CMO
#Thank you, <UNK>.
Good morning, welcome, everyone.
I'll make a few brief comments, then we'll open the call to questions.
Our results this quarter were negatively affected by higher mortgage prepayments and higher borrowing costs while benefiting from higher cash yields and higher portfolio balances.
Overall, yields were down 1 basis point while our related borrowing rates were up 15 basis points.
After declining by 2.7 CPR in the first quarter, mortgage prepayment rates reversed course during the second quarter, increasing about 1.8 CPR to average 24.7 CPR for the quarter, largely attributable to seasonality and the flattening of yield curve.
This resulted in about $2.4 million in additional investment premium amortization, negatively affecting portfolio yields.
Meanwhile, our repo borrowing rates were higher this quarter with the market adjusting for 3 25 basis point Fed hikes in the last 7 months.
Higher interest rates also weighed on our hedging costs due to the cumulative effective of older lower rate swaps expiring in recent quarters and newer higher rate swaps being added.
On the plus side and key to our short-duration ARM strategy, we picked up 6 basis points in portfolio yields largely due to periodic coupon interest rate resets.
And as illustrated on the last page of our press release, the currently resetting portion of our portfolio can be expected to continue increasing in coupon in the coming quarters with fully indexed coupons 32 basis points higher at June 30 than related coupons in effect on that date.
Against this backdrop, we earned $0.14 per common share in the second quarter down from $0.20 in the first quarter.
We paid a $0.21 common dividend for the quarter.
Book value was down $0.26 for the quarter to $10.72 per share, including $0.07 return to stockholders with the common dividend.
Weaker ARM pricing levels contributed $0.12 to the decline in book value compared to March 31, while swap pricing contributed $0.07.
Year-to-date, book value is down only $0.13, including a total of $0.08 in dividends over earnings, and we paid $0.42 in common dividend.
This produced an annualized economic return of 5.3%.
Given the stability inherent in our short-duration ARM strategy, we believe we are well positioned to preserve our stockholders' capital while generating attractive risk-adjusted returns over long-term investment horizons.
More immediately, mortgage prepayment levels in the coming months and quarters as well as the pace of future increases in short-term interest rates remain key to our near-term results.
With that, I'll open the call up to questions.
Sure.
I mean, obviously OAS on ARMs, depending on the model you run, could give you a lot of different answers.
If you [rule behind] an OAS and speed assumptions post resets look fairly attractive right now versus new issue.
But then you get into the various cohorts and speed performance and issuers, I would say that irrespective of OAS, post resets were a lot more attractive now than they did 6 or 12 months ago.
I think particularly in some of the paper where IO is expired 2 or 3 years ago, it's been beat up pretty severely.
And I think 1-year LIBOR has been fairly stable for the last 7 or 8 months.
And so you're not going to have the payment shock in those securities like you have 12 months ago.
So some of that paper looks very attractive in our models.
Newer issue, 5/1s are the speed ramp is faster now there's been some time.
And I think a lot of that has to do with property values going up, flippers in there.
So borrowings that normally you would see prepaying in the 10 to 12 CPR area, 6 months in, are prepaying at 20.
And so I would think that because of that, we are not as prone to buy as many new issue 5/1s right now.
So long answer, more season post resets are throwing off higher OASs and just seasoned paper in general I think is more attractive than new issue for the most part.
What you're seeing on the IO paper in general, the paper that went from IO to fully amortizing in 2016 and 2017, that is fairly fast right now.
It went to fully amortizing in 2015 or earlier, it's not ---+ it's fairly well behaved and paper that still has IO on it is fairly well behaved.
So the fastest IO paper is back and expiring in that year are 1 to 2 years earlier.
On either side of that, it's fairly well behaved.
So we saw ARM speed generally pick up for the July factors and a lot of that was day count related.
And then we should see that come back the other direction for our August factors.
That's just a matter of how many business days were in the month versus holidays.
And longer term, we expect to see some moderating of the prepay activity, <UNK>.
I don't know if you want to provide any additional insight, <UNK>.
No, I mean, I think the data is out there generically.
I think ARMs July versus June were up between 5% and 10% from the June trend, which was kind of in line with fixed rates and as Phil alluded to, they should come back down in August due to day count.
And June is the highest from a seasonal standpoint.
So quarter-over-quarter, third quarter speed should be slightly higher than second quarter.
Based on the data we've seen so far.
