Orchid Island Capital Inc (ORC) 2024 Q1 法說會逐字稿

Good morning, and welcome to the first-quarter 2024 earnings conference call for Orchid Island Capital. This call is being recorded today, April 26, 2024. 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, beliefs with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements.

Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commision, 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.

Thank you, operator, and good morning. I hope everybody's had a chance to download the deck, as as usual that will be the centerpiece of today's discussion. So I'll be walking you through the deck, and then at the end of that, we'll have a Q&A session.

As usual, I'll just give you a quick rundown of the agenda. So first thing we'll do is go over our results for the quarter, then we'll talk about the market developments that shaped our results and provide our outlook for the future. And then we'll dig into the details of the portfolio and our hedge positions.

So turning to slide 5. For the first quarter of 2024, net income was $0.38 versus $0.52 Q4 of last year. Our book value increased slightly by $0.02 over the last quarter. Total return was 4.18% versus 6.05% in Q4, and the dividend was unchanged for the quarter.

The average MBS portfolio appears to have declined on slide 6, but that's somewhat misleading because in the fourth quarter of last year, early in the quarter, we had to de-lever when rates were peaking and so that calculation is just a simple average of the beginning and ending so it makes it look like it was higher. But if you looked at where we were at the end of Q4 versus where we were at the end of Q1, was not a meaningful change.

Leverage increased slightly from 6.7 to 7. Speeds increased slightly, that's probably more seasonal and just aging of the portfolio slightly. And then liquidity slightly improved over where it was at the end of the fourth quarter. But again, right in the middle of our kind of target range.

Slide 7 provides just our preliminary balance sheet income statement. We would expect to release our 10-Q sometime today so you'll get the final numbers. We do not expect these to change.

With respect to slide 8, this is what we call our adjusted economic income. I just kind of like to do two things here: one is just walk you through these numbers on the top of the page and just show you where they come from, and then in the bottom just show you on a per share basis and make a couple of comments about the dividend.

So with respect to the top, the interest income number, that comes right off the balance sheet. So that's just interest income -- or the income statement rather. That's a GAAP number. It is representative of the number we would report for tax. So if you're thinking in terms of our taxable income which drives the dividend, that number is representative, although not exactly the same. We do calculate interest income slightly different for tax, but again, that's representative.

The next number is just the accretion or the premium amortization. It's down slightly this quarter, just reflecting the fact that it's calculated based on beginning of period prices and they've been marked up at the end of Q4. So the discount was a little less than it had been. Again, this number is not exact what we report for tax, but it is representative. The next item is interest expense. That's not a GAAP number, but that's in actual dollars paid in interest expense. So that would be the same for tax.

And then finally the last two, the hedge number, that is a very close proxy to what we report for tax. That's basically taking the change in the open interest of our hedge positions and allocating it between a portion that pertains to the current period versus all future periods. And that's similar to the process you would use for tax. So that number is also representative.

And then finally, just expenses, that's just right off the income statement. And that, again, is very close to tax. So that's kind of a long and short of it, so this number is a very good approximation of what we would call taxable income. It's not exact, but it is at least a representative.

And then just on a per share basis, you can see below, $0.47 and $0.50 the last quarter, above the dividend. So it appears that we're comfortably earning the dividend and then we will reassess as we always do as we move through the year to see if there's a need for an adjustment to the dividend, kind of thinking about doing that after the second quarter as of now. So we'll see. But for now, you never know, markets can change very dramatically. So when we think of dividend policy, you've got to look backward, but you also have to look forward. So we'll be doing that, as I said, in the near future.

Turning now to market developments. The top left is an interesting slide, I want to kind of walk you through this, and this is a Q1 discussion. So the book end dates would be 12/31 and 3/31. And those are the two bottom numbers, but we've added these extra two just to give you some context. The orange line represents the peak in rates last October. And if you see what happened between then and the end of the year, we had this strong rally and we all know why that was. It appeared the Fed was about the pivot and the market rallied. And since then, we've retraced.

So the green line is how we were at the end of the quarter, and then the blue line is where we were last Friday. So we've been retracing the rally that we saw last November and December. And we, at Orchid, thought that that rally was overdone, and our hedging strategy and positioning reflected that.

And then, again, if you look on the bottom, it's just the inversion of the curve. As you can see in the most recent data point last Friday, we are off the lows, intending in a steepening direction, but still inverted. It's still fairly well inverted.

Onto the next slide, this is just the current coupon spread. Couple of comments I want to make. If you look at where we were at the end of the quarter, it is kind of a range that had been in place since the end of, really, '21, mid '22, at least which is when we were in the tightening cycle. We were kind of at the local lows. Mortgages did quite well in the first quarter. Since then, we've kind of backed off some but we're still quite a ways from where we were last fall, so not quite as tight as we were, but still a long way from the wides. But then on a historical basis, if you look back since this data goes all the way back to 2010, we are still wide by historical standards.

On the bottom left, you just see the absolute price change in these various coupons. These prices, of course, have been normalized to $100, going back to the beginning of the year. And if you look at where we were at the end of the quarter, they were all down in absolute terms, but most mortgages have done fairly well on a relative basis, relative to hedges. Since quarter end they've widened, so they've done an absolute price, but also versus hedges. With respect to roles, most roles are negative except for the production coupons, and that's, as you can see, has been the case for quite a long time.

Turning to slide 12 now. This is vol. Obviously, volatility is a very important driver of mortgage performance. And I just want to point out if you look at where we were at the end of the year versus the end of the quarter. volatility came off meaningfully. That's very supportive of mortgage performance, but it's not the only thing that helped.

During the first quarter, we also were aware that it was quite a bit of inflows into money manager funds, presumably out of equities. And so you got inflows of cash, banks getting reengaged [in vol off], so it made for a good quarter. To date, it's kind of reversed but we're still not in a bad place. And then if you look at where vol is on a very long-term historical basis, again, going back 10 years, it's still elevated. We're well off the local highs, but on a historical basis, it's still elevated.

Slide 13 is just prepayment activity. It's really hasn't changed. The red line on the top left is the average rate. It's probably up a little bit since then, but it's still very, very elevated. And the refi index is at extremely low levels going all the way back to the 90s.

With respect to primary, secondary spreads, still somewhat elevated and still volatile; we still see volatility in there. That's really driven more just by the originator community and their business decisions and where they want to try to price mortgages. We've had a lot of volatility in rates, and so that's somewhat probably is captured in these spreads.

And then this final slide before we move on to the portfolio, I just kind of -- I'll call this food for thought. Just threw this in there and I think it's worthy of some discussion. I don't want to draw any too strong a conclusion here, but what you see here, the top line goes back really to the end of the financial crisis. This is GDP, US GDP, just in dollar terms, so nominal dollar terms, not adjusted for inflation.

And as you can see, it's been increasing at an amazingly steady rate up until the pandemic. And it's kind of interesting when you think about all the time and energy spent by economists and market participants hashing overall the economic data and policy decisions. But yet when you look at growth over this very long period of time, up until the pandemic, was amazingly steady, so that's an interesting point.

And in point two, as you can clearly see, that it's accelerated since the pandemic, and it's also become a little choppier. The red line just represents money supply, that's M2. Most money aggregates are kind of been taboo for quite some time. There have been no longer really viewed as appropriate measures of looking at economic behavior or performance or forecasting. But when you look at this, there's no question that M2 very closely tracks the growth of the economy. In fact, its correlation is essentially is one, it's $1 for $1 increase. So that's one interesting observation.

And another one is we put these lines in here, these are just kind of our trend lines. And as you can see, the red line, M2, is clearly above its long-term growth trend. And I guess I don't know if this is bit of a stretch, but kind of the relationship between growth in the money supply and the economy, which was so steady for so many years, has changed. Now, it's kind of out of kilter. So now the money supply has grown much more rapidly in the economy, although the growth rate of the economy has picked up.

Now I don't know if it's appropriate, but if you were to say that this growth in the money supply is kind of a function of fiscal spending, we've had outsized fiscal deficits of late. There's been deficits, no question, by the government for years, but they're very much outsized as we speak, starting with the CARES Act in response to COVID and the various follow-on programs, and even today when the government's running $1.5 trillion to $2 trillion deficits. I don't know if this growth in the money supply is purely a function of that. But to the extent it is, it's interesting to note how this has had an impact on the growth rate.

One thing I think you can draw a conclusion here is that, if you go back to the immediate aftermath of the financial crisis, when Chairman Bernanke was the Chairman of the Fed, he would talk, when you spoke to Congress, about monetary policy being basically [as comedated] as they could. They had the funds rate at zero. They were doing QE. They pretty much couldn't do anything more. Fiscal policy was somewhat accommodated, but not that much, but they were at least in line. They were doing the same thing, maybe not as much as the Fed had hoped, and there was the sequester back then, but monetary and fiscal policy were more or less in alignment.

If you look at today, monetary policy is very restrictive. The Fed has raised rates over 500 basis points, they're doing QT, but fiscal policy coming out of Washington is not in alignment whatsoever. It's very much [stimutive], huge deficit. So monetary policy and fiscal policy are working at odds, and that kind of leads you to think, well, maybe that's why the Fed's not having the success that they had hoped. Growth is still fairly robust, inflation is still strong, the labor market is still strong. So anyway, food for thought, but I just thought just an interesting picture. I wanted to throw it in here just for that reason.

Now moving on to the portfolio and so forth. I kind of wanted to set the stage before we get into the details of the portfolio. If you want to understand what happened in this quarter and what we've done, I think you have to understand where we were coming into the year.

And so in the fourth quarter of '23, the Fed had clearly appeared to pivot after we'd -- not long after we'd hit the cycle highs in rates. The Chairman and various members of the Fed had spoken pretty openly about interest rate cuts on the horizon. And so when the market sized, the Fed had pivoted. The market quickly moved to price in six cuts in 2024 and the market rallied. And we just discussed and saw that in pictures above.

We actually didn't buy that. We thought that a lot of that was overdone. And turns out, as we enter 2024, what we've seen in the first quarter, is the data has remained quite strong, inflation has been strong every month so far, payroll growth is strong. GDP, even though it was reported somewhat low yesterday, a lot of that was because of inventory and trade.

And so I think it's safe to say that pivot is on hold and [is it not on] hold, but we don't necessarily know when it's going to happen or maybe even if it's going to happen. So that's kind of the background. So in our minds, what that means is we're kind of looking at a status quo outcome where things don't necessarily change, where monetary policy stays high, rates stay high. And we basically have to continue to exist in this environment for the foreseeable future. And the takeaway from us is that there's not a bad outcome.

Our hedge positions as you know, as I mentioned in '23, when the market rallied, we didn't buy into that rally. We thought it was overdone so we kept our hedges at a very high level. As a result, we were very adequately hedged coming into this year. And our NIM has been -- not only has it not really decreased, it's actually increased. And so we're basically taking positions now to basically position for this kind of condition existing for some time.

What we did during the quarter, going to the slide here on slide 16, we continue to increase the average coupon of the portfolio, was up another 5 basis points. The realized yield on the portfolio increased from 4.71% to 5.03% for the quarter. And inclusive of our hedge instruments, our economic net interest spread was 2.47% for the quarter versus 2.04% for the last quarter.

Now next slide is really, I think, illustrative of what we've done. So on the bottom right here, you see our portfolio has existed at the end of 2022. Now, keep in mind, at that point in time, a lot of the higher coupons that exist today really didn't exist then; they hadn't been produced and there were a lot of coupons outstanding even to the left of threes here. But that was the portfolio at the time.

And as you can see, as you move through time, moving to the left through the end of last year and then the end of this quarter, we've continued to migrate the portfolio higher in coupon, and the current, basically, target structure is more of a barbell construction where we have an overweight to lower coupons and higher coupons. We may add belly coupons opportunistically over time, but they're not our ideal target holding long time.

So we're trying to increase the exposure, we're trying to build this kind of a barbell. We are able to use our paydowns and/or proceeds from our ATM offering over time. They've been relatively modest, but still a source of funds we can use to do so.

And basically, that's kind of the direction we're heading. The belly has been very directional belly, I mean, coupons. Those coupons have been moving with interest rates. So when we sell off, they tend to perform poorly; when we rally, they tend to perform well. And we may do the construction using the wings, if you will, of that strategy, makes more sense.

So now turning to slide 18, kind of focus more on our funding and hedging side. As I said, we were very aggressive in maintaining our hedges going into the end of the year. And even with the expansion of funding that we saw over that two-year period, we've been able to protect. As you see in this graph on the right-hand side, the red line is our cost of funds, the grey line is SOFR, and you saw that rapid expansion, meaning you can see our economic cost of funds has been very flat for some period of time as a result of our hedging strategy.

In fact, if you look, the economic cost of funds actually decreased this quarter from 2.67% to 2.56%. And the reason that happens is as the market has sold off and its price cuts out of the future. So if you think about, for instance, in a swap where you have a pay fixed receipt floating, the fixed rate is very much fixed. You pay a prescribed fixed rate on a notional balance. And so the present value of those cash flows is absolutely known.

The floating leg is where you're receiving a floating rate on the same notional balance. And as the market prices out cuts in the future, the present value of those cash flows on that side become higher, just because your projected funding rates in the future are higher.

And so as a result, our NIM has actually expanded in this quarter. And that means that, for instance, if we move into the future and the market price is out even more, it will go up. Eventually, if they start to price in hikes, it would go up even more. Of course, if they did actually hiked, then the repo side would actually be higher as well. But in any event, we can stay in this position for some time and our NIM appears very, very solid.

Just moving on to slide 19, this is more of a bigger-picture hedge focus here. But basically, we have 91% of our repo funding is hedged, excluding our TBA shorts and interest rate swaps. But at the same time, the migration up in the higher coupons, lower duration assets in conjunction with our lower coupon positions, which are well hedged, really helps protect our book value as well. And we just want to reemphasize this point: in Q4, when we did have the rally, we did not extend our duration. We kept our hedges very high, and that's worked very well for us in Q1 and into Q2.

Slide 20 just gives you our hedge positions in greater detail. Our interest rate future's positions are unchanged for the quarter. TBA positions were increased slightly. We actually added some TBA shorts at the very beginning of this quarter as the market tried to sell off or started to sell off.

And then just yesterday after the number, when the market sold off very much, we actually took that kind of back off. So that position now is at about $400 million short versus $370 million at the end of the quarter. So we've done a round trip there and worked very well for the first, whatever, 20-odd days of the quarter, but we think we've moved quite a bit in short time, so we've taken some of that off.

With respect to the swaps, we added slightly to our swap positions. Otherwise the changes there, just the passage of time. Some of the swaps that were greater than five years are -- longer than five no less, and so it appears that it moved. And we did add what is called a dual digital option.

On the bottom right, that is a hedge strategy that basically is kind of binary. We pay a premium. And if certain conditions are met, there has to be two, you get a very nice payout, and those payouts are tied to both the level of rates and the S&P 500. The idea being that if rates are much higher for longer, that that would probably cause the stock market to sell off. If both of those conditions are met, we have a very nice pay day.

Now let's just change to slide 21, and this is really what's driving a lot of what we're doing here. So these numbers we look at on a regular basis. So these are the various coupons, being the coupon stack. And using yield book, we can project the effective duration, convexity, and then returns under these different scenarios.

And I want to point out a couple of things. First off, while we look at this very regularly, we also look at empirical or observed results and we factor in both in decision making. But if you look at the convexity column, if you look at the, what we call, the belly coupons, 5%, 5.5% and 6%, very clearly the worst convexity. And in our world, very negative convexity means very hard to hedge.

And so while -- for instance, if you look at the lower coupons, that very low negative convexity makes it easy to hedge. And so even if you look at these securities in a rally, you can see they have very great returns. In a sell off, it's, of course, equally bad but they're easy to hedge. And so we can use swaps or futures and fairly effectively hedge those, and then the lack of negative convexity really helps with that process.

And then when you look at the higher coupons, again, very low negative convexity, and they do very well in a sell off. And so that's kind of what's driving what we're doing here. We're looking at a situation where we think we could be here for a long time. But if we do move in either direction, this kind of barbell strategy when it's going to be very effective and we don't have to deal with trying to hedge the belly, which can be very expensive and very challenging.

So for instance, if you look at some of those belly coupons in a meaningful sell off, they could extend and underperform hedges meaningfully. And again, in a big rally, the same thing can happen. So this construction allows us to position ourselves to do well if nothing changes, but at the same time do pretty well if we move meaningfully in either direction. And so that's kind of what we're focused the strategy on.

On slide 22, this is just our interest rate shocks, our duration gap. Just want to point out the bottom right two numbers there, those are basically the changes in equity given these plus or minus 50 basis point rate shocks. Ideally, you want those numbers as low as possible. And again, it's only models. So you don't necessarily know that you'll realize that. But we're comfortable with our positioning.

And then slide 23 is just our speeds for the portfolio. We show January, February, and March as well as Q1 and Q4. Speeds have picked up somewhat over the course of March. That's really just coming out of the seasonal trough. So that's why we were kind of faster in March. I suspect with the backup in April, even though we're still moving towards the seasonal peak, which is around June, the net effect would be probably a uptick in speeds, but not as much as you might have seen otherwise.

And then finally, just to kind of sum up and provide our outlook, I think if you look back at where we've come from, the market very much thought ahead of itself with the pivot, basically didn't work out. The developments I just described have driven rates higher in Q1; in early Q2 vol is much higher.

And really there's even uncertainty in the market about what the Fed's going to do. I mean, current market pricing is one cut this year and there's some who think the next move actually could be increased. I think that's a very, very low probability, but it just points to the uncertainty in the market, and, in sharp contrast, to the outlook at the end of last year, where everybody was assuming significant cutting. As a result of all this, mortgage valuations are cheap and then are attractive. So that's very good for us.

So looking forward, all of these developments are not bad for us. They're actually quite nice. The investment opportunities are very attractive. Our funding costs have been very well contained through our hedging strategy. We're in a position where we can protect book value; absent some extreme moves, higher. We have been maintaining very good protection of book value, and we have potential upside through our exposure to lower coupons to the extent we rally back. So that's kind of what we've done and where we are and what we look at going forward.

So operator, that is it. I guess I will say, just before we conclude, our book value, I'm sure everybody wants to know where the book is. As of last Friday, we were down about 5%. As of yesterday, about 5.5%. Market rallied hard on Tuesday when we had a very soft PMI number in risk assets rally, but Wednesday and Thursday, we gave some of that back. So down about 5.5% is our best estimate as of last night and about 5% last Friday.

So with that, I will turn the call over to questions. Operator?

(Operator Instructions) Matthew Erdner, JonesTrading.

Hey, good morning. Thanks for taking the question. Can maybe talk about the repo markets on the overall health and just kind of how they're functioning right now?

We see no signs of distress. We've actually added some counterparties, and we have a few more in the works. And we're looking at some -- both sponsored repo and going through State Street -- I can't think of the term. But anyway, no, I don't see any stress in the repo markets. We have more than adequate funding, haven't seen changes in haircuts.

I will say this that like I said, that maybe some people are thinking the Fed's going to raise the rates. I mean, the repo market will be very quick to jump on that. They love to price that into term repo. And so even if you go out six months, there's no almost no cuts priced into it. But other than that, I don't see any signs of distress.

Occasionally, we'll get some weird money movements around month and quarter ends, which might drive rates up a few bps. But in general we've been able to really diversify our funding book across 25-ish lenders and are actively having conversations about adding new counterparties. And haircuts have on average come down a little, but there are few counterparties that have been willing to decrease haircuts from like 5s to 4s. So it seems pretty healthy. But as you know, that can change in a moment's notice.

Yeah, that's helpful color there. And then I see the move up slightly in coupon kind of hitting the lows and the highs there in the stack. Have you continued to add, I guess, higher coupons in the second quarter, consistent with the strategy that's been laid out?

Not yet, but that's on the immediate horizon. [I'm going to be] able to use the ATM in the quarter just because we did it more or less blackout and we get it paid [off all the labor] very modest. But the plan is to continue to do that in the immediate future. So when we talk at the end of the second quarter, hopefully there will be much more progress to discuss in that regard.

It's been -- I think there was a slide at the beginning of the deck that showed how pronounced the rate movements have been from October to December and then back to where we are today. Back then, 5.5s and 6s were consistent with that barbell strategy we discussed.

So it may stick out that we have some -- we are exposed to some belly coupons, but we'll continue to maintain the strategy of trying to own a little negative convexity, fully extended deep discount securities that are easy to hedge, along with higher coupons that have lower duration and less convexity because they're just not right in the middle of the stack where the extension gets the worst.

Got it. Thank you, guys.

Yep, thank you.

Mikhail Goberman, Citizen's JMP.

Hey, good morning, guys. I hope you guys are doing well, and thanks again for the slide deck. I didn't know it was possible to make a -- I always tell people this is the best agency mortgage REIT slide deck for like a crash course in agency MBS investing and somehow you guys made it even better. So congrats.

It's really good stuff, especially slide 16 and 17 disclosure there, it's very nice. Thank you for that. If you could perhaps flesh out your comments on the dividend. Early in the call, Bob, I believe you mentioned something about the second quarter. I don't know if I heard that correctly, but maybe just flesh out your comments about the dividend going forward.

Sure. It's, obviously, $0.12. And if you look at that slide, wherever it is, slide 8, we're running about -- our proxy for taxable income is running above the dividend. So we will reevaluate it if there's a need for an adjustment. I mean, the obvious adjustments there would be higher. But as I said, you have to look backward and forward.

So we don't like to change the dividend all the time. And so if conditions are changing in the market over the -- at the time and it looks like there might be downward pressure on that, that's going to very much affect our decision making, but we do intend to revisit midyear after the end of the second quarter. What we'll do is we'll update more precisely our taxable income estimate year to date and see if there's a need and then weigh that against what we see on the ground at the time and the outlook going forward for the balance of the year and in the next.

Okay. So I guess in that adjusted economic income per share line, the one for Q2 that you're reporting in July, August, is that sort of what's going to drive any sort of decision?

Yeah, I think so. And again, it will be a discussion. We'll weigh that, will also weigh kind of the outlook from that point forward, whether we think it's going to stay at that level, go up or go down. So as I said, you don't like to change the dividend frequently, and so you try to pick a level that is going to be the most appropriate for the medium term. And if that means you over or under earn at any given month, that's okay. We don't earn exactly what we pay every month, but that's the thinking that goes into that decision.

Got it. Thank you for that. Best of luck going forward, guys.

Thank you.

Christopher Nolan, Ladenburg Thalmann.

Hey guys, the deck is great. And Bob, I always like your comments. I thought your stuff on the M2 money supply was really interesting food for thought.

It is. That's right off of Bloomberg by the way, if you pull that up.

You're dealing with a lot of cross currents here in the macro level. That sounds that you're basically pursuing the same strategy of going to more high coupon stuff. They have a barbell portfolio.

Going forward, assuming that the economy continues to muddle along and the Fed doesn't really do anything, what do you see benefiting more? Earnings or book value or neither? I mean, a little clarification on that might be helpful.

Yeah, that's a good outcome. I mean, as long as we don't get a violent sell-off on the long end. If we start heading north of 5% on 10s or something, we stay around here, the curve stays inverted, book should be stable, and we can earn the dividend.

I think the question is, like -- this week, the curve has been inverted longer now than it's ever been inverted. And I just always say on road trips way back when, what happens when the curve inverts, how are you going to pay dividend? I used to say, well, if the curve inverts, that means that the market thinks that the Fed is going to be easing in the future. And either the Fed's wrong and they do ease or the market's wrong and they don't and long-term rates go up and then you get a normal curve shape. Well, we've always been like this for a long time.

And so today, the yield on the two-year is still well below Fed funds. So the market's still saying, we think the Fed's going to ease. We'll see what happens. But eventually you would think the curve should be going back to a more normal shape.

The question is when and how? Does that mean short rates rally? Or does that mean long rates go up? When you look -- you referenced my M2 slide, that kind of tells me that with fiscal policy the way it is, that's stimulative. They're pumping money into the economy. And if you look at that surge in M2 as a proxy for deficit spending, excessive deficit spending, I would tell you that inflation's probably not coming down anytime soon. [Well], it's going to stay fairly high, which might lead you to believe that longer-term rate should be higher.

But the market still thinks the opposite. The market still thinks they're going to be easing. It's just a question on how much. I don't know, we don't know. We'll have to watch like everybody else. But the point is, for now, if nothing really changes meaningfully, book should be pretty stable and the dividend is pretty well covered. So that's not a bad outcome for us at all.

Yeah, I think that's the environment where volatility comes off, both into a rally as well as just sort of staying here and being range-bound. Certainly, the last six months have been extremely volatile. And so I think as the market processes what exactly is going to happen when the Fed is going to be involved, [we have] a lot of hedges on the front end of the curve.

In December, we took strides to lock in as many of these anticipated rate cuts as we could. We sort of traded Eurodollar or SOFR futures for a very long time [and] we started locking in some of those cuts. And so I think we're in a good position.

Again, it's not going to be fun to be a levered mortgage investor if more hikes start getting priced in, and the market has been trading -- mortgages have been trading very long over the course of the last few weeks. And so we'll see big green days whenever we rally, and days that are redder than expected just based purely on the rate moves on days when we have big sell-off. And the thought of easing or the prospect of even tightening starts getting batted around, mortgage basis really slips in that environment.

So that will continue to be the case. But if we're just modelling around here and the tightening cycle is almost over, we don't have to pause or pivot right into an immediate easing cycle to benefit from this environment. Just one of a little bit of stability is also an attractive environment for us.

Great. Thank you for the word. See you guys later.

Thanks, Chris.

(Operator Instructions) There are no further questions at this time. I'll turn the call to Mr. Cauley for closing remarks.

Thank you, operator, thank you, everybody. As always, to the extent other questions come up or you don't listen to the call live, only the replay, and you have a question, feel free to call us at the office. The number is 772-231-1400. Otherwise, we look forward to speaking to you at the end of the second quarter. Thank you.

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