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DATE
Friday, July 25, 2025 at 2:00 p.m. ET
CALL PARTICIPANTS
Chairman, Chief Executive Officer, and President — Robert E. Cauley
Chief Investment Officer and Chief Financial Officer — Hunter Haas
Controller — Jerry Sintes
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RISKS
Book value decreased from $7.94 per share at March 31 to $7.21 per share at June 30. Management reported a negative total return of 4.66%.
Management noted, “Mark-to-market hedge losses totaled $0.47 per share, or $52.8 million. Swaps accounted for the disproportionate share.” directly impacting results.
Chairman Cauley described “chaotic” market conditions driven by tariff announcements and concerns over “The sanctity of the dollar and the flight of capital out of the US”
“Prepayment speeds were 10.1%, compared to 7.8% in Q1 2025.”
TAKEAWAYS
GAAP Net Loss-- $(0.29) per share (GAAP), compared to net income of $0.18 per share (GAAP) in Q1 2025, due to realized and unrealized losses.
Net Income Excluding Realized/Unrealized Losses-- $0.16 per share (excluding realized and unrealized losses, non-GAAP), unchanged quarter-over-quarter, highlighting core earnings stability.
Book Value-- Book value decreased from $7.94 per share at March 31, 2025, to $7.21 per share at June 30, 2025, reflecting the negative impact from market volatility and hedge losses.
Total Return-- Total return was negative 4.66%, compared to 2.6% in Q1 2025, indicating adverse performance.
Dividend-- $0.36 per share dividend, matching the prior quarter despite earnings volatility.
Average MBS Portfolio Size-- Average MBS portfolio size was $6.9 billion, up from just under $6 billion in Q1 2025, demonstrating investment expansion funded by $140 million in new equity.
Leverage Ratio-- Leverage ratio was 7.3 at June 30, 2025, down from 7.8 at March 31, 2025, reflecting a “defensive position” taken by management.
Liquidity-- Liquidity increased to 54% at June 30, 2025, from 52% at March 31, 2025, as a result of capital raising and defensive management.
Hedge Composition-- 78% interest rate swaps (by DVO1), with the remainder in Treasury futures; management expects a further shift toward swaps due to market spreads.
Repo Funding Environment-- Blended funding rate of 4.48%, essentially flat quarter-over-quarter; average maturity narrowed to 35 days.
Economic Interest Spread-- 243 basis points economic interest spread, supported by a portfolio shift toward higher coupon MBS.
Portfolio Rotation-- $334 million and $137 million sold in lower coupon Fannie Mae fours and fives; $555 million, $145 million, and $86 million redeployed into 5.5%, 6%, and 6.5% coupons, respectively.
Prepayment Speeds-- Prepayment speeds were 10.1%, up from 7.8% in Q1 2025, with explicit management commentary that speeds are expected to remain muted going forward.
Market Event-- Swap spreads became “extremely negative.” making swaps an increasingly effective hedge for levered MBS portfolios.
Capital Actions-- Over 1.1 million shares were repurchased at a substantial discount early in the quarter and shares were issued at a slight discount to book to build liquidity.
SUMMARY
Management attributed performance pressure primarily to market volatility linked to early-April reciprocal tariffs and subsequent hedge-related mark-to-market losses. Both portfolio shifts and capital actions were taken in direct response to these dislocations, with an increased allocation to higher coupon MBS and a larger equity base. Management highlighted the continued steepening of the yield and swap curves as central to the current strategy. The funding environment remains stable, with excess borrowing capacity and active repo counterparties reported. Hedging continues to favor interest rate swaps in light of wider swap spreads, with swaps comprising 78% of DVO1, and management sees the agency RMBS environment as “extremely attractive” for total return potential based on prevailing spreads over swaps, as discussed on the earnings call.
Chairman Cauley stated, “ROEs are 16, maybe 16 and a half. If you were to stretch the composition, buys it more up in coupon. You could probably get to about 18.”
Management expects dividend policy to converge with forward economics over “maybe a year or two more,” as historical hedge settlements become less material with portfolio growth.
Haas reported, “Our all in economic cost of funds rose modestly from $2.83 to $2.95, mainly due to swap portfolio dynamics.”
Current coupon production spreads were cited at 200 basis points over swaps, a historically wide level driving management’s conviction in carry opportunities.
Chairman Cauley said, “we were able to limit the deleveraging or selling, if you will, to less than 10%, and we, in fact, actually bought back a little over 1.1 million shares early in the quarter at a substantial discount.”
INDUSTRY GLOSSARY
Production Coupon: The prevailing interest rate on newly issued MBS, typically referenced as a spread to benchmark rates or swaps.
DVO1: Dollar value of a one basis point move; quantifies interest rate risk per one basis point change in yield, for both asset and hedge positions.
SOFR Swap Curve: The yield curve derived from interest rate swaps linked to the Secured Overnight Financing Rate, used for hedging fixed-income portfolios.
Specified Pool (“Spec Pool”): Pools of mortgages selected for specific prepayment characteristics, often commanding pricing premiums.
Barbell Approach: Investment strategy balancing allocations between low- and high-duration assets within a portfolio to manage risk and return profiles.
Full Conference Call Transcript
Robert Cauley: Thank you, operator, and good morning. As usual, we will be going through our deck over the course of the call. Hopefully, you have had a chance to download that from our website. We placed it up there yesterday afternoon. With me today is Hunter Haas, our Chief Investment Officer and Chief Financial Officer, and Jerry Sintes, our Controller. As usual, following the table of contents, the first thing we will do is go over our financial highlights. Jerry will handle that for us. I will go through the market developments and focus on what could happen, how that impacted us, our performance, and our decision-making.
Then Hunter will go over the portfolio characteristics and our hedge positions before we open up the call to questions. So with that, I will turn the call over to Jerry.
Jerry Sintes: Thank you, Bob. If you turn to page five, we will start with the financial highlights of the quarter. During the quarter, we reported a loss of $0.29 per share compared to income of $0.18 per share in Q1. It should be noted that excluding realized and unrealized losses, there was a net income of $0.16 per share, which is the same as Q1. Book value decreased from $7.94 per share at March 31 to $7.21 at June 30. Total return per quarter was negative 4.66%, compared to 2.6% in Q1, and we reported $0.36 of dividends in both quarters. Turning to page six, go to Portfolio Highlights.
We had average MBS during the quarter of $6.9 billion compared to just under $6 billion in Q1. We had our leverage ratio at June 30 was 7.3, which is down from 7.8 at March 31. Our prepayment speeds during Q2 were 10.1% compared to 7.8% in Q1. And our liquidity at June 30 was up to 54% from 52%. On page seven is our summarized financial statements. These are the same as what was in our earnings release last night, and we will have more detail presented with our 10-Q that will be filed today. So with that, I will turn it back over to Bob.
Robert Cauley: Thanks, Jerry. I will now go through the market developments for the quarter. And as we all know, there were two big events that occurred in the quarter, one much greater than the other. The first of which was the reciprocal tariffs announced in early April, known as Liberation Day. Later in the quarter, the administration's what became known as the one big beautiful bill was passed. It was signed into law on July 4, although the heavy lifting to get the bill to the point where it could be signed occurred late in the quarter, and it definitely had an impact on the market and outlook, although much less than what occurred early in the quarter.
Obviously, what happened in early April was not quite as bad as the onset of COVID in March, but pretty significant. There was obviously a lot of forced deleveraging, and there was a lot of concern in the market about a host of things. The sanctity of the dollar and the flight of capital out of the US and so forth. So it was clearly a very chaotic period. That being said, given that I have been doing this for a while, we were quite well positioned for that. We had very high cash positions. Our leverage was on the low end of our range.
As a result of that, we were able to limit the deleveraging or selling, if you will, to less than 10%, and we, in fact, actually bought back a little over 1.1 million shares early in the quarter at a substantial discount. Once the dust settled there in the quarter, and we kind of basically grinded sideways. We maintained a defensive position, but we were able to sell some shares. We actually did so at a slight discount to book, but we were able to generate a nice cushion, a cash cushion, if you will. As I mentioned, we were still defensively positioned. We kept the leverage at the low end of the range.
Now I will go through the deck and the slides and try to focus on the things that happened that were of most relevance to us. And there were two primary takeaways I want to focus on. On slide nine, you see the curve, the US treasury curve and the swap curve. And, obviously, the first thing I want to point out, if you look at that blue line there, that is where the curve was last Friday. The green line is June and then March. You can see the curve has been steepening. And that continued in this quarter. I have a fair amount more to say about that as we go on.
But also note on the right side, the SOFR swap curve. And I want to point out, if you look at these curves, the horizontal lines line up. So you could effectively put all of these curves on the same and you can see the gap between the nominal curve, if you will, and the swap curve is wide and has been growing. And that is significant for us. So that is kind of the first takeaway. So swap spreads are becoming extremely negative. And for levered MBS investors who have to hedge their positions, using swaps is becoming a very attractive option for us because of the spreads that are available in the market as a result of that.
So that is kind of point one. If you go to point two, that is on slide 10. So here we show some of the mortgage metrics. The top is just the spread that we show, and this is, you know, a lot of history. Years of history going back. Current coupon spread at ten year. That is a ten year treasury, not swap. As you can see, with respect to that spread, I mean, it is still wide by historical standards, but it is well off the extreme levels we saw in late 2023. But in the case of swaps, that is not the case.
If you look at the bottom left, what we did show this every quarter, these are normalized prices for selection of Fannie Mae thirty year coupons. So what we do is we set the price equal to a 100 beginning of the quarter. As you can see, I want to point out that even though the return for the index, mortgage index, and the thirty year subcomponent were positive for the quarter, that is just because there is an income component of total return. Price returns was negative or close to negative in the case of everything but Fannie sixes. You can see that prices just did not fully recover.
And in fact, as we have entered the third quarter, they have continued to soften. So that is just keep that thought in mind for a second when you consider the following. When you look slide 11, this is what a picture of volatility. And, you know, in this case, we are using a pretty common measure, three month by ten year normalized vol. This is what we would refer to as gamma. But notice that in this one year look back period, as you saw in early April, vols spiked, which is what you would expected. So that was the high reading for this one year period. But notice over the course of the quarter how much it fell.
So we went from the local high to the local low over the course of one quarter. And if you look back in the middle of that graph, say, late 2024, and '25 when vol was also low, mortgages were doing very well. But you look at where we are now with vol at the lowest levels of this period, and they are not. It is kind of that is the second takeaway is this combination of relatively weak mortgage performance even in the face of low volatility, which is counter to what we would expect. And so that means you have attractive assets to acquire and very effective ways to hedge them the swap market.
So those are the two primary takeaways I want to focus on. Continuing on with the rest of the deck, you look at Slide 12. On the left hand side, you see various swap tenors, sevens, fives, or so I am sorry. Second two year, five year, seven year, and ten year. And as you can see in this graph right around the April, these things dropped down precipitously. Note how the fact that they did not recover. They have trended sideways since. So and, you know, what is driving this? And what is driving this is the falling.
With the government running deficits in the market and anticipating continued deficits, especially after the passage of the one big beautiful bill. That means that the market is in effect anticipating heavy treasury issuance. So as, you know, in the face of very heavy treasury issuance, it is as if nominal treasuries are cheapening to a effectively has become the new risk free asset, which is a swap yield.
And so and since the market expects this to continue, and I mentioned earlier that the one big beautiful bill was passed, and while it is going to be very stimulative for the economy, it also if you look at it from a perspective of fiscal deficit, it is not likely to cause a shrinkage of those. So a continuation of deficits, which means nominal treasuries have been cheapening relative to swap yields. And that appears to be something we expect continue for quite some time. On the bottom right, we show the composition of our hedge book weighted by DVO1. And as you can see, swaps, the green area, are over are almost 80% futures at 21.
Given what I have just said, we would expect that composition to shift going forward in favor swaps more, if for the obvious reason. Moving on to slide 13. This is a picture of the mortgage refinancing and mortgage housing market. On the left, you can see the refi index versus mortgage rates. You know, the song remains the same. The refi index is at historically low levels. Mortgage rates are high. The reasons I have been discussing, I would expect that those would continue to stay high. And just to give you some added color, this last week, existing home sales were released. Home prices are all time highs. They continue to hit all time highs.
The inventory to sales ratio, which was at 4.7, typically, is considered kind of middle of the range. But that being said, that is the highest reading since February 2016. So inventory levels are building. And when you consider that the consumer is relatively tentative given the uncertainty around tariffs and potential job losses. Affordability is at multi years, if not decade lows, and rates are high and likely to stay higher, you know, what does this mean? Well, refinancing activity is likely to stay quite low. And what that means then for carry, particularly higher coupons, is that carry could be very attractive.
So I am trying to paint a picture here that shows that based on what is going on in the market, the outlook for mortgage and mortgage investing could be quite attractive. A few more slides before I turn over to Hunter. Slide 14. I have been showing this one for years. Or at least quarters rather. And you can see I just have on here the GDP of US in dollars versus the money supply. And the red line, as you can see, is the government continues to run large deficits and it is keeping growth elevated. It is really buttressing growth.
When you look at, for instance, what happened in '22 and '23 when Federal Reserve raised interest rates by over 500 basis points, yet the economy never really ran into recession. And even today, in the face of these tariffs, you know, the labor market appears resilient. The unemployment rate has not grown. And spending, and, you know, consumer spending has remained at least resilient, if not very strong. And what this really means is that you have this deficit spending, which is really preventing the economy from slowing in the face of what would otherwise be typically slow the economy quite a bit, whether it is the uncertainty surrounding, the tariffs or the Fed hikes.
And so I expect that to continue which means that the account, I would expect to continue to be quite robust. I want to go to a few slides in the appendix I will give you a moment to turn the page. If you look on slide 26, this is new. What we are showing is the term premium as measured by the ACE ACM model. I am not an expert in the ACM model, but I can tell you that it is one widely used and well respected. And what you see in this data, this goes back twenty five years, is that for a long period of time up until around February 2015, term premiums were positive.
In some cases quite high up to 300 basis points. But then we entered a long period of where they were negative or rarely positive. But that is changed, and we are starting to see them move higher. And for the reasons I have been discussing, think that is going to continue to be the case. And so with respect to, say, instance, the curve shape, while we may not get as much Fed cuts as many Fed cuts as the market anticipates we may, but even if we do not, I think this upward pressure on longer term rates is going to keep the curve steep, which is again, attractive for investors such as ourselves.
On Slide 27, another new slide what we are showing here is the spread of the current coupon mortgage to both a seven year swap in the case of a blue line and a ten year swap versus a red line. As you can see, where we are now, we are in the neighborhood of 200 basis points for the current coupon mortgage to a seven year swap. Have not been at those levels since late 2023 when the Fed was just finishing up in a massive tightening cycle and mortgages had suffered mightily. So here we are right back in those levels.
And I also, you know, in conjunction with what I have been saying about the market generally speaking, all this paints a very attractive picture for mortgages. The final slide before I turn it over to Hunter is slide 28. And then talking about this one as well for quite a while. What you see here bank holdings of mortgages as well as the Federal Reserve. And as we can see in the red line, the Fed just continues to let the mortgages run off their balance sheet. Banks have been growing slowly, but very slowly. The rate of growth is minimal and they represent one of the most, if not the most important marginal buyer of mortgages.
If you look at the mortgage market today, obviously, REITs have been growing, raising capital. They are still not nearly as big as the bank community. The money manager community has been seeing inflows. They have been overweight mortgages for some time, so they are a good source of demand. But their flows can go both ways and be volatile. So what is really been missing is this big 800 pound gorilla that is banking community from coming in and buying mortgages. And really, I think that is what is a big reason why mortgages have yet to perform well, and we still trade at these cheap levels. So going forward, what could change that?
What could cause the banks become more engaged? Well, one of the points mentioned often is these uncertainties surrounding tariffs. Hopefully, that is behind us relatively soon. We will see a regulatory relief that is in the works. And then, obviously, Fed rate cuts which would further steepen the curve. All of these could combine cause the banks to be more engaged, and that would represent a very much a big win behind the in the sales of mortgages. I guess the final one might be if the economy does get really strong and deposit growth grows that at the banks, they could buy more.
It definitely is a source of potential tightening but we are just not sure when in the past it is going to occur. So that is kind of my synopsis of all the macro developments in the market and what those mean for us. With that, I will turn it over to Hunter.
Hunter Haas: Thanks, Bob. If you are following along, we will go back towards the investment portfolio section starting on Slide 16. During the second quarter, we continued to reposition our portfolio up in coupon. Waived average coupon increased from $5.02 to $5.45 from $5.32 at the end of the first quarter. While the realized yield slightly declined from $5.41 to $5.38. Our economic interest spread remains healthy at 243 basis points. We rotated out of lower pay up Fannie fours and fives, $334 million and $137 million respectively, and increased five and a half, sixes, and six and a halves by $555 million, $145 million, and $86 million, respectively.
This marks a continued strategic shift away from our barbell approach towards a more concentrated production coupon bias. This has served us well in this recent curve steepening environment that Bob has been discussing. Turning to slide 17. This slide shows the evolution of our coupon allocation over the past couple of quarters. You can see the meaningful decline in the exposure to three and a halfs to four and a half coupons and a corresponding rise in five and a half to six and a half percent buckets. This shift is deliberate.
Lower coupon pools while theoretically easier to hedge, have shown elevated spread volatility during risk off events largely due to redemption driven selling by the money manager community that Bob was just talking about. The combination of the heightened spread volatility, considerably lower realized yields, relatively higher hedge costs resulting from a steeper yield curve, have all contributed to the rationale for us to shift away from the barbell into a more production coupon focus. Turning to slide 18. Our repo funding remains very stable. We had a blended rate of 4.48% in the second quarter, which was basically unchanged from the first quarter. Our average maturity shortened slightly to thirty five days.
Our all in economic cost of funds rose modestly from $2.83 to $2.95, mainly due to swap portfolio dynamics. And we ended the quarter with our leverage at 7.3 down slightly from seven and a half, reflecting our disciplined focus on keeping leverage stable in volatile times. The funding environment remains very constructive with repo spreads relatively stable outside of period end tightness. And at June 30, 2025, and continuing into the third quarter, we had excess borrowing capacity with 24 active lenders. And a few more sources of funding in the queue. Turning to slide 19. Just to briefly discuss our hedge positions. Our hedge ratio stood at 73% of our repo balance at quarter end.
Down slightly due to the asset mix shift that I discussed earlier. Going forward, we will likely shorten the hedge mix and thereby increase the notional balance of the hedges commensurate with the shorter duration of the assets we have been adding. The book is still biased towards interest rate swaps. As discussed earlier, 78% of our DVO1, in fact. And the rest is in futures, predominantly, treasury futures. Current configuration leaves us modestly positioned for a higher rate bias and a steeper curve. Mark to market on the hedges in the second quarter totaled $0.47 a share or $53.8 million with the majority stemming from our swap positions.
While both swaps and treasury futures contributed to losses, the treasury hedges outperformed our swap hedges. And this reflects the sharp tightening in swap spreads following April's hedge fund stop outs, when levered players were forced to unwind basis trades, under stress and distorting the price of the treasury curve. Going to slide 20, I just have a couple points to make here. You will see the full breakdown. This will show you our full breakdown of all of our hedges, swaps, futures, and TBA positions. Our swap book had a weighted average maturity of five point seven years. With an average fixed rate of 3.30. Futures remain concentrated in five, sevens, and tens. So the FDs, GYs, the ultras.
And, at the end of the quarter, we did not have any short TBAs or swap ship positions. Slide 21 shows how combination of the assets and the hedges lead to our current risk profile. It shows our interest rates. Page 21 shows our interest rate sensitivity by coupon. Our portfolio is now as I mentioned, more weighted towards lower duration assets. And we have maintained a slightly higher duration on our hedges. Giving us the curve steepening bias that I alluded to. We expect positioning to be this current positioning to be resilient in a bear steepener or higher rate scenario. And while still capturing meaningful carry.
Because spreads of mortgage assets over swaps are very elevated at the moment. Slide 22. Our dollar DVO1 for RMBS is $2.285 million, while the hedges $2.492 million, leaving a modest negative duration gap of $207,000. This equates to 0.17% exposure in an up 50 parallel shock. Which is very manageable. Our strategy keeps us agile across rate paths with modest exposure, as I alluded to, to curb shape and lower rates. Slide 23 is our prepayment experience. Prepayments remain pretty muted overall, with the slight seasonal uptick. Higher coupons continue to see very modest speed increases. The most of them are still in kind of the mid to high single digit range.
And our deep discount positions continue to benefit from favorable prepay speeds, you know, mostly in kind of the mid to upper single digit range. Which provides a consistent source of income. Just kind of wrapping things up, and giving a little bit of an outlook. Q2 opened with a severe volatility reminiscent of March 2020. The tariff announcements triggered a violent risk off move in widespread deleveraging. Thanks to our ample liquidity and strong hedge positioning, we avoided large scale forced sales. As the market stabilized, we raised $140 million in new equity and deployed it into higher coupon specified pools. Expanding the portfolio modestly, by quarter end.
Mark to market hedge losses totaled $0.47 per share or $52.8 million. Swaps accounting for the disproportionate share. Going back, this is due to the violent swap spread tightening move that we saw in April. Portfolio shift towards higher coupons as short in sole overall duration. And as a result, our hedge ratio as a percent of our repo balance declined slightly. Going forward, we may modestly narrow that gap. Looking ahead, we believe the investment environment for agency RMBS remains extremely attractive. Production coupon spreads are currently 200 basis points roughly over swaps, which is historically wide level that presents a very compelling total return potential. Even with that, some sort of catalyst driven basis recovery.
Our larger equity base and refined coupon allocation and reduced leverage also provide us with a lot of flexibility going forward to be opportunistic. Our higher coupons specified pools offer a lot of carry and our hedge structure by being biased towards slightly longer tenures is designed to mitigate upward interest rate shocks, the effect of upward interest rate shocks in a steepening curve. So with that, I will turn it back over to Bob for some concluding remarks.
Robert Cauley: Thanks, Hunter. Just a couple of things I will mention before we turn over to question and answer. We did not dwell a lot on funding. We have seen some volatility in funding spreads around month, quarter, and year end. Three, four or five basis points generally is the range. Otherwise, I would say funding has been stable. We have had no issues whatsoever adding repo counterpart when we need it, you know, as we have seen we have been growing. So if anything, the complaint we hear from our repo counterparties is they are asking for more bonds, not less.
So I would say, you know, characterize funding as ample for our asset class, with spreads that are somewhat choppy around period ends, but otherwise fairly stable. And then I suspect we may hear this question, but I will be glad to talk about it more. But with respect to GFC privatization, I think it is not on the immediate horizon. I think it could happen, but our basic takeaway is that with mortgage or housing at multi decade lows, anything that has any risk of causing mortgage spreads to widen is not something that is going to be pursued.
Even if it does, the president has already said, you know, it is just a statement, not law, but saying that, you they would the implicit guarantee of mortgages. So that would basically derisk that if it were to occur. Again, you know, who is to say if that actually became law, but, at least with the perspective of the current administration they would try to maintain that. So that is about it. Otherwise, I would just, you know, reiterate we expect the market to stay favorable for mortgages. We talked about swap spreads being where they are, like, that could continue to erode. We will see what this price in the market.
I think it is quite a bit, but it could potentially get worse. Otherwise, you know, volving low, curb steep, and the mortgage is looking quite attractive from a carry perspective. All bode well. So with that, I will turn the call over to questions, operator.
Operator: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press 11 on your telephone. If your question has been answered, you wish to move yourself from the queue. Our first question comes from Jason Weaver with Jones Trading. Your line is open.
Jason Weaver: Hey, guys. Good morning.
Robert Cauley: Good morning, Jason.
Jason Weaver: So I get a number of about $18.8 million increase in shares over the quarter. I guess that squares with the $140 million capital raise mentioned. I wonder what is your position towards raising additional capital here given the incremental ROE opportunity that you are seeing?
Robert Cauley: Well, with typical where the stock trades, we would like to see it obviously higher. Let us just talk about ROEs. I would say obviously, it depends on your coupon mix and leverage ratio. Let us just assume for the moment a leverage ratio of eight, which is above where we are, but a nice round number. And I think that increasing our leverage could be warranted in this environment given everything we have said. So let us just start with eight and our current coupon mix. In other words, what we have in the portfolio today, I would say ROEs are 16, maybe 16 and a half.
If you were to stretch the composition, buys it more up in coupon. You could probably get to about 18. So that is kind of the range I would say which is available in the market. And, with terms of capital raising, it is a question of where the price is. We would accept slight dilution to book, which we did in the second quarter given the you know, the chaotic nature of the market and the fact that spreads were so attractive. But going forward, ideally, we would like to be at broker better all the time and these are still attractive levels, which we really have not seen in a while.
Jason Weaver: Agree. And that is helpful. Thank you for that. I was also wondering, given the stance towards high coupon positioning, how you are thinking of the premium risk in those you know, say, six and six and a half pools, I would say either a point or three points of premium. Today, on generics, think maybe that just squares with your view that, you know, rates stay higher for longer in the long end.
Robert Cauley: Yeah. I would say so. And we tend to buy I do not know. Hunter speak of this more. Like, we tend to buy lower pay up, pools. And the prepayment experience on those has been very good. The housing market is in a real challenging situation with from a perspective of affordability and the ability people to refinance. And with the curve staying the way it is, what deficits running the way they are, and the economy is strong and resilient as it is. It is really hard for me absence of some external shock, to see a big rally in the lung.
And now you could argue that is the obvious pain trade it is, but I think carry, absent in a shock and higher coupons, is very attractive.
Jason Weaver: Yeah. Got it. Oh, go ahead.
Hunter Haas: First of all, just to chime in on that, you know, all of our premium specified pools are you know, have some sort of a story to them. So that is the kind of first line against, in against, know, some sort of a large rally and premium risk. So we have focused on stories that are relatively inexpensive, know, try to kind of focus inside of an extra point. But those stories have held up really well as we have had these small, you know, kind of micro refi waves over the course of the last year or so. And, so I think we are well positioned.
We still do have a decent portion of the portfolio, in the discount coupon, so that always helps in that big rally scenario. We would see expected to see those assets do very well. While the higher coupons, specifically like the six and a halves and maybe even the sixes, underperform a little bit. And we have seen that happen as we have you know, pushed towards the lower end of the rate range here in the last several months. And the strategy is to be working relatively well.
We keep enough, enough exposure to discounts even if they are more recently just slight discounts, so, like, fives and the five and a halves, that I think we are pretty well diversified for both Little Rally and refi wave as well as a sell off. That is the other side of it is the sixes and six and a halves have done incredibly well as we push towards the higher end of the recent range. So how we think about it.
Jason Weaver: Got it. Thank you. And one more if I may. Did you give an updated quarter to date book value? Apologies if I missed it during the prepared remarks.
Robert Cauley: We did not. And as of last night and these numbers are not audited, obviously. It is just our best guess estimate. We were down about 3¢ quarter to date. About 3%, 3 pennies. 3¢.
Jason Weaver: Thank you very much. Appreciate the time.
Robert Cauley: Yep.
Operator: One moment for our next question. Our next question comes from Mikhail Goberman with Citizens JMP. Your line is open.
Mikhail Goberman: Hey. Good morning, guys. Hope everybody is doing well. Thanks as usual for the detailed slide deck. Just a quick question on prepay speeds. There was a bit of a spike up in the second quarter. What is your sort of outlook for the third quarter in terms of prepays?
Robert Cauley: I would say very muted. You know, consider that the second quarter is typically the peak seasonal period. Now that is not a premium story or discount story. That is just, you know, the nature of the turnover. It was very muted given that. And that was the brief refi spike was really just because of the rally that occurred early in the quarter. I do not expect that to continue much at all. And, you know, again, if to the extent we continue to see pressure on longer term rates, I do not really see how you can have that come back meaningfully. I would say, I expect them to be muted.
Hunter Haas: Yeah. And we have added if you are of that was just the naturals seasoning of the portfolio, in conjunction with a small refi opportunity, similar to sort of what we saw at the end of let us see, September, October of last year. Pushing into December and January speeds. So, I think going forward, we should be in good shape. And we have also added a lot of newer issue spec pools in the upper coupon range. So that should pull that weighted average speed down a little bit going forward.
Mikhail Goberman: So I will probably expect something with an eight or low nine handle as opposed to almost eight in the first quarter, you would say?
Hunter Haas: Yeah. I do not have that much. Which slide is that on? 23.
Robert Cauley: Yeah. Yeah. I mean, the what was the three month fee? It was $8.09. Is that what you are referring to? And then $14.04 and some of the 6 is I do not know if we get to single digits in those coupons. I think they will remain in the teens with possible exception of sevens. So I do not even in mid low to mid teens, I would think, by the, you know, end of the year. So I think that the carrying those is going to continue to be good. And combination of relatively muted speeds and the dollar prices that we are looking at, the yields in those are in the mid to high fives, I believe.
Mikhail Goberman: I want to say, oh, I do not if you have it in here, but six and a half, I think they are in the $5.70. $5.65, $5.75 range. And I would expect that to be maintained.
Hunter Haas: Mhmm. That is right.
Mikhail Goberman: Thanks, guys. Appreciate it.
Robert Cauley: Yep.
Operator: One moment for our next question. Our next question comes from Jason Stewart with Janney Montgomery Scott. Your line is open.
Jason Stewart: Hey, good morning. Thanks for taking the question. Hey, Quick one on Bob, on the capital activity. For the share repurchases and the do you have a number how that impacted book in the quarter, either separately or together?
Robert Cauley: I do not have one on the buybacks. On the issuance, it was somewhere around and this is there is no precise way to measure this because you do not necessarily know what book value is at the moment you are selling shares. I tend to just look at end of day book to compare that to the issuance price, which I am not going to say is absolutely the best way. It was somewhere around $0.20 to $0.21 cents. Negative in the second quarter. And it was about a positive $0.21 or $0.22 in the first quarter. But we sold more shares in the second quarter.
So the combination of the two was about 99 and a half percent of book for the first six months of the year. Net of fees. Yeah. Net of fees using that methodology.
Jason Stewart: Okay. Alright. Thank you for that. Just on the ROE range, you know, relative to the dividend, I know there are tax differences. But, I mean, if we think about the dividend today on a let us use $7.24 for current book value. That is a 99 payout. Plus cost to operate. Relative to the ROE that you are talking about in the high teens could you just help me think through how you put those two and how we should think about the tax versus economic return difference?
Robert Cauley: Okay. Well, first of all, you know, keep in mind that the mark market of the portfolio affects the yield. So obviously, as you mark the portfolio down, the yield is going to go higher. And I think that is capturing a part of that. You also think of it this way, whenever the mark to market portfolio occurs, you also have a realized or unrealized loss. So that dividend yield might be 20% but you have also incurred a mark to market loss. Now that does not impact the dividend per se, when you think of it from a total return perspective, yeah, you are paying a higher dividend, but you have got a mark to market loss.
So what is the net of that and compare that to what you are earning on new capital. Also, keep in mind that for tax purposes, when you close out a hedge, if the hedge is in the money, you are required by tax law to allocate that equity over the balance of the hedge period. So when you look at the dividend we pay, some it is driven by taxable income, some of that is a result of closed hedges. So there is no that cash is not necessarily sitting in an escrow account.
So if at any point in time, you have a period where market moves and your hedges go into money and your mortgage assets go out of the money, you are going to get margin call activity. You are going to be sending out cash to your repo counterparties, you are going to be taking in cash from your hedge counterparties. The net of that could be zero. So your cash position could literally not change. Under tax law, you have to take that equity in those hedges.
And let us say you closed your hedges, all of them, just for argument's sake, at the end of that period, all of that open equity would have to be used to reduce interest expense over the balance of the hedge period. So when you calculate your dividend for tax purposes, you offset interest expense incurred over that period and then reduce it by that open equity. But that cash does not exist. That is just an artifact of the tax law. Now under the tax law, you might have capital losses in that period, but those do not affect the dividend calculations generally.
In fact, respect to calculating, say, taxes on under distribution of REIT earnings, you ignore capital gains. Those are kind of thrown out the window for that purposes. So in our dividend, it is capturing those effects. So the one you have is interest expense, adjustment. But you also have the fact that your portfolio in this period went down in value. So now when you look at that yield, as a percentage of the current mark to mark value of the portfolio, it appears very high. When we give you a ROE, that is on a flat line basis. So the perspective of total return, that is just the carry.
When you look at the historical, it is a combination of carry and mark to market danger losses. Right. Does that help?
Jason Stewart: So yeah. No. That is helpful. So would it be fair to say that the dividend policy, right now is sort of being driven by the taxable distribution requirement? And if that is right, know, how long till that converges with maybe go forward economics?
Robert Cauley: It is I do not have that in front of me. I am going to say it is maybe a year or two more. Yeah. The bulk of it will be gone by then.
Jason Stewart: Okay. But that is also keep in mind, keep in mind this is important. As we have grown that is getting diluted. Right? So the dollar amount a year ago and the impact it has on the July 2024 dividend, and the July 2025 dividend because we are larger on a per share basis, that dollar, that is going down. And so it depends on what happens to the size of the company in the next year or two. Just the exact magnitude of that effect. If we were to continue to grow, that effect would become let more and more diluted.
Jason Stewart: Gotcha. Okay. That is really helpful. I appreciate it, Bob.
Hunter Haas: Through the first seven months of this year, our taxable income projections are right on top of our district our dividend distribution.
Jason Stewart: Got it. That makes sense. Alright. Thanks, Hunter. Thanks, Bob.
Robert Cauley: Certainly. Thanks, Jason.
Operator: One moment for our next question. Our next question comes from Eric Hagen with BTIG. Your line is open.
Eric Hagen: Hey, Eric. Hey. Thanks.
Robert Cauley: Hey. How are doing, guys?
Eric Hagen: Just as a matter of clarity, the book value update, does that include the dividend? The accrual for the dividend or no?
Hunter Haas: Yes.
Eric Hagen: Okay. Okay. You guys are always so thoughtful around market conditions. I mean, you expect MBS spreads are more likely to widen or tighten into an interest rate rally? Specifically for the current coupons, are there scenarios where we could you feel like we get a curve steepener with lower rate ball? And how would you respond to that?
Hunter Haas: I know. Mortgages have been directional of late. A meaningful rally depends what drives it. I do not you know, I think if it is a classic sort of rolling over of a credit, you would definitely see probably a pronounced widening into a rally like that. So, you know, economy starts to break and credit cycle, rolls over. I do not know that is our house view, but, I think it is certainly a risk that we have to think about.
And, but for, you know, a more orderly market, like we have had over the course of the last couple of years at least, you know, I think we will push down to as we push down to kind of the lower end of the recent rate range, you will see weakness in higher coupons as we would expect. And a little bit of a tightening in the, slight discounts I think that those will do those will continue to do well.
And you know, the opposite is true if we continue to have a very strong economy, which is I think, kind of the way we lean, you know, we could see resteeping of the curve from the front end as Fed cuts get pushed out of the front very front end of the curve. And, you know, some of the weakness that Bob talked about in the longer end of the curve during his prepared remarks resulting from, you know, just much higher treasury issuance. I think we are seeing that continue to play out. We saw it in the swap spreads, you know, in April. And, so we have got our eye on that.
So I know that was not specifically the risk you were addressing, but yeah. That is what we have been keeping our eye off.
Robert Cauley: I do not see the potential for significant widening from here. And the way I approach it is just from the perspective of who the players are in the market. If you look at it, the marginal buyer to a large extent has been REITs and money managers. Know, fast money hedge funds are in and out all the time. Banks have not been involved much in what they tend to buy are floaters anyway. You know? So for instance, if you have the economy roll over, and credit became a concern, I think money managers, if anything, are going to increase their allocation to mortgages.
From the perspective of the meaningful steepening of the curve, let us say, economy weakens and the Fed now is going to aggressively cut, which I do not think is likely to happen. But if it did, I think you could see banks become a more meaningful marginal buyer. But in any of these scenarios, whatever this perturbation is to the market, I think it results in more buying of mortgages not less. It is know, I just really they are pretty cheap here right now. It is just hard to see us really getting a lot cheaper. That is shocked. I do not know what that is, frankly.
Eric Hagen: Right. But the house view generally is that you do not feel like MBS spreads really, reflect the likelihood for the Fed to cut rates before year end. The Fed needs to deliver a cut, and that is going to catalyze MBS spreads to be tighter?
Robert Cauley: Maybe. I mean, we have been talking about Fed cuts for so long. We can go all the way back to '23 and '24, or not '23, 2024 and earlier this year, everybody is expecting the Fed to cut. It keeps getting pushed out. The economy is too resilient. It is here is my metaphor. You get one of these a year. So my metaphor is the economy is a car. It is driving down the road. And if the car goes too fast, we grow too fast, the Fed intervenes to slow the economy. So in my metaphor, the driver of the car is the Fed, and they put on the brakes to slow the car.
Then you have this government running these massive deficits, and that in my metaphor, is a truck that is behind the car and it just keeps pushing it. So no matter how much the Fed tries to put on the brakes, these deficits just keep pushing it. And that is going to just continue to be the case. Think about it. What is the potential growth rate of the US economy? Two and a half percent? And we are running deficits at multiples of that. So I just think the Fed is going to be continue to be challenged containing inflation. And everything in this big beautiful bill is extremely stimulative.
You know, they are going to ex full expensing of factories. Trump's negotiating trade deals where all these countries have to agree to spend money in the US building. The multiplier effects of these things are significant. CapEx has a greater impact on growth than the housing market. As in terms of a multiplier. And it is just all these factors combined. I just do not see how the economy does anything but stay strong, if not get stronger, and inflation stayed the same or maybe even get worse. So that is my personal view. How that leads to Fed cuts? I do not know.
That being said, think the curve can continue to even steepen just because the term premium continues to grow. In treasury issuance. Gets worse. I think it is really a question of what is neutral. Right? So if somebody at the Fed decides that rates are too high in spite of all the things that we just discussed. Then, you know, they may cut rates a couple times. I am not sure if they need to, but they may do it. You know? They might revisit what neutral is. Decide that four and a half is pretty close.
Eric Hagen: Hey. I appreciate your thoughtful responses as always. Thank you, guys.
Robert Cauley: Alright. Thank you.
Operator: And I am not showing any further questions at this time. I would like to turn the call back over to Robert Cauley for any further remarks.
Robert Cauley: Thank you, operator. Thanks, everybody. If you have any questions that come up later or if you happen to miss the call and want to listen to the replay and then trigger that triggers a call, we will be glad to take any no calls. Our number is (772) 231-1400. Otherwise, we look forward to speaking with you next quarter. Thank you.
Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.