Orchid Island Capital Inc (ORC) 2023 Q1 法說會逐字稿

Good morning and welcome to the First Quarter 2023 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, April 28, 2023. 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 the future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements.

Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent Annual Report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements.

Now, I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today. Hopefully, everybody has been able to download our slide deck off of the website because as usual, that's what we'll be going through. And as usual, also, I'll just kind of walk you through the agenda. The first thing we'll do is just briefly go over the highlights of our results for the quarter. Then I'll go into a description of the market developments that we faced during the quarter, our financial results, and then I'll go into a greater detail on our portfolio characteristics, hedge position, and so forth. But I also, unlike most calls, want to spend some time at the end to talk about development so far in Q2, which are, one, they've been very significant, especially for mortgage participants, but also because they're very meaningful for us in our positioning and our outlook, going forward.

So with that, just turning to Slide 4. Orchid Island reported net income per share of $0.09, net earnings per share of negative $0.24, excluding realized and unrealized gains and losses in RMBS and derivative instruments, including net interest income and interest rate swaps. We had a gain of $0.33 per share from net realized and unrealized gains in RMBS and derivative instruments, again, including net interest income on the swaps. Book value per share was $11.55 at March 31 versus $11.93 at the end of 2022.

In Q1, the company declared and subsequently paid $0.48 per share in dividends. And since its last initial public offering, the company has declared $65.29 in dividends per share, including the dividend declared in April of 2023. For the quarter, our total economic gain was $0.10 per share, which is 0.84% for the quarter unannualized. And I'd also like to just point out, just because it's topical that all of the assets and hedges of Orchid Island are held at fair value. None of our assets or hedges are classified as available for sale or held for maturity. And accordingly, fluctuations in the value of both are reflected in earnings in the period they occur. So we have no issues with held for maturity or even available for sale.

Now turning to Slide 6. We can go through the market developments. In this slide, just 2 points here. One, you can see as we move through time, the peak of this curve just keeps moving further and further to the left. And you can see that on the red line reflected the curve at the end of the year and the most recent one was last Friday. And all that reflects is the market's perception that the Fed is nearing the end of their hiking cycle. In other words peak of rates, it's getting closer. But also, if you look out the curve, it's inverted. So the market expects a recession to follow at some point in the future. But I also want to point out that if you look at these curves, you can see that the movement for the quarter was very minimal, 30, 40 basis points, and that's very misleading. It does not tell the story of what we faced, in fact it's like the opposite.

In fact, if you look at what happened in the first quarter of 2023, it's really just a continuation of what we faced throughout 2022, and that is very high volatile markets, lots of interest rate involved. Market condition is changing dramatically, and that affects everybody in the markets and in particular mortgage market. And that has had a profound impact on how we have reacted to these market conditions in terms of our leverage ratio, our positioning, and our performance, and I'll go into those in greater detail later. For now, I just will continue going through what we faced in the quarter. And as you can see, kind of get a picture of what happened in the first quarter. And you can see that in the case of the [tenure], just using that as a proxy, how much things changed. And really, I would describe it as kind of phases, if you will.

The first phase, which kind of ended in early February was just a continuation of what we saw late in 2022, and that was this kind of belief that inflation was ebbing, and that the Fed was nearing the end of their tightening cycle and would start to ease. And that changed very dramatically in early February. The primary catalyst was the nonfarm payroll report on the 3rd, which was a blowout number north of 500,000. Subsequent [date] over the balance of February was very, very strong and the market just made a big pivot and started trading higher. The yield on the tiered treasury exceeded 2% -- or 5% in early March. And the terminal rate pricing in by the market of Fed funds, the terminal Fed funds rate got north of 550 basis points, so a big sea change from where we were in January.

And then there was another catalyst in early March around the 9th, we had Silicon Valley and Signature Bank fail, and then we had a huge move the other way. In the case of the 2-year treasury yield, the yield declined by 130 basis points in a little over 2 weeks. The December Fed funds future contract declined by 175 basis points in 1 week. So the market went to thinking that the banking crisis was going to force the Fed's hand that it was going to impact the economy. Of course, they would assume also that credit conditions would tighten meaningfully. And so, this big pivot occurred again, that was around March 9. But even after that, as we moved through the balance of March and into April, after the Fed also and the treasury, the FDIC had taken significant steps to kind of buffer the impact, if you will, of the failed banks.

The Fed introduced their bank term funding facility, the treasury and the FDIC moved to guaranteed bank deposits. And these macroprudential steps as they are referred to seemed to work. And as we moved through the balance of March and into April, it appeared that these macroprudential steps were going to work. They were going to contain the problem and the Fed could focus on monetary policy and inflation, which was still running quite strong, especially the Fed's new preferred measure, what we call super core, which is services ex-shelter, which has become the kind of the buzzword in the market for inflation, and that's still running quite strong. So assuming these conditions were contained, the Fed could continue to hike rates, and that's kind of where we stand today, at least we were until this week.

And now, we've had another bank show up on the verge of collapse, which is First Republic. And that's obviously a risk, going forward if there going to be another shoe to drop in the markets, very much on edge. And very, very sensitive to the latest headline, and so it all contributes to this theme of just a very volatile market, realized volatility, implied volatility and options market are high. And just what we've seen in the rates market is just amazing. In fact, there was a brief period in March, I believe it was when the 2-year futures market actually stopped trading for 2 minutes, and that is extremely rare, I don't know that that's ever happened. And it's just a function of the extreme volatility in rates that we've experienced. And really, you could argue going back over a year. So that's kind of the background and it has meaningful implications for us and how we manage our business.

Just going through the rest of the slides on Page 8. This is one that we like to talk about. Again, there are many measures of the relative cheapness -- richness of mortgages, but this particular one is just looking at the current coupon spread of the 10-year treasury. There are, of course, many others you can use. And just to point out a few things. One, you saw the spike in 2020 when we got to 165 basis points, which at the time was the highest level we had seen with the financial crisis. We surpassed that last fall, when we got to 190, and we're somewhere in the low-170s today. So if you kind of look at this chart on the bottom, you can see it's still creeping out, [don't] look at the one on the top. That level there reflected on the top is our last Friday at 168. We've probably been as much as 5 higher this week as a result of the news relating to First Republic and the potential for liquidations of their portfolio. And I'll have a lot more to say about that in a few minutes.

The rest of these slides, just glance through them quickly. Obviously, the 5-year and 10-year points of the curve are no longer is topical, given what the current shape of the curve. But as you can see, the curve is still very flat or nearly inverted.

On Slide 10 is somewhat interesting. These are holdings by both the Fed and the bank. And as you can see, starting in April of 2020 when the Fed started their QE, and the balance sheet started to grow that bank holdings of mortgages also grow. And then, they started QT last year, and they've been both coming down. If you note, on the very far-right side, you can see that the bank line dropped. That just reflects the FDIC taking over Signature Bank and Silicon Valley Bank, and you would expect that those 2 continue to bleed off over time.

Slide 11. The top-left, you can just see the performance of a select group of mortgages, and it kind of follows the same pattern I just described. In the first month or so of the quarter, we did very, very well. Then there was the kind of reversal as the market started to price in much more aggressive Fed hikes and so forth and rates soared off. And then in early-March, we had the bank failures and market rallied and mortgages did well, but less so as you can kind of see there that even though rates fell precipitously, mortgage performance was lagging and that just reflected the widening. And of course, the reason is because the FDIC has taken over 2 banks that had a combined $114 billion of securities that need to be liquidated, that's an obvious risk for the mortgage market. That's a lot of supply that we're going to have to face.

With respect to the bottom-left, you can see the roll markets, which have been trending softer over the balance of the quarter. They've gotten very, very weak. And again, that just reflects the anticipation of a lot of supply coming out through FDIC sales. And what that means for the mortgage market, we'll see over the course of the balance of the year. Specified pool payups, they have stabilized. They tend to do well when rolls are bad. But it's given where the rates are, there is really no reason given that most of the markets are out of the money that these numbers -- these spreads would be anywhere near where they were prior to the pandemic.

With respect to Slide 12, one point I want to make out here is just that, this shows you the movement involved implied in the 3-month by 10-year swaption, and it seems to be sort of on the low end of the range, but these levels are all very high relative to where they were pre-pandemic. And as you can see, earlier this quarter, we had a very high spike in pretty much the highest reading we've seen over the last year, so it just continues to be a very volatile period.

Slide 13, I'm not going to say much, you can just see that mortgage spreads are widening. It does say TBA Libor OAS that should be SOFR, that's what we're going to be going with solely, going forward. And then, just some Specified Pool Payups. You can see they have moved somewhat higher.

On Slide 14 and really '15, just kind of the performance of this mortgage asset class for Q1, mortgages did quite well. They were very representative of the all fixed income assets kind of in the middle of the range you can see. But that, again, that's through March as we moved into April and the FDIC liquidations were announced and commenced last week, and [pressure] mortgages have come under you kind of see on the bottom or on Page 15.

I'll point out just a couple of things. At the first column, it's kind of pink at the top, it's says year-to-date change -- and that's through April 21. So last Friday, you can see that most of these numbers are negative, which implies tightening and mortgages are wider, and they stand out really in contrast to pretty much every class, asset class there. And then if you look on the far-right, the last 2 columns, the one is just '22 highs, that's basically we've seen stream spread widening last year, those are the high-level marks. And if you look at current levels versus those peaks, most of them are negative and meaningfully high numbers, mortgage is not so much. So it just kind of reflects the fact that what's going on in the market today, especially in Q2, late-Q1 is very much market-centric, at least for now.

Now turning on to Slide 16. This is kind of our expectations for speeds. I just want to point out a couple of things. If you look at the top-right, this is the primary- secondary spreads. So the spread between prevailing mortgage rates and underlying treasury rates. And one thing -- or a couple of things that stand out. If you look at the period that ends at the end of 2021, you can see a gradual tightening trend and relatively low volatility in that spread. In other words, the day-to-day movements were very minor. But then, if you look at starting last year, the trend is kind of an increasing trend, but also much more volatile. So we see much greater volatility in the primary-secondary spread.

And what does that mean for mortgage rates? So, if you look on the left side, that red line is the mortgage survey rate, and really what it kind of implies is that, rates have become fairly sticky at a high level. And then I suspect that they're likely to stay that way until we really see clear evidence that the Fed is going to pivot and we start to see longer rates that meaningfully move lower, and then we'll see what happens in the primary-secondary spread. But for now, it just seems to be that the takeaway here is that we're going to have sticky high mortgage rates for a while.

Now I can talk about our financial results. Slide 18. This is a slide that we've presented every quarter. And I know that there is going to be questions. So I'll just try to head those off. If you look at the left-hand side, you can see that when we bifurcate our results between kind of like the net interest income and expenses versus the realized and unrealized gains, it flips to minus $0.24, and we pay a dividend of $0.48. And like I did in the last [few] quarters, I just want to point out a couple of things.

One, because of our accounting, we do not use what's called the level yield method, which means that discount accretion or premium amortization are not captured in our interest income number. And because we don't use hedge accounting, the [effective] hedges on our interest expense number are not reflected here. And so just like I said, again, like I did in the last few quarters. For the quarter, the discount accretion number was about $4.8 million, that's about $0.125. And the hedge -- the effect of our hedges in the current period, and I talked about this at length at year-end, and just how much we have available to offset our interest expense for tax purposes from both our current and legacy hedges is very, very large. The impact of the existing hedges for the quarter added almost $0.50. So that negative $0.24 actually goes to about $0.385, which would be a proxy for what we earned, it's reflective of the accretion of discount in our hedges.

And again, we paid $0.48, so there is a shortfall there, but it points to our positioning, which again, I'm going to speak to at length in a few moments, but we do have a low coupon bias. We have not opted to try to change the coupon composition of portfolio in an effort to chase higher funding costs because we think that in the long term, that strategy is not going to work. We really don't like especially the convexity, Again, I'll talk about this more in a moment, but [at] higher coupons, we think they're very much exposed to a rally, which will probably follow the end of the Fed's tightening cycle. So there is a slight shortfall in the earnings, but from a total rate of return perspective, going forward, we remain very comfortable with the portfolio positioning. That could change if conditions warrant, but for now, that is our intention. So again, a slight shortfall this quarter, same as the last 2, but all in all, not all that significant, especially given the fact that our hedges are so much in the money.

Running through the remaining slides on Slide 19, really just history here. The green line is kind of our economic net interest income. And as you can see, it kind of appears to be bottoming. That's probably just consistent with the fact that we're nearing the end of the tightening cycle in all likelihood, and that should stabilize and eventually hopefully move forward. The remaining slides, 20 is just pure history, I'm not really going to say anything about that.

Slide 21 is our leverage ratio. This is, of course, important. On the left-hand side, we report our leverage ratio kind of like on a GAAP basis. So this is total liabilities divided by equity. But unlike most of our peers, we all who use TBAs extensively, we're short TBAs we're not long. So in essence, our economic leverage ratio, which would be our liabilities adjusted for the shorts and the TBA is much lower than it's reported here. It's actually about 6.5 at the end of the first quarter versus the $8.4 million reported here. So immediately lower, and that's about where it was at the end of the year, so it really did not change. Since the end of the first quarter, it has drifted slightly higher just because we've had some modest book value erosion without making any meaningful changes to the portfolio, but it's still in the high-6s or so. It's still quite low, and we still have capacity to expand that fairly meaningfully so when and if conditions warrant, and we think that time is coming soon, so that's why we want to maintain that type of positioning.

Going on Slide 22, just basically the allocation of capital is very much unchanged. We still have no desire to own IOs in this environment. They have basically been as fully extended as they can, and we think there is just much more downside to owning those than upside. And then the right side just kind of rolls you through the portfolio changes for the quarter. As you can see, we added about $470 million of pass-throughs. We did use the ATM raised some capital early in the quarter, and we sold about 2.7 million shares raised a little under $32 million and bought about $470 million of mortgages, and I'll talk about where we allocated that though, so we did grow the portfolio slightly during the quarter, and we would like to continue to raise capital going forward just because of the investment opportunities being the way they are. And that's kind of it.

Now as I said, we can talk a little more detail about the portfolio, that's on Slide 24. As I mentioned, we did add about $470 million, and the additions were primarily in Fannie 4s, and we did also about $320 million. These are kind of low pay-up specified pools, and we added some Fannie 5s, same kind of things, we're not looking to add a lot of specified pool duration, but we did move up in coupon somewhat. That being said, the weighted average coupon of the portfolio at the end of the first quarter was 3.56%, thats only up about 9 basis points from the end of last year, which was 3.47%. So really, not much has changed since the year-end. And we continue to maintain the same lower coupon bias because we think that those are offered by far, the best total rate of return prospects going forward, and we don't want to try to chase the up in coupon trade, because we think that those mortgages are very much exposed to either a rally or a sell-off.

Prepayment speeds on Slide 25. Obviously, these are extremely muted. And as I said, we expect that to probably be the case until we see a meaningful move with respect to a Fed pivot.

I'm going to skip Slide 26. 27 (sic) [Slide 27] is our funding. I am going to make a few points here. On the left side, we list all of our counterparties. And I want to say basically 3 things. One, that this list is very stable, hasn't changed. We continue to have very ample access to funding. We have no funding issues whatsoever. And not only that, but execution levels remain very stable. Haircuts are stable, spreads stable. They're obviously slightly higher than they were 1.5 years ago when we were close to the 0 bound. And funding were 10 and 12 basis points, 15 basis points, and now we're at much higher levels. So the spreads are slightly higher, but have been very stable.

And then on the right side, again, talking about our hedges. As you can see, the red line is our cost of funds, and it very much tracks 1 month SOFR. But if you look at our economic cost of funds, you can see that it's pretty much leveled off, and that reflects the effect of the hedges, and it's pretty much stabilized. And to the extent that we are close to the end of the heightening cycle and the red line is going to flatten. You would expect the blue line also to continue to do that. And so our funding costs have really pretty much been locked in at a fairly desirable level.

Turning to Slide 28, our hedges. I do want to say a fair amount about this slide. First, just to kind of give you the changes. On the top left, you can see our treasury futures, they did change. As I mentioned, we did raise some capital earlier, and we pretty much added to our 5-year note future shorts, but we also made some changes to the Ultras, we reduced the Ultras. Short position went from $174.5 million to $54 million and change, that was moved into a swap position. It's actually a forward starting swap. So if you look on the right side, you can see the longer maturity swaps increase, that's what happened there.

And much more important, I would say, with respect to the bottom left, we added to our TBA shorts in the 3% coupon. As we just saw on the prior slide, we have a very large allocation to that coupon. And especially given the choppiness in the mortgage market, those have been very effective hedges. And the other side, on the bottom right, these positions, while they've only increased slightly during the quarter, all of these instruments have a very high exposure to Vol, and they do well in this type of high-Vol environment, among other market conditions. But we've been able to reap some very nice gains from those, they had performed very well for us, even though the total size of the positions hasn't changed much. We've actually been fairly active trading there. Hunter has been very active in trying to -- and done very well, harvesting some very nice profits, and we will continue to employ those strategies as long as we stay in this high-Vol environment.

And really, I would say that if you look at the combination of our increased sizes of our TBA shorts and these hedge positions with using Vol-related instruments, they've been very effective for us, maintaining kind of a low coupon strategy, especially coupons exposed to these bank liquidations, and they've really enabled us to maintain pretty good book value performance in that environment and a very minimal book value erosion during the quarter, even with a very modest over distribution, so that has been a very key part of the strategy, if you will. And so that's kind of it. I mean, just to summarize the first quarter results. We've been able to maintain a low coupon bias. It's our preferred position. This is how we want to position going forward.

We think that we are near the end of a Fed hiking cycle. We think the recession is likely to follow. It's more a question of when, not if. And I think that the if or the when is going to be driven by the path and inflation, but the combination of all the hikes and the tightening of lending standards, it is to us, pretty clear evidence that we're heading to a slowdown in the economy, in which case you would expect longer duration mortgages to perform well, very easy to hedge, very great convexity in those assets and our hedges have worked very well. The combination of a low leverage ratio, the TBA shorts, and these Vol-related instruments have been very effective in allowing our strategy to do very well in this environment, even with a modest over distribution. So that's kind of wraps it for Q1.

Noe just kind of -- as I mentioned, I wanted to spend some time talking about developments in the second quarter, and what that means for us going forward. So as I mentioned, when we entered April, it looked like all the macroprudential steps that the Fed and the FDIC had taken were working, they were containing the issue and the Fed could refocus on trying to fight inflation and that appears to be what's going to happen. But that being said, once the FDIC took over those 2 banks and they may have to take over a 3rd, those assets have to be liquidated. And when you started last week with these liquidations from agency mortgages, and they're expected to take months. I suspect that given the way the auctions have started up, they are going well, but they may be less than what's originally planned. But you're still looking at a pretty prolonged period of liquidations of mortgages and other asset classes. And so, that obviously is a meaningful development for a mortgage investor.

And the other thing is we're very mindful of the risk that given the length of time that this could occur even if the market turns in our favor, the size of these sales over time could degrade the performance of mortgages, especially the lower coupons that we own. And there is also a possibility that we could have another bank get taken over, and the liquidation list could grow. And then there is even more risk, and that is just the fact that inflation could stay high and the Fed could keep rates higher for longer. So those are the risks that we face given our position that's meaningful that we address these and have a strategy in place to deal with them.

And I think that, as I said, I think our strategy is sound and we are going to -- the intention is to continue to follow it. And based on pretty much the premise that we do expect that the economy is eventually going to roll over that the Fed will pivot. And we think when we do so, we're going to be very well positioned. And one thing I want to say about the liquidations of the mortgages that are being sold from the Silicon Valley and the Signature Bank portfolio is that they're skewed towards lower coupons, which are longer duration assets. And keep in mind that, if the economy is rolling over and credit starts to perform poorly, mortgages are kind of a countercyclical asset. They don't have any credit element, and they tend to do well in those types of environments. And so that would bode well if that would occur, and these assets that are being sold have been the longer-duration assets.

A lot of asset managers are meaningfully underweight the sector. This would offer them an opportunity to get to a more neutral position, and especially given that the coupons that are being sold are extremely large components of the index. And so, it would be -- it's more likely that those would be the ones that would be desired. And we think that, that's going to help these liquidation lists do well when and if we do see this outcome. And it also, of course, lines up with what we own. And we also think, as I said, up in coupon, if you look at mortgage originations going back to '22 and into '23, all these higher coupons are extremely exposed to a rally or sell-off, frankly, certainly a rally because they are going to be the most likely to be refinanced.

And so, given the balance of risk that we face, we're very comfortable with our current positioning. And in fact, we would look to the extent we can to add capital to be able to increase our allocation and continue to position ourselves even better to take advantage of the situation when it does, in fact, eventually occur. So that's kind of it. That's kind of how we've gone through the first quarter, how we're positioning ourselves going forward.

And with that, operator, I think we can turn the call over to questions.

(Operator Instructions) Our first question comes from Jason Stewart from JonesTrading.

Bob, again, all the great comments. So it sounds like you're going to stay up in the coupon stack.

No, no. Down, we're lower coupon bias, so definitely. We have a high concentration in 3s. We've added some 4s and 5s, but we're trying to avoid the top of the stack. We think, as I said, that the curve -- that the markets in the economy are going to roll over and we expect duration to perform well in that environment and the higher coupons, we think, are very exposed to that. They are the low-hanging fruit, if you will. And when and if that occurs and the mortgage bankers out there looking to refi. So we expect those to experience very high speeds and these lower coupons, which are quite easy to hedge and have duration in them would do very well in that environment.

All right. Agreed. And what's your view on natural turnover in housing right now?

It's very low. It's gone into the mid-single digits, and it's trending -- it can only go so low. But 4, 3 -- 3 to 5 CPR, you have a lot of issues now. One is, I'm sure you're aware of it, affordability is extremely low. The combination of higher prices and higher rates make affordability very high, so it's tough for new homeowners. A lot of existing homes are owned by people that have very low rates. So they really have no reason -- no economic reason to be moving, because they will be just replacing their expensive home with another expensive home only that their mortgage would be much higher. So I would expect existing home sales to remain very benign. And I think that new home sales are going to be challenged by low affordability, high mortgage rates. So I would say it's going to be low. And it really probably isn't likely to change meaningfully until you kind of see the market go the other way in a meaningful way.

Got you.

Yes. That said, the first quarter was very slow. So we would expect a modest acceleration in speeds, just the seasonal effect of coming into the summer months into the second and third quarter could be a little bit better for us, which would mean slightly faster.

Got you. Okay. That's helpful. And then do you have an opinion on the MSR market right now?

We don't follow that closely, but I know that it's -- a number of our peers are involved. I think, it's more downside than upside. You've seen a lot of the large banks, the [G-SIBs] move away from the market. I'm sure more than I do the - for instance, Wells has been selling some of theirs. That asset in the current market is very great carry, but I don't see a lot of upside for it in the future.

It's very tricky to hedge right now. So -- and I think that the new production is, it would be particularly challenging to the extent that they -- MSRs that are created off of these new higher mortgage rates are going to be -- if our view of the MSR market parallels, what we've done in IO space, which I think it does -- we're not seeing that as a great asset class.

(Operator Instructions) Next question comes from Mikhail Goberman from JMP Securities.

Just a couple of real quick ones. Could you guys give an update on book value for the quarter and thus far? And the 6.5x economic leverage figure you guys gave, is that a March 31 figure? Or is that a current number?

Both. It's maybe a little bit higher because book is down a little bit, so to answer the first question, we were down about 2% as of last Friday, maybe another 1.5% or so this week because of what happened with respect to First Republic. Mortgage is obviously widened, I think I mentioned on the call, we're probably 5 wider than what we were just last Friday. And it's really somewhat perplexing because unlike Silicon Valley Bank and Signature Bank, at least based on what information is out there in the market, out in the balance sheet, the assets of First Republic don't contain much in the way of agency mortgages, a few billion, $2 billion or $3 billion. It's much more unsecuritized whole loans, from what I understand, uni debt. That's going to be an issue to liquidate. That market is not that big. But there is not a lot of agency mortgages.

That being said, there has been days -- there has been times this week when the martgage trades -- market trades to every headline regarding First Republic Bank. And it's just were high percentage of them because the liquidation started last week. And they said when they started it, it was going to be a 30 to 40-week process and it's obviously a long time. It looks like because they've added, they've modified the process, now you can upsize some of these option list. So for instance, they might put $150 million of a certain coupon out there, but you can add an extra $100 million. And so far, that's been -- a lot of these have been only traded at good levels, but a lot of buyers have been upsizing, so maybe it goes faster, but it's still a long time. I mean, it's definitely -- and this is going to be here for a while.

It's going to get very technical within even the agency mortgage class as well. So for example, so 15-year list that came out yesterday, it was like 660 some million. And I don't know, everyone has sort of had their own opinion about how it did. But it definitely put pressure on 15-year sector initially and that sector is going to have kind of a hard time digesting all of this volume, because it's just not as liquid as the 30-year sector now. So you may see a little nuances. We've experienced it in our portfolio as well because we have the down in coupon focus, so new stories like this break. The first couple of days after it broke, we saw significant pressure, the volatility day-to-day and our book values, we could be 1% or 1.5% moves on a day. And then, the last couple of days, we've seen things reaffirm and yesterday was a reversal of that, and today at least before the call started it looked like there is going to be a continuation of more of the same. So we may end up by the time the day is over kind of flat to slightly down on the week, but things are changing very rapidly, I guess is what I'm seeing.

Right. It sounds like a buckle up and enjoy the ride is the motto for maybe the rest.

It's been this way for a while.

Yes. Well, with that in mind, best of luck going forward. As I say, I think it's the finest slide deck in the agency MBS space.

Our next question comes from Christopher Nolan from Ladenburg Thalmann.

How should we look at the dividend -- common dividend going forward? The comments that you provided in terms of the discount accretion income and the hedges was very interesting, and that seems to be a big guiding guidepost for you guys in terms of your dividend payout. But is that sustainable income?

Well, here is the deal, Chris. I mean, we really want to maintain this positioning. We have a view. We think that the economy is starting to roll over and that eventually the hiking cycle is going to end and they're going to have to pivot. And these are the assets we want to own when that happens, so even if there is a slight over distribution that -- if you think of a total rate of return, it's a combination of coupon and price. And we think that the potential price appreciation far outweighs the shortcoming, if you will, and income. And just from a book value perspective, if we bleed off a little bit of book, because we are over-distributing, we think when the market rallies that the price appreciation of these things is going to overwhelm that effect and net-net, we're going to be better off. I mean, the return opportunities are very high in that scenario. And so, we want to try to do that.

That being said, if we end up -- it looks like inflation is just not going to decline or even accelerates and that the Fed is going to -- and the economy is not rolling over that, we're going to have to stay here, then we're going to have to reconsider. But like -- we're close, we think to the end of the cycle and we think the data is starting to roll over, so -- and we have to just be very diligent and mindful of what's going on. We're going to try to hold onto the strategy, keep the dividend where it is, and we'll see. But if it becomes apparent that that's not the case, then we will have to reconsider and potentially make some changes in the portfolio, which would probably involve going up in coupon to generate more income.

Yes. I just would add a few -- we talk about this all the time. And what we've been doing, especially in Vol space, our efforts have been focused on putting positions in place that will do very well, highly-geared trades that will do very well to the extent that the curve continues to sort of flatten from a standpoint of not realizing.

Inversion.

The inversion, right? So, I think there are a couple nuances that are important when we have this conversation about what our earnings stream is. We've kind of outlined, as many of the easier to grasp things, I think in terms of discount accretion and the value of our hedges that have subsequently been -- become realized gains that contribute to this dividend stream. But there are also some more subtle things. The portfolio is sort of in the position where we're in the opposite boat, and that we were -- when we had an extreme premium world, right? So, back then we would buy specified pools, and as they age, we would recognize decay in pool payups, right? That's just was sort of the nature. These brand new pools are a more highly desired and have better carry than older ones.

We're in the position now where, a lot of the high discounts or the big discount pools that we own are aging such that they're appreciating in value by a tick or 2 per month, right? So, we have -- like we said, I said, we had some more subtle things in the portfolio with respect -- going back to the Vol positions, we will see if the Fed is a higher for a longer -- takes higher for a longer sort of term, those positions will do very well. That will offset some of the damage done by the fact that we're not realizing forwards. And then the other side of that is as we start realizing forwards, then we're going to quickly start stacking up more income on a month-over-month basis for the sort of underhedged, if you will, part of the portfolio. So I think, that's the way we try to think about it. And I think we also feel comfortable in the current level for those reasons.

(Operator Instructions) We have no further questions in queue. I'd like to turn the call back over to Mr. Cauley for closing remarks.

Thank you, operator. Thank you, everyone. As usual, to the extent if you have follow-on questions and you wish to call us, please do so at the office. The number is 772-231-1400, or if you're just listening to the replay and you have some questions, very willing and look forward to taking any and all questions. Otherwise, we look forward to speaking with you at the end of the second quarter. Thank you. Bye.

This concludes today's conference call. Thank you for your participation. You may now disconnect.