Dynex Capital Inc (DX) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Dynex Capital Second Quarter 2020 Earnings Results and Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Alison Griffin, Vice President, Investor Relations. Thank you. Please go ahead.

Thank you, Casey. Good morning, everyone, and thank you for joining us. With me on the call today is Byron Boston, President and CEO; Smriti Popenoe, EVP, CIO; and Steve Benedetti, EVP, CFO and COO. The press release associated with today's call was issued and filed with the SEC this morning, July 29, 2020. You may view the press release on the homepage of the Dynex website at dynexcapital.com as well as on the SEC's website at sec.gov.

Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified.

The company's actual results and timing of certain events could differ considerably from those projected and/or contemplated by those forward-looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks, please refer to the annual report on Form 10-K for the period ending December 31, 2019, as filed with the SEC. The document may be found on the Dynex website under Investor Center as well as on the SEC's website.

This call is being broadcast live over the Internet with a streaming slide presentation, which can be found through a webcast link on the homepage of our website. The slide presentation may also be referenced under quarterly reports on the Investor Center page.

I now have the pleasure of turning the call over to our CEO, Byron Boston.

Good morning. And thank you very much for joining our call today. As the CEO and a shareholder of Dynex Capital, I am excited about the future of our business. I have a strong and experienced team of professionals managing our capital. We believe it is an exceptional environment to generate solid cash flows for our shareholders. Financing rates are low and the liquid assets we're invested in offer attractive risk-adjusted returns and are generating solid net interest income. And our balance sheet gives us flexibility to navigate the complex environment.

For over 30 years, Dynex Capital has managed leveraged securitized asset portfolios to generate cash income for our shareholders. We have managed every asset class that you see represented across the mortgage REIT industry today. Over the past few years, however, as global risks have intensified, we have chosen to limit our investment focus to assets with the highest credit quality and highest levels of liquidity. In addition, we have chosen to maintain a higher level of overall liquidity on our balance sheet. This is a choice that has served us well if you look at comparative long-term returns through the second quarter of 2020.

We believe the key to a successful long-term strategy of managing a mortgage REIT is risk management first and effective capital allocation across multiple asset classes. We have been consistent in our approach to the market. So let me recap what we have said to help you understand why we are excited about our business today.

So since the fall of 2018, when the Fed was still tightening credit and allowing the balance sheet to run down, we pointed out to you that we did not believe the Fed could continue on that path and that our financing costs will begin to decline. And as a result, our net spreads would increase. Well, today, our financing costs are pegged at low levels. And as a result, we're generating substantially more net interest income.

We noted that surprise events were highly probable because global risks have intensified. In fact, March of this year represented a surprise event similar to what we saw in 1998. We had the experience, and we were prepared to weather this storm.

We also highlighted that we were excited about the future outlook for our business model because the demand for yield would increase globally. We feel stronger about our expectations now that global yields have continued to plummet further towards 0 and below.

And finally, for the past decade, we have also said that government policy would drive returns, but we did not anticipate the extent to which this would evolve. A profound shift is taking place in economics, as we all adjust to a super-sized level of state intervention in the economy and financial markets.

I will now turn the call over to Steve Benedetti to go through our second quarter results.

Thanks, Byron, and good morning to everyone listening. For the quarter, we posted a total economic return of $1.05 per common share or 6.5%. Book value per common share was the largest contributor, increasing a net $0.62 or 3.9% to $16.69. Of this increase, $0.79 per share came from changes in the value of the investment portfolio net of hedges, as volatility ebbed during the quarter and credit spreads tightened versus benchmarks across the investment portfolio. This was partially offset by $0.07 in declared dividends in excess of core EPS and $0.10 in costs related to restricted stock grants made during the quarter.

From an earnings point of view, we reported comprehensive income of $1.15 per common share and core net operating income of $0.36 per common share. The decline in core EPS from last quarter was really a function of the size of our investment portfolio as we maintained a lower leverage profile and a higher liquidity buffer early in the quarter.

For the quarter, average interest-earning assets, including TBA securities, were approximately $3.2 billion versus $5.1 billion last quarter. Offsetting the smaller size of the investment portfolio was an increase of 49 basis points in adjusted net interest spread.

Net interest spread and adjusted net interest spread benefited from the rapid decline in financing costs by 112 basis points, driving the interest spread expansion and more than offsetting the decline in earning asset yields of 48 basis points from sales of higher-yielding assets and the addition of new assets on balance at lower overall yields.

Drop income on TBAs also increased as we added them throughout this quarter given implied financing costs on dollar rolls being more favorable versus repo, as Smriti will discuss later in the call.

Our hedging activity continued to favor a mix of interest rate swaps, options and treasury futures. The average notional outstanding for swaps was $351 million, down from $2.9 billion in the first quarter. The notional balance of our swaps at the end of the quarter was $475 million, with a fixed rate of just over -- pay fixed rate of just over 70 basis points, and the notional balance of our outstanding options and treasury futures was $2.65 billion.

With that, I will turn the call over to Smriti.

Thank you, Steve, and good morning, everyone. I will briefly review our performance for the quarter. Then I'll talk about our actions taken last quarter and discuss our current outlook and strategy.

In terms of performance, please turn to Slide 22, titled fixed income market update. As Steve mentioned, our book value moved up during the quarter by 4.9%. This was partially offset by 1% from dividends in excess of earnings, capital stock transactions, bringing overall book value up 3.9% for the quarter. This was primarily driven by spread tightening on Agency CMBS IOs, which you can see on the bottom of this page, spreads tightened in approximately 140 basis points from 400 to 275 on agency IOs and from 450 to 300s on agency -- non-agency CMBS IOs. We also saw modest tightening in Agency CMBS DUS. You can see that on the next page, Page 23, on the top right-hand side and as well as a tightening in agency pass-throughs.

It's important to note that while spreads on par-priced agency CMBS DUS have come in almost 35 basis points, as you can see on the top right panel on Page 23, premium DUS did not experience similar tightening. Premium DUS are actually only 11 basis points tighter on the quarter.

Our current rough estimate is that book value in July is a little over 1% higher than at quarter end, although we have not yet completed our standard month end closing process.

Turning to our actions last quarter. In March, we shifted our thinking on cash flow risk and started to reevaluate our agency CMBS DUS portfolio for the increased possibility of delinquencies and defaults. While DUS paper has a government guarantee of principal, in a default scenario, the entire premium of the bond over par goes away in a repayment. Our bonds were very high premium, close to $1.18, $1.20 price. And during the month of April, we reduced that position from $2.1 billion to $800 million, realizing gains of $193 million and cutting the majority of our premium exposure in that sector. These sales as well as those made earlier in March of high premium Agency RMBS pools, 4s and 4.5s, brought our leverage to total capital down to about 4x at the end of April.

In May, we rapidly deployed that capital into Agency RMBS, aligning the investment strategy with government policy actions, focusing on liquidity and flexibility. If you turn to Page 7, titled business activity, you can see we increased our leverage from a low point of 4x in the fourth -- in the quarter to 8x by the end of the quarter, investing primarily in lower coupon pass-throughs and TBAs.

As you can see on Slide 10, titled Investment portfolio, as of June 30, Agency RMBS were 76% of the portfolio. 15% of the portfolio was Agency CMBS and 96% of the portfolio is agency guaranteed.

On Page 11, we have allocated -- you can see we've allocated capital to lower coupons with a mix of TBA and specified pools, primarily 2s and 2.5s. We're diversified in specified pools between higher pay-up stories and lower pay-up stories. The TBA market and the 2% coupon currently offers attractive financing relative to pools, as Steve mentioned, in the repo market. At some point in the last settlement cycle, the financing rate in the dollar roll market was as low as minus 90 basis points, an advantage of 120 basis points all-in versus pools, almost doubling the return in TBAs versus owning pools.

We see structural demand in the 2% coupon that supports continued specialness in the roll in the coming months.

Please turn to Page 12. We are operating today with a larger liquid diversified portfolio, focused on liquidity and flexibility. As you can see on this chart, our net interest spread has been widening as financing costs have declined. At current leverage levels and the mix between pools and TBAs, we feel the portfolio has the flexibility to navigate the coming months.

Assuming no changes from the current portfolio size and with financing costs trending as described in the forward markets, factoring in leverage and prepayments, the earnings from the portfolio are expected to exceed the level of the dividend for the remainder of 2020.

Turning now to our macroeconomic opinion and outlook. We have assessed the environment as a health and economic crisis, layered on top of the already existing fault lines that we identified before, socioeconomic, global debt, technology, environmental, geopolitical and demographic factors. A major consequence of this crisis is a significant disruption to cash flows, which is now colliding with huge amounts of government intervention through monetary and debt-driven fiscal policy. Many questions still abound. Will the government actions be enough to minimize the disruption to cash flows? How do the structural factors evolve as we see the duration and severity of the health and economic crisis play out? What is the risk return trade-off we need to make in the short, medium term versus the long term? These are all still open questions.

We're also still tracking risk events in the upcoming quarters. We have known unknowns like the election and the continued geopolitical and trade frictions, as well as the continued possibility of an exogenous shock. It is very likely that we will have an environment with periods of calm created by massive central bank interventions, punctuated by bouts of volatility from surprise outcomes.

With this in mind, and so many factors in play, our investment strategy is built around what is relatively more certain in the short and medium term, so that capital is preserved and available for opportunities in the long term.

What we see clearly is that financing costs are low, and we expect will stay low for high-quality assets for some time. This is a major positive for investing in Agency RMBS. Government policy, central bank policy and specifically the Fed is also aligned with investing in this sector, and the assets continue to offer an attractive return in the low teens ROE, as you can see on Page 13.

With front-end rates anchored, central banks actively purchasing their own country sovereign debt, volatility in interest rates has materially declined and will likely continue to remain contained in the absence of exogenous shocks. This is also supportive for investing in Agency RMBS.

Please now turn to Page 24. Our portfolio is constructed for this environment, to capitalize on earning returns with flexibility to adjust the position up or down as conditions warrant. The low coupon allocation acts as a buffer against lower rates. The modest high coupon RMBS and DUS allocation are a mitigant against higher rates. Our hedge position is designed to cushion book value in higher rate scenarios, with options that do not degrade book value performance in lower rates. You can see that on this chart, our sensitivity to up and down 50 parallel scenarios versus up and down 100 scenarios significantly lower than it was in March of 2020. This is really reflective of the short-dated options that are within the portfolio. And when rates go up, they actually turbo in and cushion the uprate scenario. When rates go down, they really don't impact your book value other than the amount of premium that you put out at the initiation of the trade.

So to wrap up, we continue to believe that up in credit and up in liquidity is the right strategy for this macro environment. Our capital is allocated to assets aligned with Central Bank and government policy. The position is flexible. We have more liquidity on hand today than in prior months and quarters. We have over $280 million in cash and unencumbered assets as of last night. We are focused on earning returns and preserving capital in the short and medium term to be available to allocate as opportunities develop in the long term.

With that, I'll turn it over to Byron.

We are really excited about our prospects for generating an increasing amount of income, but we take most comfort in our disciplined process of scenario planning and preparation. We continue to believe surprises are highly probable as we settle into the fact that global central banks and other government policymakers are now the undisputed kingpins in determining the winners and losers in our economy and financial markets. Hence, we have aligned ourselves with the government policies being implemented today, and we are very nimble.

Furthermore, we continue to believe there are positive long-term trends supporting our business model. As the globe continues to age, there are fewer and fewer options for investors to generate cash income. Global yields have plummeted and may continue to decline further. However, the yield on our common stock now offers approximately 1,000 basis points more in cash yield than the U.S. treasury 10-year, with a solid prospect that we will continue outearning our dividend as financing costs are expected to remain low.

Well, then what should investor do? Long-term outcomes in the mortgage REIT space will be determined by how the respective companies risk manage over time and how the company and how the management teams respond to the inevitable surprises that are bound to come in a world where global risks have intensified.

Let's look at our long-term chart on Slide 16. If you add total returns of all mortgage REITs in this chart or to this chart, that includes commercial and residential REITS, you will see that cost ratio, efficiency ratios or scale did not have and will not have a material impact on long-term returns. Disciplined capital allocation matters, disciplined risk management matters.

Take another look at our long-term chart. I'll sound like a broken record. But we are managing for the long term. It is our philosophy that investors should also think on a long-term basis and build a diversified portfolio of companies with experienced management teams and disciplined risk management and capital allocation. My teammates and I have managed securitized assets through every crisis since 1986. We are internally managed and a material amount of our personal net worth is invested in Dynex Capital stock. We're all shareholders here. Dynex Capital is not just one of many funds that we manage. Dynex is the only fund that we manage. So please join us on this journey. We remain committed to our long-term vision and being good stewards of your capital.

Operator, we'll open the lines for questions.

(Operator Instructions) And your first question here comes from the line of Eric Hagen with KBW.

And it's good to hear from you guys. A couple of questions on the TBA. How do you -- how do you think you hedge TBA differently than if you hedge pools on balance sheet? In other words, would the strategy around hedging necessarily change materially if you held specified pools in place of the current TBA position? And then what was the average drop that you guys captured on the TBA in July? And how does that compare to the drop that you're seeing in TBA today?

Yes. Eric, yes. So to answer your first question, the hedge ratio on TBAs is different than it is on specified pools. I will say in the lower coupons right now, it's really a primary -- it's not going to be much different. So in terms of whether we're choosing a different instrument on the part of the curve, it's really a question of what percentage of the 10-year futures or whatever it is that you're using, it's not materially different. In higher coupons, like 2.5%, as I say, higher coupon, that is -- it makes more of a difference because the prepayment characteristics really do impact the duration of the cash flow. So those will typically have a longer-durated hedge against them.

In terms of the roll, I would say, on the 2% coupon, the average drop has been somewhere between 6.5 and 7 [ticks], and we're still seeing that persist for at least another month or 2 into the future. And that's about -- I would say, that's at least 70 basis points through 0, negative 70 basis points effective cost of funds.

And Eric, look -- Eric, I'll add one other piece here, which is, also remember that we're very disciplined in our top-down approach. So our hedge ratios do fluctuate based on our macroeconomic outlook and view.

One on the -- one more on the hedging. The options on futures contracts, if you guys rolled that position at the beginning or I guess, today, how would the costs compare relative to what you paid last quarter?

Yes, that's a good question. I think the implied vol in options has actually stayed relatively low. So you're paying that carry cost. And that carry cost comes out of book value. It's been relatively stable the last 2 quarters. It's been relatively stable the last 2 quarters in terms of our roll cost, if you will.

Your next question comes from the line of Trevor Cranston, JMP Securities.

In light of the shift in the portfolio to heavily favor Agency RMBS, can you guys share your thoughts sort of generally on the prepayment environment and maybe more specifically talk about how you think some of the lower coupons would perform, like, particularly at 2.5 in the event that primary mortgage rates were to decline significantly from here?

Trevor, I'm going to give you a high level response, then I'm going to let Smriti get more specific. When you noticed that back at the beginning of March or so -- end of February, beginning of March, we literally sold most of our [past dues]. And we definitively sold our premium, a lot of our premium position. We kept some, and we slowly whittled down. When primary rates dropped and had the potential to decline, it was my opinion of just, in general, from a high level and from where I sit, to be concerned overall about prepayment. So I'll let Smriti get more specific on that.

And the thing I like the most about the investment process here at Dynex is the discipline in thinking about those scenarios that you just talked about, which is what if the curve steepens and rates move higher, which is an event that has some probability attached to it. And we have a very disciplined process. And Smriti and her team really spend a lot of time thinking about a variety of scenarios and developing plans of actions to implement if those scenarios start to evolve. That's high level. Smriti, I'll let you take over and actually answer in more detail.

Yes. I mean it all starts with mortgage rates. And mortgage rates are now being driven primarily with the demand for mortgage securities coming from a number of players, the Fed being the biggest, but also banks have been large in purchasing mortgages. So that's really bringing mortgage rates down. You can see that also in terms of primary, secondary mortgage spreads, which had come down to about, I want to say, 175 basis points or so. They're creeping back up right now, but there's just been a massive decline in primary, secondary rates. And that really is what drives prepayments.

So with primary, secondary rates at this level, you are seeing a substantial portion of the mortgage universe, including 2.5s in the money. And at this point, the competition for volume from mortgage bankers is going to start to drive that spread tighter from here. Could it go tighter from here? Yes, I think it could. You also have to have a view on mortgage rates. And again, here, I think mortgage rates are probably around 3% right now. We think that they have the probability of going as low as 2.75%. That's very much in the foreseeable future.

What limits the amount of decline in mortgage rates versus treasury? So there's a few things. Number one, just simply the cost, the guarantee fees, the operational costs, all of those have an impact in terms of how low the mortgage rate can go versus the risk-free rate. And then secondly, just if you think about a mortgage as being a 30-year bond callable immediately, a 30 non-call 0, that options cost has to be -- has to be factored in when you think about how investors price for that risk. So those 2 things together really keep that mortgage rate, at least a minimum amount above the 10-year -- the 10-year treasury.

So if you think that mortgage rates can go down another 25 basis points and primary, secondary spreads another 15 or so, then you're really looking at the entire universe other than a 2% coupon being in the money. And so for that reason, we are concentrating on the 2% coupon. We have more investments in that coupon than others.

The other story in terms of prepayments, really becomes the amount of unamortized premium that is allocated across your investment portfolio. So the higher premiums you have, the more at risk your future return is. And so that's something we are very, very cognizant of in the book. And if you look at the way the book is structured today, our unamortized premium as of June 30 is actually exactly the same as it was on December 31 or very close within a couple of million bucks. But the distribution of that is now primarily in the 2 and the 2.5 coupon versus 4s and 4.5s in December. So you've basically taken that risk and put it in the lower coupon.

So from a prepayment standpoint, we expect that there will be higher prepayments coming. We've structured the book to be able to be flexible within between TBAs and pools, and we're focused on the lower coupons to be able to manage that risk.

Okay. Got it. That's helpful. And as you guys are thinking about reinvestments and investing the marginal dollar, is it fair to say that you guys are more focused on TBAs at the moment given the role specialness? And can you maybe sort of quantify how different you think the returns are in pools versus TBAs today?

Yes. It is fair to say that we would be more focused on TBAs. I think in the lower coupons, I mean, the differential is multiple ROE. I mean it's like 7% ROE better in the short term versus the long term. So the interesting thing on that trade-off is in a TBA trade, you're really counting on the financing costs to be a certain level for you to earn your return. In the pool, you're counting on the prepayment experience to earn your return. And what's interesting is in the last prepay cycle that we just went through, a lot of prepayment-protected stories didn't perform as expected. Many stories actually paid faster than people expected. So it's really not as clear-cut a trade-off as it was before, where you're able to rely on spec pools as a return generator versus TBA.

So I would say right now, the economics definitely favor the TBA versus the pools, and then we're going to have to see another couple of months' worth of prepayment experience to really figure out which stories hold up over time, especially when you're in this kind of waterfall scenario where just a massive deluge of prepays coming down the pike, given how low these rates are.

Your next question comes from the line of Christopher Nolan with Ladenburg.

Smriti, your comments in terms of you expect the portfolio returns to exceed the dividends in the second half of the year. Did I hear you correctly?

Yes.

Okay. And then I also saw that you're targeting now a core ROE of 8% to 16%, which is up from the 7% to 8% from last quarter, is that also correct?

That is actually just the marginal return that we see on investments. So that slide is intended to say, if we had to put the marginal dollar to work, what types of returns are we seeing across the capital stack.

Okay.

And the lower end of that 7% or 8% is more like 15 years pass-throughs, that kind of stuff. The higher end includes the return from dollar rolls in the TBA market.

Okay. But if -- from your earlier comments that you expect to continue the current dividend in the second half of the year, the current dividend requires a core ROE of roughly 10%, am I correct?

Chris, this is Steve. I think the way for you to think about it and what we're trying to communicate is sort of -- we've taken the earning asset balance up, so we've invested in our capital. And you can see on Slide 12, sort of the net interest spread and how that's expanded, right? And so we're 196 basis points at -- for this past quarter and Smriti and -- and both Byron and Smriti guided to this, funding costs are low and reasonably anchored here, so you can sort of expect a very strong net interest spread. So if you think about 8-ish leverage on 200 basis points of net interest spread, that sort of is kind of a back of the envelope kind of the earnings power of the portfolio on a gross basis as we sit here today.

And then that leverage range has increased since last quarter. You're targeting 6 to 7x, but now closer to, what, 7 to 8x, you would say?

Yes. And I think that's actually an excellent -- one of the things that drove us to actually take the leverage up higher than what we had mentioned before was simply the environment and the opportunity that we saw in the TBA market. And at this time we're fairly comfortable sitting at this too. The advantage of that just means -- just one more thing on that is that if you're sitting in the TBAs, it's just super flexible in terms of [getting] in and out.

Okay. So it looks like the leverage is going up. The incremental returns appear to be going up as well is the takeaway from that. Is that fair to say?

I agree.

Yes. Let me just throw one in. You're absolutely right. Look, we didn't just increase the damn leverage to chase after a dividend of some sort. We've made a very disciplined capital allocation decision here. We think it is absolutely our responsibility to try to capture that return for our shareholders. So I appreciate you phrasing it in that manner, that is absolutely correct. We're very concerned about not trying to take too much risk in an environment like this.

So when we talk about disciplined capital allocation, it means that as you see us making these decisions, you could go all the way back to 2008. We move -- during 2008, marginal dollar went into the agency sector. By the end of 2009, the marginal dollar went into the CMBS sector for multiple years after that. And we're making a decision today to go into this specific sector based on a very disciplined capital allocation process that takes into account that we are stewards of our shareholders' capital, and we want to protect them as much as possible.

Good point, Byron. And I'm looking at the stock and everything, 12% dividend yield and your target ROE is going to be somewhere around 10% or so. You have a pretty liquid balance sheet. I mean I guess the big variable here is going to be where is your portfolio returns, which I think goes to the question of prepays, if I'm not mistaken.

I think so. I mean I think even in the prepays, you've got some cushion from being in the lower part of the capital stack -- in the lower part of the coupon stack. Also, I think the div yield is 10% at this point.

Got it.

Yes. But yes...

But [Dan] delayed pricing on these stocks here.

Yes.

You're cutting back on the sell-side all over the place.

Yes. Yes. But you're right. I mean it's going to be prepayments and book value. And I think, again, we talked about the volatility and interest rates being dampened by the central banks. And then you've got, at this point, just realized prepayments and how much we have at risk. And we think that's a manageable risk. This is what we do. And even factoring that in, I think I mentioned in my comments that we feel pretty good about our outearning (inaudible) rest of the year.

Your next question comes from the line of Jason Stewart with Jones Trading.

Thanks for the comments on Agency CMBS premiums. Given that we have a little bit more data, I was wondering if your view on buyout risk in Agency CMBS has changed at all. And then along the same lines, how do you think that develops in Agency RMBS?

Jason, yes. So I think, again, fundamentally, we love Agency CMBS as a product. It's a great product. It's positively convex. It has an agency guarantee. You can earn roll down. It's financeable. It's liquid. It's in alignment with government policy as the Fed has guided in its basket of assets that it's purchasing. So all of those things are in the positive category for Agency CMBS.

What's interesting right now and specifically with our portfolio was that we just -- we bought a lot of these bonds when the 10-year note was up at 3%. So we had high-yielding bonds with high dollar price premiums on our balance sheet. That was a risk we chose just to take off the table simply because we didn't know how these cash flows were going to -- were going to work themselves out and due to the disruption in cash flows. So that risk is still present for any bonds that you see that are premium dollar price out in the marketplace. That has not gone away.

And that leads us to say the type of risk that, at some point, we'd be -- we would prefer to take in the agency CMBS market is closer to the par dollar price bonds, and the returns are just not there in that sector. That typically can become a bank bond or banks just come in and buy the heck out of that paper. So you can see on that sheet, the spreads on par price bonds are in the high 40s. And at this point, we think the risk return on Agency RMBS is just substantially higher in terms of our ability to make that incremental return up. At some point, I would say, as those spreads maybe widen, we would consider putting more par-priced securities back on our balance sheet. But at this point, the agency RMBS is better.

On the Agency RMBS side, the -- were you concerned -- did you want to hear about a comment on the credit being an issue? Or how would --

Right. How the -- right, how delinquency performance would translate into prepays on buyouts?

Yes. Wow, that's one of the things that leads us to sort of continue to want to stay down in coupon. It's not yet clear how that works. So forbearance is good in the sense that you're still getting your P&I payments while the loans are in forbearance. It's just a much bigger risk for premium coupons, like the 3% coupon, 3.5% coupon, 4% coupon, 4.5% coupon. All of those coupons are at risk from this buyout issue. So again, over time, what we'd expect to see is that the forbearance actually eventually turns into actual cash buyouts and then you'd have unexpected prepayment increases in those coupons as well.

Right. So that's leading you to stay down a coupon away from [this type] pools?

For now, yes.

Okay. And then what's your view -- and then I'll jump off. What's your view on the credit? When you look at credit availability in the space, there's obviously some positives and negatives. But how that impacts prepays and sort of that marginal coupon that's maybe like a 3, 3.5 instead of the really low coupons?

So I think in general, credit availability is being tried to be expanded as much as possible. So the agencies, the Fed, everybody really -- they have a tremendous incentive to increase credit availability in general. Where you're seeing the shrinking of credit availability is really going to be in things like the jumbo market, where investors really don't want to take that incremental risk. So to me, and the way we think about it, the credit availability is really starting to be expanded in the GSE market. That also has implications for things like first time homebuyers, turnover. They've tightened up the limits on cash out refinancing a little bit, but on balance, our bias is that these prepay speeds are biased to the faster side, not the slower side.

(Operator Instructions) Your next question comes from [Jim Delisle] who is private investor.

Everyone else is congratulating you on a good quarter, but I want to go a little bit further and congratulate you on a great year. Most of us know that total economic return is really the only way to judge a structure, management team and a business model. And by my back of the envelope, you guys kind of went through the last 4 quarters somewhere around 5% total economic return, which relative to any hybrid REIT is hugely in excess of and relative even to the agency-only guys, I think is at the top of the list. So congratulations on that.

Thank you, Jim.

On a second level, Byron, in particular, thank you for clarifying something for me. I've been doing this in one flavor or another for 40 years. First week on the job, I was told, don't fight the Fed. And for the last 40 years, I've been relearning that at my own peril. To paraphrase what you said earlier about what all the central banks are doing, and putting that side-by-side with how you guys have done over the last several quarters and several years, it seems -- am I wrong if I say that your core business model is, don't fight the Fed?

It is a -- the point I was trying to also make was about 10 years ago, it was really 2000 -- late 2009, we said -- we decided, don't fight the Fed. And at that point, the Fed -- at that point was supporting -- for example, we were trying to decide to go into non-Agency RMBS or CMBS. The Fed was supporting CMBS, they weren't supporting non-Agency RMBS. We went into CMBS, and we started to develop a thought process that government policy will drive returns, they will kind of held hostage, just don't fight the Fed. My point earlier was, wow, this is even bigger than we even imagined. And yes, we think it would be dangerous to try to go against. They're not dangerous. It's just that we're putting our shareholders in better position over the long term, if we align ourselves with the government policies. Because at this point, Jim, holy mackerel, they are the kingpins, all over the globe. Would you agree?

Well, philosophically, what I would say is part of not fighting the Fed, taking it to another level is help do what they want you to do, and they will pay you well to do that. So you buy agency credit, and you basically apply some leverage to it. You're putting money in the system and you're doing their work, and they will let you make -- they will let you make a yeoman's wage. So I would agree with that.

And I'm showing no further questions at this time. I will now turn the call back over to Byron Boston for closing comments.

As always, we thank you so much for joining our call today, and we look forward to speaking to you again at the end of the third quarter. Thank you very much.

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.