Orchid Island Capital Inc (ORC) 2021 Q1 法說會逐字稿

Good morning, and welcome to the First Quarter 2021 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, April 30, 2021.

At this time, the company would like to remind the listeners that the statements made during today's conference call relating to matters that are not historical facts are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith belief with respect to future events and are subject to 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.

Thank you, operator, and Good morning, everyone. I hope everybody as usual has had a chance to download our slide deck, which we put up on our website last night and I'll give you a second to get ready and then we will as always walk you through the slide deck.

As usual, I'll start on Page 3, just going to go over the favorable comments, in other words, set the agenda for today's call. And the first thing we'll do, as usual, is just go through a summary of our results for the quarter. I'll spend some time talking about market developments that occurred throughout the quarter and then go through our financial results and then spend the bulk of the time talking about our portfolio characteristics, hedge positions, both with respect to what happened during the quarter, what has happened since quarter end, if anything, which in this case is we did do some things, then I'd just give you some comments on how we see things going forward and just some more high-level comments on the performance of the company for the quarter.

So with that, I'll turn to Page 4. For the quarter ended March 31, 2021, Orchid recorded a net loss per share of $0.34, net earnings per share of $0.26, excluding realized and unrealized gains and losses on our RMBS and derivative instruments, including net interest expense on our interest rate swaps. We had a loss of $0.60 per share from net realized and unrealized losses on our RMBS assets and derivative instruments, again, including net interest expense on our interest rate swaps. Book value per share was $4.94 at March 31, a decrease of 52% -- $0.52 or 9.52% from $5.46 at December 31 of 2020. In the first quarter of 2021, the company declared and subsequently paid $0.195 per share in dividends and since our initial public offering, the company has declared $11.915 in dividends per share, including the dividend declared in April of 2021. Total economic loss for the quarter was $0.325 per share or 6%, 23.81% annualized.

On Slides 5 and 6, we present our results versus our peer group; the peer group is defined at the bottom of the page. The first page is as of March 31, which is using stock and dividends to calculate total rate of return. As usual, we present this both, while we look backdate as of 3/31, so 1 year back from 3/31, 2 years, etc., and then, of course, each calendar year as well. Slide 6 does the same thing for book value as we -- is always the case, we do not know all of the book value numbers for our peers. So this data is presented with a one quarter lag, so it would be through the fourth quarter of 2020. Now with respect to market developments. I think by this point, some of this business is somewhat old, so I'm just going to summarize most of this, but I will make some comments with respect to anything that's germane for purposes of Q2 and beyond.

With respect to Slide 8, as you can see, the difference between the blue line and the red line on this graph here is the change in rates that occurred during the quarter. So a very substantial move, and a substantial steepening of the curve. Since quarter end, rates have backed up, this green line you see there is as of last Friday, actually today that line will be slightly closer to the red line, so we have seen rates back up somewhat more. But noteworthy in the magnitude of the steepening of the curve here, in the case of the 10-year cash, now it's almost 80 basis point move in rates over the course of the quarter.

Slide 9 just presents the same kind of data, only looking at certain points on the curve, the 10-year treasury and the 10-year swap rate, there's really nothing more to be said about that. With respect to Slide 10, note that even though the curve has flattened somewhat in Q2. In the case of a 5-30 curve, it's only been a couple of basis points, in 2s, 10s curve, about 10. The curve still remains very, very steep and well off the trough that we saw back in 2018.

With respect to the mortgage market on Slide 11, what we show on the top left of the page is a slight different approach than we've done in the past, we basically normalize the prices of all the security so you can see the relative performance. So in this case what we're doing, we're taking the price at the beginning of the core -- quarter and setting it at a 100, not that they were priced in parts, this is a just 100% of the beginning price. And as you can see the red and the blue lines there, which represent the lower coupons, have declined the most in price, in the case of 2s, down 117 ticks, 2.5 were down 94 in a quarter ticks. But as you can see, a clear differentiation between those lower coupons and the higher coupons, coupons that are materially more in the money, but also not the ones that the fed purchases. Those were relatively unchanged, in fact, in the case of 4s, were actually up in price, almost 17 ticks.

With respect to the rural market, the story remains the same, while the fed is aggressively buying lower coupon, production coupons and those roles do very well and all the rest are at or near negative levels. With respect to spec payups, very meaningful developments this quarter. As you can see in the top right, in our case here, we're showing representative pools, these are 85k low loan balance, 3s, 3.5s and 4s. And as you can see those payups have dropped dramatically, they're actually back to the levels that we observed before the pandemic, in some cases, slightly lower, mirroring what you've seen in a 10-year treasury. New coupons still come in relatively, substantial payup. The backlog is not really as relevant with respect to Orchid.

On Slide 13 or 12 rather, you can see I'm using this proxy for volatility in the market as is typically the case when we have a sudden substantial movement in rates, [ball] increases and obviously very high levels here, almost as high as it was back in March when the pandemic first hit the market. Since quarter end, while it has come off some, but still remains just at the bottom end of this range, it's been established since middle of the second quarter. One final point here, which is very, very important with respect to the mortgage market, on Slide 13, we show here the OAS -- LIBOR OAS of the various TBA coupons. And note how tight they are, these numbers are in many cases, negative numbers and we see that in a lot of securities that trade in the market with negative LIBOR OAS numbers. The mortgage market is very tight and for obvious reasons, we have the -- very substantial support of the fed buying on a daily basis. And as we heard this week, the fed has no intention of tapering those purchases anytime soon. And as a result, the market remains well bid and we also have large other investors, non-fed buyers, in this case banks, who are also very supportive of the market. So one takeaway from this slide is that the mortgage market is trading at very tight levels on a historical basis.

Slide 14 just kind of gives you a snapshot of what happened with respect to fixed income sectors. This is all of the aggregate index components as you can see. All fixed income components were down with the exception of higher yield and high yield as always has kind of an equity component to it, it's not purely bond-like instrument and of course, equities did very, very well. Mortgages were on a relative basis, somewhat better than most other fixed income instruments, but still negative in return. And this is absolutely by the way on an excess return versus treasury or LIBOR swaps. It was negative as well, maybe at 30 basis points.

With respect to 15 -- Slide 15, a few important points I want to make here. First, if you look at the bottom of the page, the refi index, which is the blue line versus the percentage of the mortgage market that's in the money, very substantial move over the course of the quarter, we went from being in a situation where approximately 80% of the market was refinanceable, now we're down close to 40%, a very substantial move. One of the things that's offsetting that, though, if you look at the top right, this primary, secondary spread. We've talked about this before on our earnings calls, it's very important. This is basically the spread between a mortgage available for borrower and in our theoretical current coupon mortgage, it has gotten to very wide levels and it's been tightening for some time now. As you can see, it continued to tighten even in the first quarter, so the significance of this, they tend to commute the impact of higher rates on prepayments and put differently as rates have moved higher over the course of the first quarter.

Rates available to borrowers increased, but much less so as a result, the rates available to borrowers are still not that unattractive, they're still quite attractive. In fact, various proxies, the Freddie Mac survey rate or the Mortgage Bankers rate are still in the very low 3s, so on an historical basis, still quite attractive. As you can see on the top left, the refi index, of course, has come off versus mortgage rates. But it really only moved from the mid-4,000 range to the low 3s, it's still at a fairly high level. So refinancing activity has come off, no question, but not off a cliff, for sure.

Turning now to our financial results, Slide 17. On the left hand side, we disaggregate our results, basically showing you the mark-to-market effect on our earnings. As you all know, we use fair value accounting, so all fluctuations in market value of any instrument, shows up in our earnings. As you can see, just looking at that center column, the realized and unrealized losses on the assets, exceeded those of our hedges, and that was because of the positioning of the hedges we had in place beginning of the quarter obviously. And as you can see, the substantial underperformance is what gave rise to the quarterly loss. Absent those, you can see that we still generated an income of $0.26 per share, I have more to say about that in a second.

With respect to the sector allocation of the portfolio between pass-throughs and IOs and inverse IOs, as you can see, not so unsurprisingly, the pass-through portfolio had a fairly meaningful negative return of 9.4%, meeting average of capital allocation in the IOs and inverse IOs had a very strong positive return, nearly 30%. Not surprising given the movements in rates.

Now with respect to kind of our historical perspective on Page 18. At the top of the page, we show the same 3 lines that we've shown for many years now. The blue line is the yield on our assets, as you can see, it's at 2.66%, the red line represents our economic cost of insurance, it's down to $0.62. And then the difference between them too is the green line, which was at 2.04%. It appears now, given the events of the first quarter of 2021 and now moving to the second quarter, that both yield on the portfolio and the economic cost of interest are probably at or near a trough. And so we would expect those to level off and potentially rise in the future. But importantly, the net of the 2, has remained quite stable now for several quarters and it stayed in or around that 2% range. And that's of course, meaningful in the perspective of our earnings and dividend. And that's also reflected on Slide 19, where you can see the blue line, which is the actual reported earnings per share versus the earnings per share excluding those mark-to-market gains and losses, you can see, it's been very stable. And so I mean, looking at the $0.26 reported for this quarter, it's very much in line with the results we've generated over the last several quarters.

Turning to Slide 20. The allocation of capital on the left hand side, there was a slight uptick in the allocation of structured securities from 6.7% to 10.1%. We'll get into this in a little more detail in a moment, but since quarter end, that number has continued to increase and in fact it is close to double of what it was at the end of the quarter. So we are increasing our allocation of capital towards IOs and away from pass-throughs. The right hand side just kind of walks you through the changes to the respective portfolios that occurred over the course of the quarter. As you can see, there was one add, we did add one inverse IO, that's representative of the bulk of the increase in the allocation to that sector, otherwise you can see our pay downs, which we'll speak to in a moment, with respect to pass-throughs was a very subdued number. Again, representing -- we're reflecting the asset allocation that we continue to employ.

Now I'm going to walk you through kind of what I generally consider the more immediate conversation, the portfolio positioning. The first thing I'm going to do is go over the steps that were taken, the changes that were made in the quarter. Then we're going to talk a little bit about what transpired since quarter end, and then as I said, I'll make some more general comments about the results in -- for the quarter and then how we see things going forward.

So first on the asset side here, I'll get to the hedges in a moment, but just want to focus on the top of the page. As you can see here, the portfolio is still heavily concentrated in 30-year securities, we did not make a meaningful change in that regard either during the quarter or since quarter end. We did add somewhat to our 15-year positions, they increased fairly substantially in absolute terms, but still won't represent less than 6% of the portfolio. We also increased our allocation to 20-year securities, but again, not meaningful enough to change the overall characterization of the portfolio. The more meaningful changes occurred within the 30-year coupons. The 20-year allocation increased slightly, but recall at the end of last year, we had a fairly substantial long position in TBAs in those coupons, that was taken off during the quarter. So now the exposure that coupon is strictly in full form and as I'll say in a few moments, we've actually reduced that since. The biggest change was to the capital allocated to the 30-year, 3 coupon, we did raise capital during the quarter on 2 occasions and most of that was deployed in that coupon. So the allocation to 3 has increased by approximately $1 billion. We did sell some 30-year, 3.5s, what we were doing there was just reducing exposure to very high coupon spec pools, mostly in New York 3.5s.

With respect to higher coupons, they're more or less unchanged, I just -- the change over the quarters reflects run off. And as I mentioned, we did add to the IO portfolio, and we did reduce the TBA loan. Since quarter end, we've continued some of these same trends, we reduced our exposure to the 30-year, 2.5 coupon, allocating most of the proceeds into 3 on a net basis, it was a reduction in outstandings by about $150 million, and then we did add a few higher coupon low balance pools in the recent auctions. So now I'll just kind of walk you through the balance of the slides in this section and I'll come back and talk about the hedges. Slide 23, this is a slide that we've been using quite a bit lately. It was very germane during 2020, when prepays were at such a high level. The red line is our allocation to high quality spec pools and as you can see, it's come down dramatically and the reason is something the fact that we no longer need those assets, because prepayments have come off with a certainly different rate environment and that's reflected in the rate available to borrow the refi index has come down.

With respect to Slide 34, we are about generating income and earnings and therefore, we're very much focused on minimizing our premium amortization and that's reflected here, the thrust of our efforts are in security selection. We tend to use more spec pools and TBAs that's close to say, some of our peers. But we do focus on security selection and we had very good results, as you can see just by the bar charts for each of the respective months in the quarters. But also with respect to the pass-through portfolio in the first quarter, prepaid in the aggregate is just under 10 CPR and the overall speeds of the portfolio were down a little over 40% for the quarter. This is also reflected on Slide 25. As you can see with rates backing up, we've maintained our pay-downs as a percentage of our outstanding principal balance within a very low range and again this is still lower than the levels we were at in 2019.

Finally, before we get into our hedges, our leverage is running at about 9.1 at quarter end, there may be some changes to that slightly in the horizon, I'll get to that in a moment, but I just want to point out, if you look at this slide you can see the last few quarters, the range is around between say 8.8 to 9.9. We remain near the low end of that range. With respect to our hedges, this is where the more substantial changes occurred during the quarter.

With respect to our swap book, it was increased with the movement in rates and how we're positioned going forward kind of drove our decision-making. We had some older 5-year swaps that had been on the books where a lot of them moved down the curve. They were less than a full year, so we actually terminated those swaps and added approximately $800 million of 5-year swaps and I'll get into the rationale for that in a moment. And we also added about $200 million of 10-year ultra swaps. We've also changed the TBA position, we were only short $328 million at the end of the last year and that's now $1.3 billion. We've added with the course of the quarter, a short and 2.5s and then the rest of the increase was in 3s. Then with respect to swaps, there was one that rolled off and we've added it over, we crashed on the levels on several payer spreads that we have on -- these are designed to allow us to economically put on protection against movements in either the belly of one of the curve by using a combination of long and short positions and then from time to time, we refresh those levels as the market moves just for efficiency purposes.

And then, we've also added a curve floor, as you can see. Since the quarter end, we have covered the 2.5 short, that's no longer on, some of these hedges that we put on were somewhat expensive and we're trying to reposition those to make them more economical. The 3 short has been reduced by approximately half and we've actually added and replaced that with some shorts in the features market, a combination of 5-year or the FP feature or ultras and then also we did put on another 5-year payer spread.

So that's kind of the gist of what we've done in the portfolio. And now as I said, I want to make a few general comments just about our results and how this kind of steepens going forward. The first is, let's state the obvious, obviously, we had a very large book value change, that's not something we're happy with. But at the same time, keep in mind that the way we run the portfolio, we've been very consistent since our inception. There's not been any meaningful deviation at all over that period. We tend to run from, with respect to our peers, at the high end of the highest and the yield range in a higher leverage ratio than our peers. And that's been primary consistently and as a result, we have, as -- like I did, in the first quarter, we had a huge movement in rates, we tend to be exposed to that and that was the case in this quarter and it was also the case in the fourth quarter of 2016. But outside of that, the results are very good. In fact, if you look at the slide deck, getting over -- as I mentioned earlier, you can see our relative results are very strong versus our peers. So while we occasionally have this quarter and it's unfortunate, over long periods of time, the results and the strategy are very, very good -- very positive. And as a result, we do not have any intention of changing those.

Now with respect to our positioning, as I mentioned, we did make some changes, especially on the hedge side some of these hedges are so somewhat possibly, but we were able to do them very quickly and efficiently at the time. Going forward, we did suffer some mark-to-market -- negative mark-to-markets on the portfolio, but most of those are unrealized, very few realized, as a result, which left in the portfolio, it's been marked down, which means that going forward for -- with respect to premium amortization, there were amortizing a lower premium amount. And given that we expect speeds to remain below the levels we observed last year, this means we should have slower premium amortization.

And the second thing we've been doing, and I mentioned -- alluded to earlier, we continue to do so since the end of the quarter is replace several of these hedges with IOs. IOs that may have less desirable yields now, but in the event of a -- any kind of a sell-off will actually be very attractive and positive, carrying some business meaningfully. So on balance, while the hedge costs are higher based on a repositioning, we think that these are offset substantially, not entirely by slower amortization and the IOs that we've added to the portfolio and we will also be replacing some of the dollar rolls I mentioned that we took off, simply because those rolls are very attractive and should be supported by the fed going forward, at least until they ultimately taper.

Kind of in some, I would say the portfolio was positioned defensively, and it's positioned for higher rates, since the rates have rallied modestly since quarter end, our book value is down modestly probably a 1% or 2%, but we -- as I said, we think going forward, the path of rates is going to generally be higher. So to the extent that rates surpass the levels that we have done at the end of the quarter, you would assume that we would recoup some of that book value. In the implications of that, for our leverage ratio obviously, that would be beneficial, since it would be lowering our leverage ratio, it just -- all is equal, but even if that doesn't occur, we view our leverage ratio at acceptable levels, I mentioned before, we were around 9.1%.

Now with respect to the future, how we think -- see things going forward. Obviously, the economy is recovering at a very rapid rate and they -- and since they're not going to do so anytime in the near future, I think it's pretty safe to say that whatever your horizon is, whether it's the balance of the year or next year or even into '23, but eventually, the fed is going to taper the quantitative easing and mortgages are going to widen. It's hard to argue that that's priced into the mortgage market giving where they trade today. So we certainly see room for mortgages to widen over the course of the next year or 2. And that's what some of the rationale for adding to our IOs, because we think IOs will be much less susceptible to the widening and that's why, in addition to replacing some of the hedges with IOs, just because they are more cost effective, but also because we want to try to avoid some of that widening.

So you will probably see in the Q2 results a much greater allocation to IOs. And if that continues that will probably ultimately reflect in our leverage ratio since we apply leverage to the passions and little to the IOs, just monetizing for cash purposes. So you should probably see the leverage ratio remain on the low end of the range. And then the second thing is the fact that we think that eventually even after the fed tapers, they will raise rates and the consequence of that will be a flattening of the curve, and I'd mentioned that we put on a lot of hedges, especially in the 5-year part of the curve, either with -- or with respect to swaps or futures, and the reason -- that's the reason, we expect the next major move in the curve to be in the belly of the 5-year area and we want to be positioned for that. We also put on in some curve floors again to protect earnings when this occurs. So we feel in some very well positioned going forward, our income has ability to generate income as being preserved and we have the IOs -- we expect, we have a greater allocation of those to behave very well when and if we see widening in the pass-through of our portfolio.

And that's pretty much it. Operator, back to you. I'm done with my prepared remarks, we can open the call up to questions.

(Operator Instructions) Your first question comes from the line of Jason Stewart from JonesTrading.

I was -- 2 questions with regard to net economic spread, could you give us a sense of where that ended the quarter? And just remind us how hedges like futures or TBAs would flow into that number that's being reported?

Yes, it was probably not needed, given what I just discussed. With respect to how those affected and obviously, I always go through a laundry list and I'll turn it over to Hunter, because he will have more to say. With respect to paying fixed on swaps obviously, that's pretty straightforward, you're just paying whatever that rate is, in the case of the 10-year swap, obviously it's much higher than the 5-year point in curve given how steep the curve was. With respect to futures, as you roll through time remember futures are March, June, September and December. As you move from contract to contract, there is a drop and we use that component to -- as an expense. With respect to TBAs, it's the drop, we have used the 3s, because the drop was negative, that's no longer the case, that's why we reduced those and our swaption is basically up the premium you pay.

Yes, I would just add, we didn't add a meaningful amount of what I would characterize as expensive long-end rate hedges, so it was a modest increase to 10-year part of the curve both through paying fixed on swap, the 10-year part of the curve as well as putting on a handful of vouchers, which do have a rather large negative carry component to them when you're short of them, just because of the shape of the curve is so steep, which subsequently, as we've increased our allocation IOs, we have pulled back some of that hedge and done so at levels, where we're not going to really earn out that negative carry, so to speak.

With respect to the TBA position, most of what we rolled into April and May was done at negative levels, right? So the TBA performance of Fannie 3s has been so poor over the last several months just because the cheapest to deliver -- the quality of the cheapest deliver collateral of that coupon bucket has been so bad that you actually can short the coupon and clip a little bit of carry in a positive manner. So we've taken advantage of that where we can, it's just impossible to do so because we own a lot of 3% coupon-specified pools.

And in fact, we have -- a lot of times we own a fairly large position of what we would characterize as low pay up pools. So to the extent of their performance decreases over time, they become more like the cheapest to deliver, we can always just cover the shortest by delivering pools into them and clip in the carry on the specified pools, while there is still a superior asset. So I think for those reasons, I agree with what Bob said about not being materially different at quarter end than it was in the presentation.

That's helpful. And then on the capital raises during 1Q, can you give us a sense for how much -- those were either accretive to book value or the approximate book at the time of the raises? Just trying to get a sense for how that impacted book value per share.

The first one was slightly dilutive and the second one was right at book.

At the time, yes. Most of the deterioration in the quarter came in the last 3 weeks of March. So we had a small decrease in book up to that point, but.

Yes, I would just add -- and I'm sure you're thinking about this. Book value for the month of January was probably up very modestly, February probably high until mid-month when we started with our negative, maybe slightly negative by the end of February and I would say at least 75% of the decline in the quarter occurred in March and really after -- I forget what day it was, whenever the day non-party payrolls was released, I want to say it was around March 5, it was really after that. I mean, one of the big drivers of that was -- I'm also -- you may recall this when Paul made it clear that he was comfortable with higher rates, that kind of like green light in the marketing, ready to go much higher and we kind of crushed right at the end of the quarter at 3/31 just short of 175, 110s.

Yes. Okay, that's helpful color. Last one for me and I'll jump out. Could you just try to give us a reminder on the metric, the KPI you look at to set the dividend and remind us how that interplay is moving through with all the changes that were made in the portfolio towards the end of 1Q and then as you're continuing to evolve in 2Q? That would be helpful. Thanks.

Sure. Well, we look at -- Well, just to start, the dividends are obviously an artifact of taxable income. Well, we don't really look at taxable income, it's basically what we call economic income, which looks a lot like GAAP with 2 minor adjustments. So one, we look at more of our economic cost of interest expense, which in therefore reflects hedge cost because we didn't use hedge accounting for purposes of GAAPs of all of the changes in the market value of our hedges are reflected in our earnings, but not all that would necessarily be attributable to the current period that we were using hedge accounting.

And then, the second one is just to try to capture premium amortization. The one thing that's unusual about the fair value option, they contrast sharply with available for sale. Available for -- so you buy an asset and at the time, you book a yield and you use that yield assumption to amortize premium. Every quarter, you may refresh that level, then call that the retrospective adjustment, but in contrast to what we do, lease fair value, every quarter we mark to -- mark the portfolio to market and that resets the level you use for premium amortization.

So we report in our earnings release something called premium loss due to pay-downs, but remember, that's reflective of the levels that exist at the beginning of the quarter. So if you have a year like 2020 when asset prices are very elevated, it's going to make it appear like you're amortizing a lot more premium that actually existed maybe at the time you bought the asset. So that is just one nuance of our accounting. But otherwise, those are the 2 adjustments that we make to look at for the purchase of adjustment.

I will say that I mentioned, we took off some of our TBA loans, we intend to put those back on. There were some adjustments to the hedge book and then subsequent adjustments to that into replacing IOs. So there's a lot of fluidity here and the net interest margin, if you will, some are calculated on a daily basis, you'll probably see fairly meaningful fluctuations as we go through this process, but we expect when we come through the process when we're done, we're almost there that it should look pretty much as it did for the average of the quarter. As I said, taking off some of these hedges, putting on the IOs and so forth, we still think the net of all of this is going to be about awash.

The unknown, as it relates to the way we look at dividend policy is really going to be how much speeds slowed down over the next month, 2, 3 and we will observe that, we're pretty bullish about the outlook for higher coupon mortgages and the IOs that we own, which are generally be off of slightly -- cusp of your assets, at least the ones we've been adding are off of the cusp here, coupons and then another slug of high negative duration in the money loans, which we also expect to slow down. So over the -- we really are just positioned to -- I think, the Street is really just as -- to the point where it's expecting a slowdown in speeds, maybe next print, but certainly over the next couple and we'll see how we said earlier, with respect to the slowdown in speeds, as a result of higher rates.

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

Hunter, on your comments just now on bullish on speeds, is that for the market in general or for Orchid Island specifically?

For Orchid specifically, I think all the models we use, I look at it and all the Street research shows significant slowdowns in speeds, especially for higher coupon collateral that would be a big part of our portfolio, so 3s, 3.5s, 4s, then we have some loan balance 4s that are paying in the mid-20s and I think the expectation is for those to slow down into the mid-teens over the course of the next few months. So that's not an enormous position for us, but I think it's a good example of what developments that have not fully played out yet.

And what is the -- can you share with us what the allocation of capital is to IOs in the second quarter so far?

We added about $46 million of market value.

At quarter end, Chris, it was 40 -- just over 40 million, which was 10%, so we've added $46 million, so I suppose it's probably 20% or it's 0.86 of the cap there. 0.86 divided by 460, it's unfortunately, 5 -- close to 20%. It's probably going to go higher still.

And Bob, in your comments in terms of steeper curve of, I mean, higher rates. Do you mean by that a steeper curve?

The curve steepened now and the fed keeps doing a very effective job of talking the market down whenever it starts to price in any form of policy removal in the near term. They surely did it this week, but I think -- so the curve will stay fairly steep, as I mentioned this quarter-to-date and we kind of backed up the highs in rates and we flattened it really modestly. I think the curve is going to stay steep for some time, but in the camp -- the fed is not going to be able to wait that long to start tightening. I mean, I'm sure you hear the same things I do, anecdotally, there's evidence of inflation. It's not -- obviously, there's baseline effect.

So like if you look at today's number, PCE looking back at April of 2020, it's a very low bar, so the number looks high, that's transitory. I agree with the fed 100% on that, but when you hear Procter & Gamble and other entities are raising prices, and Amazon is going to give pay raises to 500,000 employees, those aren't transitory and then the President's speech on Wednesday night to extending successful with these programs, the system's already awash with liquidity. I don't know if anybody follows the RRP market, that's a reverse repo that the fed runs. So that's what people are trying to get rid of cash and take in assets. That's at 0 or very close to 0.

Yesterday, the fed did -- the treasury did a 1 month bill option at 0, maybe they eventually go negative, but we're just awash with liquidity. So the combination of pent-up demand, substantial demand for goods and services, COVID-induced supply shortages, whether it's labor, because people aren't coming back to work or all the other things you hear about bottlenecks, commodity prices, chips for automobiles and everything else, a combination of huge demand, constrained supply and then a fed/Treasury that is flooding the market with liquidity.

I hope they're right and it's transitory, but I'm beginning to think that that may not be the case and they are overly stagnant with respect to the their concerns with inflation. So I just think it's really hard press for them to -- that not to play out that way. And the fed as much as they say that they're not going to tighten -- at what level could inflation run where they had to change their mind? 4%? I don't know, but I would expect non-party payrolls to be very robust, retail sales to remain robust, everything is going to be very strong. And over time, I just think that they're going to have to move their timing forward and then you're eventually going to see the curve flatten, and they're going to start pricing in hikes and they're eventually going to have to.

Yes, for that's particularly germane as it relates to our first quarter results, we saw a steepening of the curve, mortgages selling off and then really in March, the full sort of convexity effect starting to hit the portfolio, we started to see a deterioration in pay-offs of specified pools and extension in mortgage assets and as you know, we have for several years preferred to short the belly of the curve and we just didn't get as much satisfaction being in that point, because it hasn't moved yet.

The 2-year is still very much anchored near 0 and into your treasuries or near 15 to 17 basis points. So the market is not pricing in higher rates on that part of the curve, which ultimately affects the belly of the curve hedges that we have on such as a 5-year. And so even to a lesser extent, the 7-year swaps we have on. But that I think will, we were able to sort of have our day at some point when the market feels like the fed can't stay at hold forever.

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

Thank you, operator, and thank you, everyone for joining us today. To the extent you aren't able to do so live and using the replay, if you want to ask a question or if you have another follow-up question from today and you did listen, feel free to call us, as usual, number in the office is 772-231-1400. Again, I thank you for listening and I will look forward to speaking to you at the end of the second quarter. Thank you.

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