Orchid Island Capital Inc (ORC) 2025 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Orchid Island Capital fourth-quarter 2025 earnings conference call. (Operator Instructions) Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, Mellisa Alfonso. Please go ahead.

Thank you, Didi. Good morning, and welcome to the fourth-quarter 2025 earnings conference call for Orchid Island Capital. This call is being recorded today, January 30, 2026.

At this time, the company would like to remind the listeners that statements made during today’s conference 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 and 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, Melissa, and good morning. I hope everybody has had a chance to download our deck off our website. As usual, that's what we will be using for basis of the call today. And again as usual, I will walk you through the deck. I'm joined here today by Jerry Sintes our Controller; and Hunter Haas, our Chief Financial Officer and Chief Investment Officer.

Starting on the third page, I will just give you an outline. Jerry will quickly go through results and discuss our liquidity position. I will then go through the market developments which basically shape the market that we operated in and the impact that that had on both our results for the fourth quarter and also our outlook going forward into 2026. Then Hunter will spend some time discussing the portfolio, hedge positions, and so forth developments during the quarter, positioning in the portfolio as of today. And then, we'll have a few concluding remarks. We have some information in the appendices that we want to share with you, and then we will take your questions.

So with that, I will turn it over to Jerry.

Thank you, Bob. If we go turn to page 5, I will begin with the financial highlights for the fourth quarter. During the fourth quarter, we earned $103.4 million in net income, which equates to $0.62 per share compared to $0.53 in Q3. Our book value at the end of the quarter was $7.54 compared to $7.33 end of the Q3. Stockholders’ equity at the end of Q4 was approximately $1.4 billion. We paid dividends during the quarter of $0.36 which has been the same rate for a couple of years now. Total return for the quarter which takes into account the change in book value and the dividend at 7.8% for Q4 compared to 6.7% in Q3.

Turning now to page 6, we'll look at some of the portfolio highlights. During Q4, we had average MBS of $9.5 billion compared to $7.7 billion in Q3. At the end of the year, the actual balance was $10.6 billion, so we grew a lot, approximately 27% during the quarter. Our leverage for Q4 was 7.4 which is the same as Q3. Liquidity during the quarter -- at the end of the quarter was 57.7% and 57.1% at the end of Q3. That's a little higher than our historic norms which are usually around 50%. Reason for that is primarily because of low haircuts which were around 4% at the end of the year.

Prepayment speeds for the quarter were 15.7% compared to 10.1% in Q3. On pages 7 and 8 are our financial statements which you can read in the deck or in our earnings release last night.

And now, I will turn it back over to Bob.

Thanks, Jerry. I will start with the market developments on page 10. I always do. The top left is the treasury curve. This curve is actually a very good place to start because it basically encapsulates what went on during the quarter, recognizing that these three lines just represent snapshots, if you will, of the cash curve as of September 30, December 31, and January 23, or one week ago. In fact, rates were more or less steady throughout the quarter as rates traded in a very tight range, realized interest rate volatility obviously within were low, and implied vol in the swaption market was declined throughout the quarter and really has declined for quite some time.

What is behind this? Well, typically economic data for one as it comes out tends to drive interest rate movements. Prior to the quarter, the data was basically considered to be suspect because of, well, discussed issues at the various entities that collect the data. And then we had the government shutdown on October 1. So basically, we went from having suspect data to no data at all, and then when the government reopened, you had very much delayed data that was still considered suspect. So basically there was not much to drive interest rates other than geopolitical events and/or political events which did, but not meaningfully so.

If you look to the right, you can see the swap curve is fairly similar but it did move more, and that's all swap spreads, and I'll discuss in a few moments why that is. But we basically had swap spreads moving up as in less negative and that's why you see movement in the curve from the red line up to the blue and the green line. If you look at the spread between the three-month treasury and the 10-year below really has not changed much for over a year, but there's been movements elsewhere in the curve.

Moving on to slide 11, this is very germane to what's going on. The spread of the current coupon mortgage to the 10-year Treasury. As you can see, this is a very long lookback period. This goes all the way back to 2010, and the thing that sticks out very obviously is how much we have tightened of late and especially since year end. The most recent data point there is last Friday. You can see it's at about 80 basis points.

If you look back to the period, say, between the taper tantrum in '13, up until the outbreak of the COVID pandemic, mortgages traded in a very tight range centered at approximately 75 basis points, say, and we're basically there. And obviously, the most recent development which becomes evident on the bottom left when you just look at these prices. This is again the same (inaudible) used. These are selection of 30year fixed rate mortgages, 3%, 4%, 5%, and 6%, and these are normalized prices. So these basically shows you the price movement relative to the starting point at the beginning of the quarter.

And as you can see, especially with respect to lower coupons, they had a very good quarter. And then if you focus in on what happened around January 8 when the administration announced that the GSEs would be buying up to $200 billion of mortgages, performance was affected. In the case of lower coupons, they moved materially higher. In the case of higher coupon, 6s, they gave up performance. And the reason is, remember, these are TBAs, not pools. And the reason that the higher coupon suffered is simply because the anticipation is that the administration’s goal is to lower mortgage rates, increase affordability of housing which would drive prepayments faster. So current market pricing as reflected in the roll market for any of the higher coupons, 5%, 5.5%, and 6% and above, are for very, very fast speeds, and lower coupons did very, very well.

Looking to the right, you can see in the roll market, especially the 4 roll and the 3.5, have been really much on fire, very strong. And this reflects relative value trading because these coupons are below par and not going to be cited as prepayments. And if the market rallies, these will be obviously the targets for purchases. So they have done extremely well. So the technical there is strong. And that being said, going forward into 2026, to the extent that plays out and those coupons are produced because rates are lower, then the supply will overwhelm the demand, and probably, relative performance will go away, but that very much remains to be seen.

Moving on to slide 12. I talked a moment ago about swaption volatility. And you can see that this trend is very, very clear and strong. Past year end even today, vol continue to decline. The peak that you see there on the top left, that's Liberation Day, early April of 2025. We all know what happened that day. But vol has done nothing but come off and continues to do so.

And if you kind of look at it in a historical context going on the bottom of the page, we go back to 10-plus years now, we're pretty much back to the levels that we were at back during the days of the Fed rate suppression regime when the Fed was using QE to keep rates artificially low. In doing so obviously, they suppressed volatility. And it was indeed suppressed very low for many years, and we're basically back to those levels.

What happens at this point on remains to be seen, but we are in a very low environment. And we know that mortgage is very much susceptible to implied volatility because it affects option values, especially in prepayment models and the like, and the option value is very low, then mortgages can do well. And in fact, they have.

Turning to the next slide on slide 13, we see a sample of swap spreads. The blue line is a two-year swap, and the purple line is a 10-year. And as you can see, going back through the quarter and really since the second half of the year, these have been moving higher or less negative. Why is that? Well, the Fed announced at the October meeting that they were going to end QT.

The market anticipated that. Swap spreads started to move. And then they announced in December at their meeting, reserve management program in which they are going to be buying up to $40 billion of bills. And so the logic behind that is a recognition on the part of the Fed that as the economy grows that their balance sheet should grow in proportionate fashion. As a result, they will be growing, so they're taking out bills, which also helps bring the Fed treasury holdings in line with the outstanding universe of treasuries because historically they have not owned bills.

And also has implications for the funding market because bills are an investment option for money market lenders and to the extent that the Fed is buying them, that allows more funding available for repo such as ourselves, repo borrowers.

Our hedge position, and Hunter will discuss this in greater detail later. But as you can see, we look at our hedge positions from the perspective of DV01. That's just our sensitivity of our hedge instruments to movements in rates. Then you can see, it's very heavily concentrated in swaps, and this is the reason why what we just discussed. We expect that this may continue for some time.

Moving on to slide 14. These are the same charts we've had for a while. As you can see, something has changed, but not much. On the top left, the red line is in the mortgage rate, but it's still at 6.38% and the refi index, while it's higher, it's not high. It's still quite low. And I think if you look on the right-hand chart, you get an idea why while mortgages have tightened substantially and we mentioned that the current coupon mortgage spread to the 10-year treasury was 80 or 90 basis points, the change is about 4.25.

And these spreads and available mortgage rates to borrowers are still north of 6. So the spread for the borrower, not for mortgage-backed security, but for the borrower is still relatively wide. It is not tight as much as mortgage-backed securities have. As a result, mortgage rates available to borrowers are still close to 200 off the 10-year, and therefore, refinancing activity, while it's picked up some, it's still not particularly high.

Chart 15, just basically the same picture I like to show. The red line just shows you the supply of money into, and the blue line is just the economy, GDP in nominal terms. And as the chart implies, the economy is still awash in liquidity. While the takeaway from this, I believe, is that it's hard to say that financial conditions are overly tight. And if you look at the economy, the GDP data, retail sales, there's not really weakened precipitously, and this might be -- help explain why that might be.

With that, that's the end of my discussion of the macro backdrop, I will turn it over to Hunter to discuss the portfolio.

Thanks, Bob. Turning to slide 17. Just a few highlights for the quarter. During the quarter, we purchased $3.2 billion of agency-specified pools. The breakdown of the purchases is $892 million in Fannie 5s, $1.5 billion in Fannie 5.5s; $600 million Fannie 6s; and $283 million Fannie 6.5s.

All these pools had some form of call protection primarily lower loan balances, loans that were originated in refi challenged states like New York or Florida, and loans backed by borrowers with low credit scores, high LTVs, or high DTIs and the like, some sort of credit impairment that would keep them from being able to refinance as readily as borrowers that didn't have those constraints.

On the model yield, our acquisitions, we're in basically the low 5% range and we did sell some assets that were yielding mid-4s at the time we sold them. The model yield on -- I'm sorry, the repositioning enhanced our carry profile while mitigating our exposure to higher rates and spread widening as the higher coupon mortgages have much less spread duration sensitivity than the lower coupons that we sold.

Turning to slide 18, it's a new chart we just put in to recapture what happened throughout the course of the year. Over the course of 2025, we experienced substantial growth, doubling both our equity base and MBS portfolio. Important to note that this growth occurred at a time when the MBS spreads were at historic lives, allowing us to build a portfolio with strong long-term return potential. The line on the slide shows a time series of Morgan Stanley Index that attracts 0 volatility spread over the treasury curve for a hypothetical 30-year MBS priced at par.

And the green shaded area highlights the timing of our asset purchases during 2025 and into early 2026. Over 75% of the $7.4 billion in acquisitions that we made during the last year and a month or so occurred at a time when this index was well over 100 basis points. On average, the spread level of all of our purchases was 108 basis points. And that's the weighted average of the Morgan family index at the time we made the acquisitions, I should say.

Turning to slide 19. As you can see, we talked about this in the past, our portfolio evolution as mortgage spreads tightened throughout the year, we increased our allocation to production in premium coupons, primarily 5s through 6.5s. This strategic shift reflects the fact that lower coupon MBS, which carry greater spread sensitivity, duration, significantly outperformed higher coupon assets during -- over the course of the last year. Initially, we executed this sort of strategic portfolio shift through acquisitions, deploying new capital into higher coupons. And then in mid-December, we took a more active portfolio management approach by actually selling lower-yielding 3s, 3.5s, and 4s, reallocating that into higher carrying lower duration and spread duration pools in the 5% to 6.5% range, as I previously discussed.

Turning to slide 20, just to make a few quick notes about our funding costs. Our funding costs saw a meaningful improvement over the quarter, driven primarily by Federal Reserve policy actions. We benefited from two rate cuts and the Fed's announcement that it would begin purchasing $40 billion in treasuries per month, plus an additional roughly $15 billion tied to MBS paydowns through its reserve management purchase program.

Orchid's average repo rate declined from 4.33% at the beginning of the quarter to 3.98% by quarter end. After the December 10 FOMC meeting, SOFR initially settled into the upper 3.60s before spiking to 3.87 into year-end. During that time, repo spreads to SOFR also widened, pushing from the mid-teens into the low to mid-20 basis point range. So we had a little bit of funding pressure going into year-end.

Since year-end, the funding environment has improved markedly. SOFR settled in the 3.63 to 3.65 range, and Orchid's repo spreads have trended to the 14-basispoint area, call it. So we're kind of on track to turn over the repo booking sort of the 3.8% range going into the next few months. So we don't really expect any Fed cuts before the next governor is sworn in.

Turning to slide 21. Just want to do an overview of the hedges. Our hedge notional remained relatively stable over the quarter. At the end of the quarter, we were 69% of outstanding repo, just slightly lower than the 70% it was at the end of the third quarter. The unhedged notional portion of the portfolio stands to benefit from a material decline in short-term rates and tighter repo funding spreads as monetary policy continues to ease. As rolls weakened and mortgage spreads tighten, we also adjust our hedge positions by increasing our TBA shorts, primarily in 5 through 6.5s. As mortgages tightened, we put on a little bit of basis hedge. It's not material, but just sort of lagging in as we saw mortgages had tightened for several months in a row. We added pay-fixed swaps on the very front end of the curve, further improving our downside rate protection.

Slide 22, in a little more detail, this slide helps visualize the hedge adjustments I just discussed. At the end of the third quarter, we have virtually no outright TBA hedges. The short positions you see here reflected a 15/30 coupon swap we had in place, which we've maintained for several months. Now as shown here, we're outright short 5.5s and 6.5s, and we put on a small short of 5s in early January.

On the treasury hedge side, we continue to reduce our exposure there. It's reflected in the top left table. And then as we acquired new specified pools, we hedge them almost entirely with interest rate swaps. And we were focused more on the very front end of the curve. As rates come down, the duration of the portfolio shortened, and we put these hedges on at a time when there were still several rate cuts baked into 2026, which has (inaudible) a little bit since.

Net of the unwinds that we did during the quarter, we added $950 million two-year pay fixed swaps, $800 million three years, $90 million five years, and $75 million in seven years. This strategy is aimed at locking in, as I said, market predicted rate cuts will fine tune the hedge book to account for the shorter net duration of the portfolio.

On slide 23, just going to quickly go over some of the risk metrics in the portfolio. We like to follow these measures. You'll notice the portfolio duration remains low at 2.08%. That's a direct result of our higher coupon SKU, which carries less duration exposure than the lower coupon alternatives.

The shorter duration profile is a key part of our risk management strategy performed better in a sell-off or spread widening event, which we think could occur. It offers us more defensive positioning than the 3s, 3.5s, and 4s, which we sold in December.

On the other hand, this profile is -- will benefit less from further tightening, which we've actually seen in January, which is consistent with our modestly lagging performance versus what some of the other -- some of the peer group has reported since Trump's announcement in January of having one of the GSEs to purchase $200 billion more MBS in their retained portfolios.

Also, I just want to note the OES shown here. So for OES, the 5s to 6.5s remains quite attractive in the 50- to 60-basis-point range, reflecting our strong call protection in our portfolio. For comparison, when we published Q2 earnings call deck, the same OES levels were at least 20 basis points wider. This tightening reflects improved technical and more constructive talent and agency MBS markets but also speak to how well timed our 2025 purchases were.

Slide 24, I'll discuss the interest rate risk profile. And you see we continue to maintain a very flat interest rate profile. This portfolio has some negative convexity. This is reflected in the fact that both the plus 50 and minus 50 interest rate shocks show small mark-to-market losses. It's a natural result of hedging of convex agency MBS asset with more linear instruments like swaps and futures.

In December 31, our DV01 stood at 122,000 long. As of now, more recently, it's increased slightly to 178,000. The duration gap also moved modestly throughout the fourth quarter. It was negative 0.7 years at September 30, positive 0.12 years at December 31, and currently sits at approximately 0.17 years.

Turning to slide 25. Prepayment speeds were major focused during the fourth quarter, especially given the relative underperformance of up in coupon TPAs. However, as we've emphasized in the past, Orchid is exclusively invested in specified pools with call protection. And this positioning insulated us from the more dramatic impacts seen in the TBA markets. That said, speeds did trend a little bit higher in the quarter, particularly for 6s and higher coupons, which reduced carry slightly and trimmed yields in those positions.

Looking forward, we expect prepay speeds to moderate modestly, which would improve carry, and we continue to closely monitor in light of the potential Fed actions and influence of related policy headlines that could put a little bit of upward pressure on speeds. But I think that most of that is probably baked in at this point.

To wrap it up, 2025 was a great year for us. We took advantage of the dislocated market while staying very disciplined with respect to risk and liquidity. We raised capital when spreads were wide, put it to work in production coupons and call-protected pools that should deliver great carry with lower interest rate sensitivity.

We continue to manage our leverage tightly with a year -- we ended the year with a very flat duration profile and our hedging where we see the most risk, which has continued to be sort of into reignition of inflation type of bare steepening rate shock scenario. That's where we think that companies like ours get pinched the hardest.

So with that, I'll turn it back over to Bob for his concluding remarks.

Thanks, Hunter. Thank you very much. Just a couple of things I want to go over. Just kind of spend a few moments just talking about our outlook. Hunter did a very good job of disclosing -- discussing how we're positioned and our hedge outlook and so forth.

But it seems, even though mortgages have tightened quite a bit, based on what you see in the market and the sentiment in the market, it seems that it could continue, especially if you look at alternative assets available to multi-sector fixed income investors. Investment-grade corporate spreads are at or near the highest levels we've seen since the late '90s. High-yield spreads are tight as well. And there's at least a prospect of the GSEs becoming more active. I think it's debatable how much $200 billion per year represents in terms of an increase because what we see their current run rate is not far from that. But in any event, to the extent they become -- stay there or become more active, you could see mortgages tighten further from here.

And then with respect to just the rate outlook, generally speaking, and what would be on the horizon that would make you think we're going to see a meaningful change, there isn't anything really there now, although, as you know, those are famous last words.

So to the extent we kind of stick around here and mortgages continue to grind tighter, the portfolio should do well. Everybody in our space has benefited from the benign rate environment in the fourth quarter and really through '25 generally. We could see a continuation of that. And until we get the next black swan event or shock, it should remain a decent environment. And certainly, compared to a year ago, mortgages aren't as attractive. But that being said, I don't think it's unrealistic to think we could see some further tightening.

One thing I do want to point out though, which is, I think, very important. I want to turn your attention to slide 7, and we discussed this. Jerry went over this briefly. But what I want to point out, if you look on slide 7 in our balance sheet, you can see that the company basically doubled over the course of the year size-wise.

So whether it's shareholders' equity or our total assets, they basically increased by a little over 100%. If you look at the income statement for the year on slide 8, you see that our expenses were up much less than 100%. Now you could argue that that's somewhat misleading because the growth occurred over the year. And what's more relevant is kind of your run rate at the end of the year, which would be consistent with the current size. That's a valid point.

So if you look at the income statement on the prior page, page 7, for the fourth quarter, you compare the fourth quarter of '25 to the fourth quarter of '24, that should capture the lion's share of that growth. And indeed, our expenses did go up, but certainly far, far less than double. And so now I want to turn your attention to a slide in the appendix which is slide 33.

On slide 33, this is what we -- our expense ratio. So basically, this is all of our G&A expenses inclusive of our management fee in relation to our shareholders' equity. And as you can see back pre-COVID, we were running in the high 2s, close to 3%. Then we have the COVID breakout and then, of course, this prolonged Fed tightening cycle, which forced some deleveraging, and our expense ratio got up over 5. But now we're running -- our current run rate as of the end of 2025 is 1.7%.

I'm not going to name names, but we all know that there are two other agency REITs out there that are substantially larger than us, and their expense ratios are not meaningfully below that. So when you get our 10-K next month, you will see, for instance, that our management fee did go up, in fact, over the course of the year, but the rest of our G&A expenses only increased very marginally. So we have been controlling expenses and allowing the company to grow obviously. And this is the byproduct. This is the benefit of that is bringing the expense ratio down. So that just makes the company more profitable on a go-forward basis, all else equal.

And then the final thing I want to bring your attention is, given that it's year-end, on slide 42, this information has been lifted right off of our website. And on the bottom of the page or on the top of the page, you see the dividends for 2024 and 2025. And as you can see, for every month, the dividend was $0.12.

The next column, tax total ordinary dividends, that's basically taxable income-derived dividends and then the nondividend distribution. And the second to last column, that is just the return of capital. So that basically tells you that in the case of 2024, that 95.2% of our dividends were derived from taxable income. And in the case of 2025, 95.0% were derived from taxable income. So the dividend was $0.12 per month for the year. And basically, we were distributing all of our taxable income.

Had the dividend been say, for instance, $0.11 instead of $0.12, we would have slightly underdistributed our taxable income and either had to make a special dividend at the end of the year or opted to potentially pay tax on the undistributed earnings.

So I just want to bring this to your attention, show you that the dividend policy does reflect current taxable income, both for the 2025 and 2024, and that our dividend in relation to the taxable income is very slightly overdistributed, less than 5% last year and 5% this year.

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

(Operator Instructions) Mikhail Goberman, Citizens.

A couple of questions. I guess we could start and forgive me if I missed this, I dialed in maybe three or four minutes after 10. Any update on current book value?

We do not give that. We have accrued and reflected a dividend in our current book. So our book is up just ever so slightly reflective of the dividend. Absent the dividend accrual, we'd be up, I think, 1.6%. We're basically off just slightly, inclusive of the accrual of the dividend.

Inclusive of the dividend. Okay. I was wondering if I could get your thoughts on prepays. Going forward, obviously, the CPR went up quarter-over-quarter given the portfolio construction, but also prepays with respect to your prepaid protected portfolio and what kind of premiums you guys are paying on those prepaid protected pools?

I'll say a few words, and then I'll turn it over to Hunter. I would say that the securities in the portfolio, we targeted par to slight premiums as you can see in the charts, 5% and 5.5%, 6% and lesser extent, 6.5%, but it's mostly 5.5s and 6s. And those are modest prepays, we're not paying up for the highest forms of protection. So the premiums have been -- mindful to keep the premiums kind of from being too high.

I'll turn it over to Hunter, and I will say a few words about the prepay outlook beyond the next few months.

Yeah. So over the last couple of years, we've really tried to focus on, I'd say the bulk of our acquisitions have been just sort of like the first premium coupon or the first discount coupon. And we were at times able to even at 7s using that strategy. So from a historic cost perspective, we've always been very tight, not getting too far out in the premium land. And we focused really more on kind of the mid-tier call protection. We think that the old low loan balance, 85, 110ks, those are really expensive stories.

New York has gotten pretty expensive. We've been really focused a lot more on sort of leaning into this so-called K-shape recovery by focusing on more credit-sensitive borrowers. I think that they have a hard time refinancing, buying things like high LTV, first-time homebuyer type of pools. We've focused on geos like the State of Florida is great. There's a tax that's curative for refinancing, but also home price depreciation is really sort of helping out with the portfolio there.

So we've seen very good performance, especially after the Trump announcement about the GSEs that sort of the knee-jerk reaction was that the higher coupon MBS TBAs didn't perform very well at all. But once things kind of stabilized, we've really seen good appreciation in all of those specified pool stories underlying those coupons. And as I alluded to in my prepared remarks, we've taken advantage of the fact that rolls have weakened in order to shed a little bit of basis exposure because those rolls are so cheap now, it actually makes a little bit of sense to be short the TBA and long the specified pool. So that's kind of how we're thinking about things.

Yeah. Just to add some number to that. If you go to slide 34, and you can do this -- obviously try the numbers. You don't have to do it right now. But the weighted average current price at year-end was basically 1% or 2.5%. So that would be all-in price.

By comparison, the price at the end of September was a little over 101, call it, 101-02 ticks, so we shifted the portfolio up in coupon. The weighted‑average coupon at the end of the third quarter was 5.50%. It is now 5.64%, so slightly higher, but of course the market has moved. So the price is at -- basically 102-18 is the price. So yeah, it’s a premium, but we’ve tried to avoid real high premiums.

It’s just not that kind of market. I mean, going back to the post‑COVID, we were buying New York 3s with dollar prices of 110 and change, right? So we just don’t have that kind of premium in the marketplace now, owing to the relatively high nature of interest rates. So it will compress earnings to the extent that we see an acceleration in speeds.

But I think the combination of the call protection we have in the portfolio and the fact that we just don't have huge premiums on is not going to really move the needle too much.

Yeah, I would just add that if you look at the roll market, 5.5, 6s and 6.5s, the speeds implied in those roles for the next few months are extremely high, 55, 60 CPR. So that's fine for the next few months. But if you kind of step back and look at the balance of the year, a number of market participants, ourselves included, don't really think we're going to see a lot more Fed cuts. I think the economy is quite strong. The inflation is good. Now let's think about that.

So the current Fed funds rate is 3.64% in the two-year yields like 3.54%. So if you don't think the Fed is going to cut rates much over the next two years, do you really think the two-year should be yielding lower than Fed funds? Second question you might ask is, given that, do you think that, for instance, 2s, 10s is going to invert? I don't think so.

So the current 10 years at 4.25%, if the two-year moves higher, unless that curve flattens, the 10-year should also move higher. So now you come to two-year tenure is going from 4.25% to whatever, 4.50%, the current mortgage rate available to borrowers is 6 or low 6s., right? And so if rates are going to go higher over the next year, that rate is not going down unless mortgage rates -- borrowers tighten substantially, and I don't know how likely that is.

So if you have the available borrowing rate at 6%, 6.5%, pushing up to 7%, a 6% mortgage-backed security implies basically a 7% gross WACC. That's not that in the money, especially if mortgage rates push to 6.50% and higher. So are they going to sustain 50 and 60 CPR? I don't know. But I think there's kind of an inconsistency in market pricing between the mortgage dollar roll market and the, say for instance, market pricing of Fed cuts.

There's -- they don't seem to jive. Anyway, that's my two cents.

That's very helpful. If I could squeeze in one more. I appreciate the good work done on getting expenses down. How much more the available capacity you guys have for driving that down further going forward, do you think?

Well, it's the -- I know I should probably get you the numbers, maybe we'll try to work on it for the next quarter, but almost all of the increase in our expenses was management fee. Unfortunately, we don't have detailed line item expenses here. But from memory, reading through drafts, nonmanagement fee expenses were only up in the few hundred thousand dollars. So it's gotten to a point that pretty much it's the management fee, and our marginal management fee is 100 basis points, right? And our management fee is $250 million.

The first layer is up to $250 million and there's a -- that's 150 basis points, then from $250 million to $500 million is 175, and everything over $500 million is 100. So now every dollar of capital we raise, the marginal management fee is 100 basis points, and the nonmanagement fee expenses are going up very modestly in low percentage points. So just if we double from here, I don't have -- I have to run the numbers, but it's -- that trend would continue. I don't know how much lower it goes, but it should be asymptotic towards 1%, right?

If the capital were up $500 billion, our management fee, we have to pay ourselves something. But I mean, management fee would be basically 100 basis points plus whatever your audit fee and your legal fee and whatever.

So that's kind of where it could go.

That makes sense.

Thank you. I'm showing no further questions at this time. I'd like to turn it back to Robert Cauley for closing remarks.

Thank you, operator. I hope we didn't scare everybody off the call at length of that answer. But to the extent anybody has call or questions to come up either because you didn't have time to answer them, ask now or you didn't listen to the call and you want to catch us later, please feel free to do so. The number in the office is 772-231-1400.

Otherwise, we look forward to talking to you at the end of next quarter. Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect.