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spk00: Good morning and welcome to the fourth quarter 2021 earnings conference call for Orchid Island Capital. This call is being recorded today, February 25th, 2022. 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 risk 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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, Simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again. Now I'd like to turn the conference over to the company's chairman and chief executive officer, Mr. Robert Colley. Please go ahead, sir.
spk04: Thank you, operator, and sorry for the delayed start, though. We did have some technical difficulties. We got those cleared up, so I apologize. Get going here. Hopefully everybody had a chance to download the deck as usual. The deck has not changed entirely from quarter to quarter, so hopefully to the extent you've been on our call before, you're familiar with the agenda and the format. Kicking off slide three, just an outline of what we're going to discuss. As usual, go over the financial highlights for the quarter ended December 31st, 2021. Then spend some time talking about market developments which impacted the results for the quarter and talk about what things look like going forward. We'll go through our financial results in greater detail and then do the same with respect to portfolio characteristics, our credit counterparties, and hedge positions. And this quarter, given the magnitude of the market development since QN, I will basically expand the discussion on each of those points to kind of bring you up to date for the current quarter. Turning to slide four, the results for the quarter ended December 31st. We had an ORCID recorded net loss per share of 27 cents. This is comprised of net earnings per share of 22 cents, 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 49 cents per share from net realized and unrealized losses on RMBS and derivative instruments, including, again, net interest expense on our interest rate swaps. Book value per share was $4.34 at December 31st versus $4.77 at September 30th. That's an approximately 9% decline. In Q4 2021, the company declared and subsequently paid 19.5 cents per share in dividends. And since our initial public offering, the company has declared $12.545 in dividends per share, including the dividend declared in January and February of 2022. The total economic loss of 24 cents per share for the quarter equates to 4.93%. That's not analyzed. I'll turn to slide five and actually six. Given that there's quite a bit of information to cover in this call, I will just leave these for the readers to peruse at your leisure. I'm not going to spend any time talking about them. They're actually somewhat backward-looking. This is stock price performance through the end of the year. And with respect to book value, since we don't have all of our peers' book value numbers for Q4, This is only through the third quarter of last year. I'll leave you to look at those at your leisure. Now we can talk about market developments. First, I just want to pause briefly just to give you the high-level developments during the quarter that shaped what happened both in Q4 and even to a larger extent in Q1. Three basic things. First of all, inflation has accelerated materially. If you go back to the second quarter of 2021, Whether it's CPI or PCE, either measure of inflation has been rising rapidly. The Fed characterized this acceleration as transitory. They have since abandoned that characterization and changed their outlook materially as well. Even inflation seemed to kind of level off, if you will, with five or so percent annual increases year over year during the third quarter. But in the fourth quarter and into 2022, it's accelerated. And depending on your measure, whether it's CPI headline, which is well over 7%, or PCE, which is a little under 6% on a headline basis, these numbers are clearly well above the Fed's target range. The second development has been job growth and wage growth. Again, very, very strong, and this is all in spite of COVID and Omicron. And then thirdly, and the byproduct of those two is development by the Fed, which has pivoted meaningfully. The Fed has a dual mandate, as we all know, which is price stability and full employment. We clearly do not have price stability, and if we are not at full employment, we're very close on the verge of being so. So starting really in November of last year and again in December and in January of this year, the Fed has meaningfully pivoted, and their outlook for monetary policy has moved materially. So that's basically what's happened. Turning to slide eight, we typically show the yield curve both nominal treasuries and swaps just want to make three points first of all if you look at the left hand side or the right you basically see that in the fourth quarter we had a flattening of the curve whereby shorter term rates rise more than longer term rates uh the flattening that occurred in q4 was just a repeat of what happened in q3 and frankly in q2 so throughout the last three quarters of 2021 the curve has flattened that's point one point two The flattening and the magnitude of the flattening and the magnitude of the movement in rates year-to-date in 2022 exceeds all of the movement we saw over the last three quarters of 2021. And then the final point, this is very true with respect to Q4, is the longer end rates, the 10-year did not move in case of nominal treasuries and only moved slightly with respect to swaps. Even year-to-date 2022, if you look at the yield curve You know, we've seen the 10-year rise by about 50 basis points, but the five years moved by over 80. In fact, I have the exact number through Wednesday. It was 86 basis points. So we've seen a meaningful flattening of the curve, and this is all in response to expectations on the part of the market for meaningful Fed interest rates. Slide 9, again, you see both the 10-year treasury and 10-year swap on Q4 only and in the last two years. As you can see, rates were fairly stable in Q4. Since then, 10-year rates have moved higher, basically into a new range. But again, it seems to have stabilized somewhere in the 2% range. And I think that is significant. We'll talk about that a little more later in the call. Slide 10, this is kind of our proxy for our earnings power. This just shows you the slope of the curve between the 5-year treasury and the 30-year bond. You can see this goes back to our inception. Most recently, starting last year, we've seen a pronounced flattening. This is a trend that is not our friend. This foretells earnings pressure. We got to about 40 basis points at the end. Most recently, this week, it was a little under 62 at the end of the year. Frankly, if you look in the forward curve, even out six months, it's basically flat or almost zero. Now turning to the performance of the mortgage market. A couple of things we need to stress here, and this is really relevant for ORCID. As you can see on the top left-hand side, we're showing the performance of all of these five 30-year fixed rate coupons, and we normalized this data back to the beginning of the quarter so we can show, in our mind, just a clearer picture of relative performance. What's very notable, remember, we had... The Fed announced tapering in November, and we have them accelerate tapering in December. And the market's been expecting this, but the Fed is clearly responding to these economic developments, and they're going to rapidly slow their asset purchases. You might have thought that the production coupons, the coupons that were most purchased by the Fed, would have suffered, especially late in 2004. And if you look at this line closely, you can see that 32.5 were the worst-performing coupon But Fannie 2s did better than Fannie 4s. So in our minds, that's quite counterintuitive. Fannie 3s did fairly poorly, almost as bad as 2.5s. And the reason lies in what you see in the bottom left, which is the growth. Even though the Fed has announced the tapering of their asset purchases, growth has been persistently high even into 2022. And what's notable here, at least in the fourth quarter, and more so in the current quarter, As you can see, two and a half rolls remain strong. The three roll, which really didn't make much sense to us, was one, a premium mortgage. The underlying cheapest to deliver Collado was paying very fast and the Fed was not buying them. That role has been strong, but even more so, a head scratcher, so to speak, is the three and a half roll over the course of the fourth quarter improved and is continuing to improve more so in the first quarter of 2022. Unfortunately, if you're an owner of spec securities as we are, developments in the role market tend to be inversely related to the pay-ups for specs. And if you look at the top right, you can see that spec pay-ups have been soft in the end of 2021. And on the bottom right, this is a very useful picture. So what this basically shows is the pay-up for what we would call a lower quality collateral, higher loan balance, still outperforms cheapest to deliver. but it's most sensitive to developments in the roll market. So the roll market is the red line. As you can see, towards the end of the year, the roll was trading, this is the Fannie 3 coupon, around five ticks. And the payout, this is on the left-hand side, was a little over 40. And so this divergence in favor of rolls and against specs was unfortunately not the way we were positioned. Year-to-date 2022, that red line, which is the roll for Fannie 3s, is now like 8.5 ticks. And the payoff for 225K3s is well under 20 ticks. So that divergence has increased materially. Turning to slide 12, this is just a picture on vol. Two points I'll make here. One, really since the end of the first quarter, vol traded in a fairly well-defined range for most of 2021. End of the year around 80 normal vols, this is 3 month by 10 year. Since year end it has increased, certainly higher than where it was, but not meaningfully so. It's really only around 90 sitting here today and this week. Slide 13, a couple of charts we like to use every quarter. On the left-hand side, these are just LIBOR OASs for the 30-year coupon stack and as you can see, The lowest two lines there are 30-year 2s and 2.5s. Those have been the coupons most in favor by the Fed, and they've been very, very tight and were consistently tight, even really through the end of the year, even though the tapering was announced. With respect to higher coupons, they were fairly stable as well, although at higher levels. Somewhat beneficial for us was if you look in the Right-hand side, you can see that payoffs for various loan balance threes were pretty stable, even into the fourth quarter. That has changed. All of these numbers that you see on the right-hand side are down between 30 and 40 ticks. Obviously, these are three. Whereas a 30% coupon traded with a $103 price at the end of the year, now they're more or less a current coupon. Those have dropped significantly since year end. Just a picture on the various components of the aggregate indices, fixed rate indices, and equities as well. This seems pretty much the same for both Q4 and the year. Higher risk assets did better, so the S&P, emerging market high yield, domestic high yield did well. TIPS did very well with the increasing inflation, not surprising. And mortgages, unfortunately, were laggards. And with respect to Q4, if you were to look at the One of the appendices we have on page 33, we give you the results for just December. And unfortunately, agency mortgages were on the bottom of the stack. So rough quarter for mortgages. Turning to kind of the refinancing outlook, these three charts we like to use quite frequently. Again, top left, we show you the refi index, and it's been trending down in the latter half of 2021. End of the year, as you can see, based on this, somewhere around 2,500. Since year end, that number, the most recent read this week is about 1,666 or so, so it's dropped even more. The red line here is the mortgage rate. Well, it ended the year under 3.4. Today, that number is appreciably higher. In the case of the Freddie Mac survey rate, about 3.9. In the case of the bank rate, it's a little over 4%. So that's been a meaningful change. It does appear that you might see some burnout in this slide just because of the way the refi index has been dropping, but really that's not what's going on. If you look at the bottom, you see this shaded area. This just represents the percentage of the mortgage universe that's refinanceable by at least 50 basis points. End of the year, north of 30 was around 40% at the end of the third quarter. Today it's under 15%. So really what's happened is just that Everybody that could refi pretty much has in most of the markets and lower coupons. So the refi index is quite low, and the percentage of the market that's refinanceable is also very low. Turning to our results of operations on slide 17, just want to make a couple points here. On the left-hand side, we tend to, like we always do, we disaggregate our earnings per share by our proxy for core, although it's not the same number that we get from our peers. And then the realized and unrealized gains and losses. And you can see a rather large number there for unrealized gains and losses. I want to talk about this more in a few moments, but I want to point out on this page that most of the losses that were incurred were unrealized. These securities we still own. So even though they took mark-to-market losses, our realized gains were actually quite small. So the portfolio that existed at the beginning of the quarter, for the most part, was still there at the end of the quarter. And then with respect to the right side, returns by sector, which, as you all know, we aggregate our capital into either our pass-through strategy or our structured securities, which are predominantly IOs and to a lesser extent inverse IOs. Pass-throughs did quite poorly, and IOs did okay, but given the fact that longer rates, especially in Q4, really didn't move, IOs tend to be sensitive to both longer rates, mortgage rates, and prepayment expectations, and while they did okay, they weren't enough to overcome what we saw with respect to pass-throughs. Friday 18, we just kind of give you a picture of our NAM going back. At this juncture, if you look at the green line, that's kind of where we've been in a pretty stable pattern, slight uptrend actually into the end of the year. But the blue line, the yields on our assets, even though they were up slightly this quarter, based on where we sit today with the long end being fairly stable, We're just not so sure how much that's going to increase because we're pretty sure the red line is. And so at this juncture, from an earnings perspective, all eyes are on the Fed. The meeting in March is going to be critical, I think. Earlier in this quarter, there was a high probability priced in by the market for a 50 basis point hike. I think that's less so now. But I think it will be important for setting the trend. Of course, also the chairman will speak at a press conference and have a lot more to say about their anticipated path and we'll get the dot plot. So March will be very critical for kind of setting expectations for the balance of the year for funding rates, but also we have to be watchful and mindful of the long-term rates because at the end of the day that's what controls our NIM. So at this point there's quite a bit of uncertainty in terms of the outlook for monetary policy and that hopefully will diminish over the course of the year. Slide 19 is just basically more of the same which we just looked at. And then slide 20 is just kind of our dividend versus our peers. And this is historical information. I don't need to dwell on that now. Now turning to slide 21, there's not much written on this page, but this is where I basically take a chance to kind of pause and spend quite a few moments talking about our positioning, the impact of our positioning on our results, both for Q4 and Q1, and kind of our outlook going forward. After that, then we'll continue through the slide deck, and I can give you more detail on our portfolio positioning, our activity in Q4, positioning at the end of the year, activity this year, and kind of our outlook going forward. So with that, I want to state that I think that our outlook for the rate markets and the Fed was pretty much correct coming into the end of the year. We are positioning really since the end of Q1. has been what we would consider defensive in nature. We expected higher rates. Not quite the way it played out in terms of the flattening of the curve, but we did expect higher rates. We did expect the Fed to taper. And in response, we avoided production coupons in anticipation to taper, and we expected rule softness, and we over-weighted higher coupon specs. That was the way we could generate our income without exposing ourselves to the Fed taper. we did increase our capital allocation to IOs and we kept our leverage ratio on the lower end of our typical range. However, in Q4 and especially in 2022, spec performance has been poor. Even with the taper and the acceleration of the taper announced in December and January, roles have remained quite strong. We've also seen an increase in rates and we also happen to have the seasonal We're at the point in the year when speeds tend to be slower. And Fed buying, even though it's diminished with production lower until at least the last few weeks, Fed purchases are still above production. So all of that has combined to keep roles strong. And as we've said before, and I'll say it again, role strength impacts pay-ups for specs. Some of the other nuances which are not as high-profile but still matter, is that the dealer community, which are typically large players in the spec market, they position them either to sell to customers or, more often, they'll position them for a few months, collect some very attractive carrying, and sell them into the market. And they almost exclusively hedge those positions through the TBA market. And with the roles as high as they are, in effect, their hedging costs are quite high. And so they've been much much of a less of a participant in the market so again uh it's been a negative for specs and then frankly uh with what's going on in the market and the extent of uncertainty that surrounds the mortgage market with tapering and balance sheet runoff and potential qt on the horizon we're very much in a risk-off market so mortgages generally have done quite poorly so where does that leave us um and how do we look at the world from this point forward And the answer from our perspective is we still prefer the specified pull market over the PBA market. And I'm going to explain to you why we view that way. A few points to make. One, the fact that the long end of the curve has remained fairly stable tells us that the market expects the Fed to be successful in containing inflation. So we expect long end rates to probably remain pretty stable for the balance of the year. Secondly, mortgages have widened a lot, especially in this year. One index that we look at is the spread of a current coupon mortgage to the 10-year. That was trading in the low to mid-50s last summer. Even as late as January of this year, it was only increased to 78 or 79 basis points. And as of yesterday and the day before, it was at 100 or a little higher. So mortgages have widened quite a bit. And they may widen more. There's no question that there's still a lot going on in the market that's generally negative, and we could see some widening in the short term. Long term, though, I think $100 over the curve is cheap, and I think that mortgages will, by the end of the year or next, will come back and trade in their more historical range, which is kind of a low 80 to mid-80s spread. So for that reason, long term, we like mortgages. Short term, it's going to be challenging. And then if you think about it, in terms of where we sit in the market today, in my mind, we're at a point of what I would call maximum uncertainty. We have very high degree of range of potential outcomes with respect to the Fed over the course of the year. How fast is the Fed going to run their balance sheet off? Over what time frame? How much are they going to allow it to shrink? Will they do quantitative tightening? And then we have what happened this week with respect to the Ukraine. we're at a point of very high uncertainty in the market, especially the mortgage market. And when that's the case, the market, as it always does, prices in a very high risk premium. And I think that's reflected in the spread at which mortgages trade. And in a sense, you could say with respect to mortgages, we're kind of at an absolute bottom in the sense that we have all of this uncertainty and really no sponsorship. The Fed buys, but they're diminishing their purchases rapidly. Banks have not been buyers nor money managers. So really, you have maximum uncertainty uncertainty or risk premium price into the mortgage market with no sponsorship. But we think this is going to abate, and that's important. We think that over time, over the course of this year, as the data comes in and the Fed takes action, that over time, the range of outcomes for the Fed will narrow, and the market will focus in with higher degrees of comfort on what they view like the terminal rate will be And at that point, we think that this risk premium will be able to come off. And we also think that roles will be hard-pressed to maintain these levels without the Fed sponsorship. And as roles come off, that's a positive for specs. And there are other factors that lead us to want to continue to own specs on the horizon, kind of secondary factors. But one, for instance, is in the fourth quarter of this year, the indices will include specs. So to the extent that our benchmark money managers out there They will be buyers of specs. If rules soften as it bates, the dealer community can be reengaged and start to own them. And then finally, just the fact that the conforming loan limit increased so much this year, the convexity of the cheapest to deliver collateral, PBA collateral, is quite poor, another reason to own specs. So where does that leave us? Well, it's been a rough quarter. We've incurred some mark-to-market losses, as you probably can infer based on what I've said, but we are not inclined to sell uh we have no no compelling reason to lock in losses uh the carry on these assets is very excellent uh we have had to reduce our balance sheet some we will continue to maintain levels of leverage uh but we are very good at managing our liquidity and we've been able to do that throughout all this period uh and we've been able to minimize the realized losses that we've incurred both in q4 and q1 to date so we basically have been able to retain a big chunk of this portfolio, and we think, one, that it is going to provide excellent carry over the balance of the year, and two, longer term, the performance outlook is very favorable. So with that, I'm going to move through the balance of the slide deck. I won't spend as much time on some of these slides. The first slide is 22, and you can see that with respect to our IO book, it has moved fairly sizably in percentage terms, roughly from 20% to 30%. Some of that is purchases of IOs, otherwise it's just market, just the fact that IOs went up in price and cash was down. Year-to-date, that percentage is even higher towards IOs and for the same reason. We show our activity for the quarter on the right-hand side. I'm going to dwell on that at this moment. Let's just turn to slide 24, and I can talk about the portfolio in a little more detail. If you look at this snapshot of the portfolio of December 31st, It looks very similar to the way it was at the end of the third quarter. It's just bigger. We were raising a lot of capital last year, and our total mortgage assets increased by about 16% over the quarter. However, the composition of breakdown was very stable. In fact, even the wall up only changed by one month. And the hedge positions I'll talk about in a moment here. Since year end, as I mentioned, the market has been very, very bad. We reduced the portfolio by about 20%. The way that we did that is a combination of twos and two-and-a-halfs and threes. Roughly even, a little more under or selling of two-and-a-halfs versus threes. And we've reported realized losses quarter to date of about $35 million. If you look at this, just one final point, just our interest rate shocks, we ran this as of the end of the year. And the profile is relatively flat, and that's typically what we strive for. That 31 negative million number, even though that's model-based, that represents a fairly low percentage of both assets and equities. Just quickly going through the balance of the slide, slide 25, the refi index, as I mentioned, is much lower. It's well under 2,000. Our spec allocation is probably up slightly since year-end, it had been declining through the second half of last year, most of last year, up this year just because of the relative allocation of sales for the other quality specs. With respect to our speeds, our portfolio continues to pay very, very slow. Our pass was prepaid at 9 CPR in the fourth quarter. Structured, we're under 25. So far in 2022, January was even lower than the 9%. It was a little higher in February, but Q1 is basically on track to match Q4, if not be slightly lower. Slide 27, just a couple points here. This orange line is the 10-year treasuring. I think what's kind of notable here, we ended the year about 151 basis points, and where we sit today, it's about 200. That's still well below levels observed in 2014, 2017, and 2018, and even early 2019. yet refinancing activity is lower. And the real reason is just that we've basically gotten everybody into a lower coupon, and there's very little of the index, the mortgage universe that's refinanceable. So in terms of our speeds, what we could observe over the year, I'm not so sure if we get to the low levels we saw back in 13 and 14, but we would expect them to be below that dotted line for this year. Slide 28 just talks about our leverage. We're targeting somewhere, you know, eight seven and a half to eight uh that's where we are today um it looked like we took a dip in the end of the second quarter that's really misleading we were raising capital back then we raised the slug right before quarter end so early in q3 that number was back up around eight so it will be down slightly from there kind of going forward and then finally with respect to our hedges i'll kind of Talk about this from two perspectives. One, what we did in Q4, and then what we've done in Q1. So starting on the top left with respect to our futures, the future position grew quite a bit in Q4, more so on the 500 point of the curve. As I mentioned, we've seen a tremendous amount of flattening. When I said we were positioned defensively coming into Q4, that was more of a bias towards the long end in terms of hedges, so we've shifted that. added to the fives and also ultras. And then with respect to the TBAs, we did add some threes as of the end of the year. That was zero at the end of Q3. And then that actually was basically gone now. With respect to our swaps, as you can see, over the course of the quarter, there was really nothing done at all since the end of the quarter, though. We moved some of the three- to five-year bucket. Those were just older four- and five-year swaps that were rolling down the curve. We extended those out to the seven-year point of the curve. And then with respect to our swaptions, there were not material changes. We did have a contingent curve flow that was unwound just because we'd kind of gotten out all of that trade that we could. And we have put on one trade since year end, which I'll It's not really relevant for this discussion. We can talk about that at the end of the quarter. That's about it. Those are the extent of our prepared remarks. And with that, operator, we can turn the call over to questions and field any questions anybody might have.
spk00: Thank you. At this time, I'd like to remind everyone, in order to ask a question, press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We'll take our first question from Jason Stewart with Jones Trading. Your line is open.
spk06: Great. Thanks. Good morning. Thanks for taking the question. How are you? I wanted to start with just two quick things. One, if I missed year-to-date book value, if you could give me that. And then two, maybe a quick update on how you're thinking about share repurchase activity in light of where the stock is relative to book.
spk04: Yeah, well, I did not say it. It's down close to 20%. under the fact that, especially in February, with the move in TBAs and specs, and with respect to share activity, we have not been able to do that in our blackout period. Also, given the magnitude of developments in the market during the quarter, we certainly didn't feel comfortable doing anything until that news was fully in the market. So now that it is, we are in position to continue to use our share repurchase plan. We did increase the size materially in December up to 10% of our outstanding. And to the extent the stock is trading below book, we have every intention to use that.
spk06: Gotcha. Okay. Going to thinking about the dividend based on a current book, I mean, that sort of has the current 5.5 cent run rate is a fairly high ROE or implied ROE payout. How do you sort of foot that with the current economics, and do you feel like you get credit for it? Thoughts on leaving it at $0.055?
spk04: I would say that the outlook is not favorable for the dividend. We really want to see what happens in March. I think that's a pretty pivotal month decision. As I said, not even two weeks ago, the market was pricing at a pretty high probability of $0.50. that's come off, especially with developments in the Ukraine. But we really want to see what they do and what they say, what the stop plot looks like. And it's quite possible there may be an adjustment, but we just want to make sure we kind of have a better feel for what we're looking at before we do so. But obviously, I mentioned on the call that the forward curve, even six months is inverted. So This is not a favorable environment for levered bond investors or levered investors of any kind. So I hope you can extract from that what you will.
spk06: Right. Got it. Okay. Last one and then I'll jump out. If we just take a bigger picture view of pay-ups and sort of CPRs moving to a natural rate of turnover, at some point there's little risk left in owning specified pools. How much risk do you think is left in the portfolio in terms of pay-up premium, or do you feel like we're already sort of at that point where it's an even economic trade and there's only upside?
spk04: Yeah, I think we're close. I don't know if we're there. I don't know if you make much out of what happened late yesterday and today where mortgages have rebounded, but it seems like near term we've gone through a lot of widening and specs have really suffered with the rolls. But we own threes predominantly, as you know, and in the third quarter, fourth quarter, those were $103 prices, not our current coupon. So depending on the story, those payups are very low. Could they get a little lower? Probably. But the outlook going forward, I think, is very asymmetric. And the fact that the long end has stayed where it is and the market seems comfortable with the Fed's ability to contain inflation, I think as we go through the year and the Fed does hike, You know, they often overshoot, as we all know. It could be that, you know, not long from now, a year or so from now, we're looking at, you know, the market starts pricing in the next recession. And so we're very keen on trying to maintain that optionality. That's why we're not going to sell all these specs, even if there is a little near-term pain because we think long-term. But, you know, for instance, if we were putting new money to work today, what would you buy? And I think they represent, you the earnings outlook isn't so great just because of the Fed, but from an asset-only perspective, they look very attractive, and we're trying to maintain that optionality. We're doing our best with respect to managing our liquidity, trying to keep our leverage ratio prudent, but trying to maximize how many of these we can hold on to because we think they have good carry in the near term and upside in the long term.
spk06: Got it. Thanks, Bob. Appreciate it.
spk04: Yep.
spk00: Okay, next we'll go to Christopher Nolan with Lattenberg. Your line's open.
spk01: Hey, Bob. Given that it's an election year, historically, how has the mortgage market responded to that?
spk04: I don't know that there is much. It's not a presidential year, so the focus will only be on the congressional and Senate races. I don't expect that. I mean, Now, the only instance, and I'll ask Hunter to chime in, the only time we've really seen elections affect markets is through the Fed and maybe the perceived reluctance on the part of the Fed to do a lot to disturb the economy in the run-up to an election, a presidential election. I don't think I've ever seen that with respect to other races, and I wouldn't expect one this year.
spk03: No, I don't think I would add to that. It's just to the extent that you know, it's either going to stoke the fires of inflation or cool it off a little bit, you know, to get a reversal of some of the energy policies perhaps, or, you know, or if you go cutting the other way, if you have a strong push and a willing Congress to push through some sort of an infrastructure project on top of hyperinflation that we're seeing, you know, that could be bad for us. But other than that, I wouldn't expect it to be
spk01: Great, and I guess just a follow-up in terms of the portfolio declines. Are you anticipating any further reduction in the portfolio size in the rest of the quarter?
spk04: We could if the market continues to move against us. We're doing everything we can to maximize our retention, subject to the constraint that we're not going to let our leverage ratio get out of control because we need to maintain lots of liquidity. To the extent the market goes more against us and our bulk value were to come down, our leverage would go up, we would have to prune as needed.
spk03: Yeah, the last few months have been sort of a slower evolving version of the taper tantrum we saw in 2013. And I think when the dust settles then as well as now, there were opportunities to be had, and I think that continues to be the case. So for us, we're just taking day to day, making sure that we have ample liquidity to deal with continued weakness in the mortgage market so that we can meet all of our margin calls and maintain leverage that's reasonable. And so that's kind of how we're going about this. When things start to calm down a little bit, I think we can reassess and see what the longer-term vision is going to be. Thanks, guys.
spk00: And a reminder, it's Star 1. If you have a question, next we'll go to Mikel Gooberman with JMP Securities. Your line's open.
spk02: Hi, good morning. I just have a quick follow-up on that portfolio reduction question. You said you've reduced it by about 20% since year end, mostly in two and a half and threes. Did you reduce the IO portfolio at all? Or was it all just in the pass-throughs? Pass-throughs. That percentage would be higher. Right. IOs are now a bigger percentage of the portfolio. And I think I remember you saying that the TBA shorts that you had on as of the end of the year are gone now. Is that right? As of the end of the year, gone, yeah.
spk04: And, you know, What we will do, sometimes when we sell assets, we'll sell TBA and then fill with pulls. So that's really not a hedge trade so much as just a means to facilitate a trade or a sale. And we buy the same way. A lot of times we can buy on swap as well.
spk02: All right. That's it for me. It sounds like a pretty... Difficult environment right now. Wishing you guys best luck going forward.
spk04: Yeah, it's been a brutal quarter to be a mortgage investor. I'm kind of abandoned by everybody. Nobody wants to own them. So if you know anybody who wants to buy a few billion, let us know. I'll keep my eyes out.
spk05: Okay.
spk04: Thanks.
spk00: Well, I'm sure we have no further questions. I'll now turn it back over to Bob Colley for any additional or closing remarks.
spk04: Thank you, operator. Thank you, everybody. Appreciate your interest. As always, to the extent you have further calls or questions, you want to contact us directly, feel free to contact us at the office. Our number is 772-231-1400. Otherwise, we look forward to talking to you next quarter. Thank you.
spk00: That does include today's conference call. You may now disconnect.
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