I think the curve's going to stay steep for some time, but I'm in the camp that the Fed's not going to be able to wait that long to start tightening. And I'm sure you hear the same things I do. Anecdotally, there's evidence of inflation. It's not, you know, obviously there's baseline effects. So, like, if you look at today's number, PCE, looking back at April of 2020, you know, it's a very low bar. So, the number looks high. That's transitory. I agree with the Fed 100% on that. But when you hear Procter & Gamble and other entities are raising prices and Amazon's going to give pay raises to 500,000 employees, those aren't transitory. And then, you know, the president's speech on Wednesday night, you know, to the extent he's successful with these programs, you know, the system's already awash with liquidity. I don't know if anybody follows the RRP market. That's the reverse repo that the Fed runs. So that's where people are trying to get rid of cash and take in assets. That's at zero or very close to zero. Yesterday, the Fed did or the Treasury did a one-month bill auction at zero. Maybe they eventually go negative, but we're just awash with liquidity. So the combination of pent-up demand, substantial demand for goods and services, COVID-induced supply shortages, whether it's labor because people aren't coming back to work or all the other things you hear about, bottlenecks, commodity prices, chips for automobiles and everything else, a combination of huge demand, constrained supply, and then a Fed-slash-Treasury that is flooding the market with liquidity and I hope they're right and it's transitory, but I'm beginning to think that that may not be the case. And they are overly sanguine with respect to their concerns with inflation. I just think it's going to be hard-pressed for them not to play out that way. And the Fed, as much as they say that they're not going to tighten, at what level could inflation run where they had to change their mind? I don't know. But I would expect nonfarm payrolls to be very robust, retail sales to remain robust. Everything is going to be very strong. And over time, I just think that they're going to have to move their timing forward. And then you're eventually going to see the curve flatten. And they're going to start pricing in hikes. And they're eventually going to have to. Yeah, Chris, that's particularly germane as it relates to our first quarter results. You know, we saw a steepening of the curve. Mortgage is selling off. And then really in March, the full sort of convexity effect started to hit the portfolio. We started to see a deterioration in payouts of specified pools and, you know, an extension in mortgage assets. As you know, we have, for several years, preferred to short the belly of the curve, and we just didn't get as much satisfaction being in that point because it hasn't moved yet. The two-year is still very much anchored near zero. I mean, two-year treasuries are near 15, 17 basis points. So, you know, the market is not pricing in higher rates on that part of the curve yet, which ultimately affects, you know, the market. the belly of the curve hedges that we have on, such as the five-year, and even to a lesser extent, the seven-year swaps we have on. But that, I think, we will sort of have our day at some point when the market feels like the Fed can't stay on hold forever.
spk00: Okay. That's it for me. Thanks, guys. Thanks, Chris.
spk02: Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. There are no further questions at this time.
spk00: I turn the call back to management for closing remarks.
spk02: Thank you, Operator, and thank you, everyone, for joining us today. To the extent you weren't able to do so live and you listened to the replay and you want to ask a question or if you have another follow-up question from today and you did listen, feel free to call us as usual. The number in the office is 772-231-1400. Again, I thank you for listening, and I will look forward to speaking to you at the end of the second quarter. Thank you.
spk00: thank you everybody for joining today that concludes today's conference call you may now disconnect
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