DX - Earnings call transcript Q2 2019

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Operator

Good morning. My name is Matthew and I will be your conference operator today. At this time, I would like to welcome everyone to the Dynex Capital, Inc.

Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. there a remarks, session. speakers’ the will question-and-answer be After [Operator you. Instructions] Thank Relations, President begin Vice Griffin, you of Alison Investor may your conference.

Alison Griffin

Thank thank Officer. you Benedetti, Chief me morning Popenoe, Chief everyone us CEO; Officer and President Good I With Steve Officer Boston, call, on you, today. the and Smriti Byron and Financial Investment for Matthew. joining have and Chief Operating

SEC today’s release was issued the associated with XXXX. XX with call this press July The filed morning, and

page of press as the release home at the on view Dynex may dynexcapital.com the the well SEC’s You website website on as at sec.gov.

anticipate, wish risks remind Act or project, contain Reform cannot of and expressions similar we to begin, we statements plan call the be which Private predicted conference the that of may XXXX. Before are and statements meaning estimate, within inherently forward-looking to subject forecast, identify uncertainties, you The Litigation this that quantified. of words Securities some forward-looking expect, believe,

from could results actual result and company’s considerably risks. as external statements those of The and/or certain unforeseen a factors timing events contemplated forward-looking or by differ those of projected

information SEC. on be on the December XX-K as Center the the website. XXXX, please website on ending SEC’s refer with the factors report may on For additional Form or annual for filed as Investor under XX, The period these document the risks, to Dynex found well as

Center live our found be on being the with slide page. Investor website. Internet broadcast also presentation is over webcast the slide may Quarterly a referenced through be This link Reports homepage which The call can the a streaming under on presentation, of

Byron the pleasure Boston. call I over to to the our turn now CEO, have

Byron Boston

where increased the XXXX we all you they In activities the then their us probability a complete today. started a you, then Federal fragile treasury to were our to up highlighted first we And conference quarter Thank back that a round environment, and trip a XXXX using where rates two-year XX-year period. in joining of Bank economic interest proxy, down Alison. Reserve for call, XXXX, similar as fact thank made within

at that today have that performed the Rates not over long-term macroeconomic view – changed. last outlook to Our correct. period over time and two global the is was our years similarly past

are business funds We to time global lead our rate, expect fragile should we costs net believe reduced over the We model. in will economic which a Fed continue interest that environment. be the reduces as to for financing materially our margins wider fully

best We cash one risk that is they to also housing-related in the and market. intensifying assets of global long-term are the believe continue from opportunities U.S. generating income

stated we unusual Nonetheless, This term, near has unchanged. led as the putting inversion last environment on earnings. essentially pressure and an while have over rates duration XXX basis longer by quarter, in dropping yield and it’s funding points, the market been that our the remained in our the curve have yield curve inverted is costs

current markets macroeconomic a will Fed have whether result, lower firm expectations rates and eventually prudent these pressure to funds a have though forces in And and to point XXXX. of will come drop to funding the fruition, in our our inverted basis are lasted between we Even we As we cannot decline. unusual XXX will to now end that pricing environment. six long-term nine level our economic predict fact that costs that observed hold Historically, a global this view reduce reflects dividends to we curves curve months. it nearly feel

and to appropriate dividend our the the feel at As the in past, below and risk the set we earnings fluctuate we have an our for environment in dividends. past, tolerance. Likewise, level we above as expect

of less negative in income globally the X.X%. our yield standout attractive as $XX yield a Dynex and the high has stock fixed debt of to preferred Capital both with even on an assets yielding cut, value the quality increased than Capital most extremely importantly, Most trillion stocks dividend world over Dynex and where

Our an costs on focus and that continues to see be for environment positioning the financing decline. our eventually will hence long we term are ourselves

to turn I’ll through questions lead more and she you give – we us it Alison Alison back is to a over so few going few details. specific can a

Alison Griffin

Great. us Thank Byron. second I’d like with walk the results, asking to you, please. to Steve open through quarter

Steve Benedetti

Alison. Thanks

be on the for net income on core are basis X. GAAP I’m value summarized quarter going a results my share. per Slide book and operating non-GAAP and to Our focusing comments, In on mainly

the faster As Byron mortgage on earnings, noted, potential from the expected short rates. identified factors we last curve and core lower seasonal quarter prepayments headwinds inversion near-term end to two and

expected, kept our out inversion our benefit earnings. and relatively core and two curve played reduced quarter factors this borrowing our the The of quarter-to-quarter those As high hedges. flat rates in

lower a drop yields on and rate in and The environment mortgage factors income led seasonal to asset our decline TBAs.

prepayment While to quarter compensation during still the and IO net had versus income, contributing CMBS adjusted last. CMBS lower interest we

net which declined interest XX our explains basis adjusted from per All most core points last spread in decline the quarter. of in, share by earnings

third points. adjusted back was net quarter of spread XXXX, to our the interest Looking XXX basis

with spread net that environment. reflects many a quarter lower the interest quarter in ways in Fed and of the impact versus December Our XXXX mortgage September tightenings of this together rate

asset third two should towards depending the book reverse basis see quarter Fed XXXX performance. point hedge these XX we were margin the expansion From most due which agency of If and on of shortened a underperform the duration quarter is rally X.X% back increases, as and decline to the RMBS quarter rates. last standpoint, from during portfolio, from interest value to the hedges related the

quarter modestly have Our Markets declines value the underperformed price other to as RMBS in Smriti months. we six of well, agency which technical factors contributing in quarter approximately since X% estimate about also that the book since somewhat agency we quarter later. and talk will the have recovered last end of the end. stabilized move over There hedges interest the rates are of magnitude giving the CMBS

combined an aggregate of investments, are IO XX% with approximately investment adjusted shifting mix portfolio. now the quarter, portfolio modestly During we the agency CMBS our toward CMBS which

lifted going weighted at the average on profile forward at rate modestly interest our investment years. and XX $X.X earnings X.XX% overall to June LIBOR the that should the Fed a billion X.XX% swap also funds We XX net March future. from to position event and reducing in rate These approximately lowering adjustments benefit is basis to in our and portfolio X.X swap up the hedge rate swaps, reduced

for to for the Finally, quarter common total shareholders economic it a was year positive X.X% is minus return and X.X%. the

year, since December the paid per declined common we $X.XX has in dividends modestly have while XX. For value $X.XX book share

Alison Griffin

Steve. you, Thank

more to long-term Dynex’s you Byron. now detail a macroeconomic is view? Can Turning describe what little in

Byron Boston

three please view macro like any view the years. if strong of We’ve point a out very quick points it longer three the about Let it, or four to one a our regarding we’ve on had got phone call. me have last conversation and would you for

the long sheets. hope central for and is view that global by in macroeconomic supported global being a economy we because bank debt firms fragile So are it balance large is huge increases

is We interest will grossly the that rates eliminate technology political globe lower time. facing income. skewed conflict complex continue and demographics, this wealth headwinds major from and environment to a of long-term believe pressure Simultaneously, will distribution over human jobs,

the predictable factor government uncertainty term. that complicating believe has we globe. has in to returns throughout a the say, hence Nonetheless, and and Needless will policy added policy become and short to is less also government drive less

then call, treasury mentioned that in time of the we final will in X%. more X% last And we a conference spend our that trading a range believe point to XX-year

with to will today X.X% downward this that However, the steeper financing probability lower time. and range has the to shift costs believe we X.X% materially yield curve increased over

question. next go can we the to Alison,

Alison Griffin

Thanks Byron.

view, we Given Smriti, done to that what position for the have future?

Smriti Popenoe

Byron. and Alison Thanks

Our on focus liquidity, is rate and prepayment managing risk. interest

as leads before, first hold. macroeconomic be our could the you that balance in slide us to turn in also sheet. and on in view liquidity said please in credit leads our we’ve If assets Page X on hold we up liquidity more And us to our it position presentation, up off, to

shift articulated, Second, interest time down that to risk. our will just we’ll more X.X%, range with that XX-year it on us X.X% spend to very probability the a yields, managing rate X% interest higher and between on X% has focused that prepayment now to view Byron rate

management different doing portfolio We are really and construction that portfolio with three approaches.

of CMBS agency structural and RMBS. first prepayment agency diversification protection between The is

preservation. is us have to better actual and compensation reduced paid cash believe coupon to factor we This selection dynamic agency It’s CMBS structural is buy long hedge term, prepayment specified And early leads that versus our convexity positive agency the the pools. management. is third market way up the an and second hedge is RMBS. with in of the choosing that prepayment. CMBS reason And over investors to flow there’s in an The the agency event diversification will are asset another pay and the in higher prepayment lockout we costs the market

Page are X, could So we unique for this? you doing we in to are environment why If turn prepayment.

is have where decade. you first The mortgage Page X chart showing rates been on by

see had can XXXXs, rates. in distribution You of the mortgage wide a you

So in of were some loans at loans out any the and money. money point, the given some were

decade. the XXXXs that to Contrast

the between like X% really see mortgage been of more can and most You have that decade, this time X%, X.X% rates X.X%. to

that refi waves is in in one one what observe index There three one XXXX, XXXX, are you chart XXXX. the the showing we big and And really larger was in can were currently much second is since chart, the experiencing. that The refinancing XXXX. last than much, one in

one is outstanding a So X.X% that X.X%. this loans us of now what number pretty and there’s mortgage right to conclude concentration with rates between leads high

like second We we really a to XXXX. kind big one be Not well X.X% that believe to below XXXX to that trigger in leads spike. that spike mortgage in really us of yet. or rates XXXX The will aren’t or thing have believe that is

that’s about Now have could a time there risk. fair we that macroeconomic get about this and says amount we spend of we thinking and view talk a do why

off. So prepayment binary this more risk is or on at digital point

markets the this that’s nimbleness, diversified selection coupon married this get is the in and with is good navigating structural through think why period. is environment. through a you we offered selection to and RMBS asset CMBS active flexibility, superior really asset by to this good need agency diversification alternative duration portfolio So What a protection management,

All lot team the experience doing. of of this, a Dynex at has management here

ones a this altogether. Dynex There’s page. of shows on lot curve those indicate tables So in with is on curve curve page and Page have The yield does. the scenarios. with indicate X, multiple this of across the single the what XX-year the heading profile we numbers what a put yield what the scenarios portfolio being this first two I the scenario on is does asset the series being of a a and parallel shift, two the shift second a number on and yield year

is duration. And RMBS And agency of a these, versus is the the portfolio, you’ll extension rates represents CMBS agency more lot so duration rise. which The about CMBS mitigates as acts duration this contraction reduces CMBS, as see as rates actually that stabilizer, of percentage decline. risk case in a moves as a it RMBS. our the XX% the XX% base the It each risk

duration So pure overall a while lot less position it agency the just than moves, RMBS. moves

the please on the curve, Finally, of yield turn in XX. terms to hedge position Page

mentioned, ways. Steve our we hedges in two As repositioned

to listing Fed because second, the at The eases. are hedges costs first forward existing interest the rates And save is costs so future take financing financing today the for lower lower to of higher and position realized cost advantage expense much in lower.

is including Since here What to attractive quarter of any take few you payer swaptions protect the rebalancing actions to dynamically additional monetize take the advantage opportunity can managing to lock either continued to rates. funding. of hedge addition higher to or be quarters expect end, in to us against next position we’ve over do the

Fed should these the All eases. for interest net actions positive be margin of as

Alison Griffin

returns do secondly, market Fed? investment? today think the expectations the Where out like respect forward with then on they if are are for Smriti. what Thanks a you And basis play to look your

Smriti Popenoe

Great.

charts on in XX, So portion Page are they supplemental presentation. spread and just of turn XX to the the the

given line the shows swap on chart And spread can to Page two we’ve five-year lines, and coupon the CMBS XX agency the a rate, one nominal green XX/X.X swap spread. represents more You is yield relative swaps the bond. for a of mortgage current XX, page see you DUS to of to second spreads

agency spreads just nominal What year back these the you and XX is to taken that trends prior of that have area. So are spreads they on this XXXX, widened XXXX Page sharply time widened showing over can in to see you RMBS spreads June. and we’ve

Okay.

third of factors quarter. main the the four in So contributed underperformance second to year RMBS

The I up of prepayment first perceived because X. say is just risks. higher factors on the perceived described Page we

government particularly GSEs The second surrounding involve from regarding is guarantee. did be conservatorship, a released not policy how uncertainty if government the it might

So that spread created some widely.

was to UMBS. The fair and $XX runoff they started third portfolio, regarding runoff finally there amount approach was the from billion. the the cap, And that uncertainty actually $XX increase a Fed’s the of in billion of have implementation a

seen of relatively end, smooth has have factors. implementation Now transition. been these since quarter we dissipation three four in UMBS

clarified Director Calabria going his that third and soon quarter surrounding cease net GSEs future that’s supply Fed the possibly its to today, the as the from comments from in impact release limit has and source. of even the will portfolio as runoff

teens ROEs the So going times forward, in nine the supply revert directional, be sector, core rates to nominal using agency and more more mid spreads agency at we the as spreads right widen and rates go low RMBS And driven. in think leverage. RMBS demand up, we spread now being go to hedged will down, spread see tightens,

those have the front, can and agency RMBS CMBS quarter. stable second spreads, you agency relatively agency CMBS this On been as see during chart on outperformed the

to widening sector. the cushions, the leverage. we seeing ROEs continue turn that teens core XX range this in low about sectors temporary the I’ll believe are that at CMBS in back. in it We down roll sector are in times this And agency spread

Alison Griffin

Smriti. thanks, Okay

all now, Turning can our and you for means tell of to us Dynex this what back shareholders? Byron

Byron Boston

me in we just me to summarize historically costs business for curves from this, you have have a but material heard With are before, quick let drops such cyclical perspective. and just long-term have and today always is points we of business REIT you. of let a with The Dynex, these as At financing preceded something mortgage out Dynex. companies inverted experiencing managed our point couple as many model

As we our continue to business future. want such, position to for the

is interconnectedness with realize A global Furthermore, very, sources the yields stock preferred and income. is cash from Dynex capital intensifying most low risk attractive cash the opportunities so to the markets of offered finance very and point available. a stock U.S. investment attractive generating uncertainty the in world one globe, real of important around the of housing global related system and growing estate income U.S. assets of the

we With questions. are for the that, going line to Operator? open

Operator

Suisse. Instructions] [Operator the from comes Harter line The with Certainly. first Doug of question Credit

Your open. line is

Joshua Hill Bolton

on Doug. guys. actually, Thanks. is It Josh Hey for

not long-term saw you leverage totally how We but level up running you targets? leverage. on the And Thanks. one do First have at quarter, unexpected, any Xs? leverage comfortable tick this in the internal leverage in are mid

Byron Boston

ago the the some year, over out last that point me of a especially Let that quality, liquid things a to year were in we the high leverage. we We had those that again pretty based back the be would United went increase – opportunities really in think high strong adamant, in the we we what I best said past. identify opinion last the to States. started leverage, But one assets, continues to

view on has leverage got and along. followed affirmed we’ve So this our really

of a really the huge and end May something Let our else, at really me the in June. – increases last leverage leverage out that point amount which happening is our of throughout

out reduction the the we ourselves that especially for costs in we in positioning financing of pointed are And as still, Steve a that so, impact future.

take overall maximum is think we targets, that. From such a So inverted an there in leverage curve, unusual of inversion. advantage which I of with this can terms

were In you other if yields had the the whether the XXXXs, as past invert XXXXs, words, curve inversions, XXXXs, rising. or late it’s

considered rates. term you somewhat In curve year, with We environment. the the So early you long actually above really by guidance year, get unusual come Fed out costs rates late this the financing the an longer last had invert Fed in raising would situation rally. more

at we nine-ish leverage. So here type sitting are

or XX, numbers. those our leverage not to of types We’re like take necessarily in XX up to looking

necessarily will financing come reduction not our are. we comfortable we costs. but We So increasing leverage in believe the where from benefit are

Joshua Hill Bolton

you sense. earnings level level, that second of specifically comments then level dividend makes above into the for talk And can That set the those Thanks. about the you just Great. Byron. Thanks core when the above considering discussion slightly goes decision to the the quarter were new dividend – level? and what

Byron Boston

in there above we Dynex, know, the of are we of quarters, back said maybe dividend under the couple be dividends. situation then the that were early I for point a level set of place We similar we think in maybe and the I a about point under took I’d don’t proceeded earnings – XXXX it and level out once history level one it was that environment. it to $X.XX same next, about was dividend point for and had in lot So in the $X.XX, is, the of conversation at dividend

that or mentioned We fully in I fluctuate above can earnings this, my comments below. are expecting

for forward are back XX to as decrease, ultimately where a referring financing ago points from out, our we then perspective to looking pointed we net to of future were in financing. the Steve basis And terms costs spread

that’s dividend for unusual way the is are hey, about six inverted set we we So, out, a be to alternative environment. are let’s was one think because will months. overall we the take, we going not this say, wait it and to we the nine an an this and think If going strategy to short curve, there this such

throw and in the our I earlier you view, really my unpredictable Once of in a macro what complicating politicians from throws globally factor. it mentioned nature

are us level the this the actually setting dividend believe we to up being prudent. is So moving future. for We

thinking we set believe So everything about future we that are are that. the doing, $X.XX, reflects now ourselves being is dividend for at everything we positioning and

Joshua Hill Bolton

for Thanks Great. the color Byron.

Operator

from Eric line the Hagan of question KBW. next comes was Your

open. is Your line

Eric Hagan

morning. guys. Good Thanks

hedging specified for that predictable versus like and construction. up that static conversation paying profile pools that swaptions, possibly instruments just of around portfolio terms in construction Thanks. do we’ve using or duration portfolio I’m in with swaptions. prepayment curious about thinking are comes sure I’m are to more you how follow extension up on seen Just not before. Dynex hedging the the How with and risk particularly

Byron Boston

some All pool, this. mortgage right, so a opinions to rates. I’ve first And a you drop withstand massive off, no got specified strong when in on will specified pools come

know incentive pool you is different. guys is they no was at have different their do I because different So prepay will borrowers talked prepayment about specified protected. prepayment protected, All times

I to the So community real clear want analyst mainly help to to understand prepayments. be you all,

If prepayments in you where there’s end showed mortgage much a the index, refinance will situation not a you get up X% today. you Smriti rate,

If prepayment of cycles, stack what refinancing. you XXX% literally the in happened past look the XXXX, coupon you at had

be are probably to rates, you happen, sub-X.X% between a X%. to but X% definitely to need to that mortgage For going to, closer probably

view to the topic. pools And marketplace and one this I’m of the I I specified dealing that going tell with don’t ironclad. be So all experienced will that the you in XXXXs probably to back people most way

our different let into Smriti issue. prepayments? structured a you on I’ll And we to portfolio So comment specifically and into the little Smriti, want further get then… that now

Smriti Popenoe

way mortgage that again, protection as that so efficient ways buy can trading more prepayment, have you the Yes, I market particular point. fall there’s mean, to actually think to find CMBS it one more buy do rates When of a binary than the Buying can you in a today, flow today it's or some are spec of you we cash long I pools pool do those below that specified protection as to don't right. nature that where in two relative there’s buy obviously. protection

one. number that's So

us other basically X.X%, more to on, X% could The against want two to the that the that Understanding range either They're to that earlier. occur, as the range. that, yes are mentioned does, that we their X% the thing what the but Fed payer talked actions that we to respect about, we can put X.X%, swaptions protect number lead or that policy do that to have is swaptions scenario. I things fiscal Fed actually

That's that net extension the risks. really important relative issue. you The a most to just extension we're much of big have is remember risk on the thinking that thing and So really to RMBS the the to base CMBS your reduces how the combination case about of duration. protect basis

Byron Boston

base the one this macro if case Right and me against let you down on back that the view, we're that add sit appointment, rate one you Smriti protecting on mentioned Smriti respecting there, our And walk on to while while there. scenario. swaption

any ideal so you my down amount range. enormous in product don't And a I had if the major want portfolio securitized world, hedges an sort of of against moving

for better asked and so for is instruments us And one it's use. the this to history sawption, you when about the in moment of portfolio evolution

to little managing theoretical to in a securitized you very I be to go want specific. how the swap book in you hedge And anyone our careful. major thought processes view, that that's do Smriti truly get be a get more careful to macro large if need over think and is which And ahead through need terms else products But happens I be very understand move down rates. of we

Smriti Popenoe

point specified be other I don't risk, on coupons different underlying still pools the that. in right. reason think the instrument protect that extension you suffer against from other the the protect is only extension TBA would to and They make a to that pick to

Eric Hagan

that thanks it. robust Yes, answer. Got for

net The its implies supply market. second just the Fed the question portfolio macro. is really hitting rolling The more off

that include the you is next to off next best the for be market few incremental but likely to range. what the anyone's in It is a you the be where have from? dollar to come the in guess, might demand running billion year sense hundred is Fed be in do over likely If likely

Smriti Popenoe

in one. of market one that's supports the fixed is that out income number in the valuations instrument to now other things the believe any liquidity relative mortgage One markets, the we out

curve. steeper the yield is Second,

to Our their as sheets supportive that macro mortgage product curve. the In come find banks of net margin you on steeper erosion yield view will environment as well. and support such in is really will with balance that interest investors buy

banks. as off we're of support will But going factor I of valuations terms technical in that well. a attractive investors meaningful year. makes And think stop other be to about in this to expected what that's running The the are Fed’s portfolio thinking is mortgages September that

Eric Hagan

Got it

Byron Boston

And economies balance rates, their and the exercise central enormous the central to economic important supported these Eric, an putting through the large last the point global raise supported is the they pressure We fact other Hey saying, are believe – downwards for growth most truly we've Smriti sheets. ability where to the gone could larger balance by being what of back bank was large thought banks one large central creating do the balance back year reduce by the to central is sheets. and And liquidity, debt without it sheet. habit they it that globally reduce growth. on don't bank have in goes banks

we again the global about So now and have central banks purchasing talking assets. moving more into and mode again ease buying

And central yet expect overall out person to get to ask the are that could to spreads. answer I without on time them do we someone, portfolios it. mortgage ultimately a so how us this. I clear scenario And not banks’ of can tried have give we still paying? supporting a found this continue Every

Eric Hagan

you much. Got so it. Thank guys

Smriti Popenoe

to different mortgages argue for balance when to or that a including the get say advantage opportunities high others. Also – they become compelling on due managers take difficult of returns that spread of, will investors, they just peak third-year Fed when basically supply, only the have for running on you there's types to volatility increased things lack third-year levels. they're time – attractive Those those that can temporary investment returns factors the money other mid level, to make of mean, I thinking let's due but mortgages teens be and it's teens you coming, is either et cetera, example, particular sheet cetera. over that point don't speeds et about and I'd Eric are off

this time? available like that support as Absolutely. So and technical Could attractive. wide feel widen just they could for spreads periods widen? for I stay find there's investors of long sector

Eric Hagan

the again thank for I very it. Great. good answer, Great you appreciate

Operator

next line the comes Cranston of Trevor from Your JMP question Securities. with

line is Your open.

Trevor Cranston

All right, thanks.

book the on to terms up on in quarter risk, follow-up and from hedging Slide this Eric's to change significant down there obviously last to in risk rate looking tables of pretty exposure related a at question against XX, rate sensitivity extension profile your quarter a value As scenarios. was

mean protecting you're are well you mostly little about now seems you rate focused maybe changes scenario, sort views? thinking unforeseen like right pretty the of is talk market could the So against I down guys a about on. unexpected market how looks like or portfolio which in against protected bit it

the up more exposure. has But rate scenario lot a

the Thanks. you I wondering how you recently. about could leverage just has as that, if moved was portfolio higher guys think managing particularly So talk about

Byron Boston

me value remember Trevor, think, the you had because where position where terms in our I the the first like it job Hey quarter, where a book you point projections. looked great came for out you have difference I at value we one book out simply quarter projecting our and think, thing, our let of value adjusted I versus all end was was the of between, book And the book.

Trevor Cranston

Right.

Byron Boston

liquidity, the longer. as liquidity the down, We you’re drain longer, because rates ourselves as come adjusted swaps, short the more first short increase. We ourselves book foremost your got and mid right quarter rates we came and got will down swaps

the in reason first was, terms of So liquidity.

specific I'm level as make going let The more chooses I'll here. to second and point high Smriti be she

investors versus near concerned more help term was we a all of not this in think with with to trip are when about ask rate longer up years longer we you word felt tried the sustainable. to you down the we What term deal we had round said out move our long-term understand now couple conversation rate was our of this pointing which environment. and we how use If term, to we me and all ago a

the Fed an to their now down of lowered move we target its move long-term the enormous and projections. Fed has think rate like when when So up an itself by X.X%, it's

the you're So to rates, back taking going believe risk XX points look at X.X take Fed the help XX type now environment if than to risk really on that's XX-year, cushion in we're got the lower because even basis the have because at XXX now points, call points to better large XX basis we be a it mortgage priced think to that you that I've move, some rates. take basis to X.X, lower risk the XX-year. risk from basis points refinance that And we if in here mortgages got fours, XX of on spreads as will us in willing

you how hope that's you over our many I versus we've which in terms we portfolio securitized feel and being specifics we're won't mean structuring always concerned too this rate the Smriti a said more this to Again from swaps to view, this approach, macro about the do down continue goes you most understand environment. want it? perspective. of but it. book, to and it, us remember managing short So back in years has it to really add top-down

Smriti Popenoe

in Yes, mention – of risk to than there's end that that to was as of that we we've relative the XX earlier is I it actually today worked up payer rebalanced rate swaption, skewed profile I less June my disclosed have using comments at quarter. what so mean here did down the

that's thing number So one.

two number spreads. really between Thing is and rates up interaction this

Okay.

Up concern seen We a a fundamental lot to higher present. decline, goes in very prepayments and XXX is reason real that's very and away. have of a mortgage of that that the valuation, really due

a up the let's and number is what a on X% a about here from -XX.X basis to marry happens be with the just tightening the think that portfolio value. up the to rates points second happens in XXX, you spreads, page, number here to to do increase extreme XX the has so a a with look And is you of way book XXX, what which to spreads with this in have what look that number, at I kind at

be would tightening. rates you a portion between A with is that points again in can up So basis points. tighten XX I good tighter. XX basis spread believe probably risk argue XX of basis points XXX and spreads up somewhere they'd mitigated XXX,

the So is And is like XX, that mitigating number number of or being in the out with that instead swaptions other of something terms we sort instruments what hedging number of really today. seven. about think

our think we've hedging way or stand in not a extent act repricing then that there macro the to the built going view other that. view way look, is that one require It's talked to up fundamentals lot rapid of the this consistent that on environment. But to to the that. And shift is lot right of warrant rates terms It's were lastly, to a now. the and with a about obviously ready going actually to nimbleness I extent we

Byron Boston

we because, this something internally else lot. talk a is point I me let something think, about Trevor out

So always thinking about we it. are

just it up. You brought

unforeseen You used word the events.

So when two or view we started probable. one with of ago, about this XXXX that this conclusion, so, are macro highly was surprises our was years number

they've operating since we highly are perspective time. happened So that are multiple that surprises that probable, from times

say it debt level, with disagree thing we American consumer now at in at the shape. level, corporate that who the is the very global of Here's consumer amount government one to with academic at level, enormous economists that feel the try and the great the confident, this all we is

doing great. – we’re The we're wealthy, yes, Americans

All probably us enormous this doing of American are on phone the fantastic leveraged. amount consumers of and heavily

a we'll rates. investment, major interest can at what because thesis means take believe That global investment point in our theme risk core economy is we higher our that is handle up sustained rate this time. long-term that So of don't the

we thinking? does in of little are how help bit understanding So a terms that

Trevor Cranston

color. you relationship any Yes, guys helpful in been wondering what actualization that's if closer you June all LIBOR of end between improvement on a versus any to of financing noticed get and Fed since could of between market cut? the sort changed for we the as seen you've Thank side. on repo color is if that. recently at Then that's the provide there's potential the my you've repo very if question was I the second

Smriti Popenoe

that's yes, observation, Right, Trevor. a great

Certain repo Fed price think it's were patchy. the early. unanticipated willing to cut counterparties been I

were And we in rates to that. certain willing do saw quarter not some others so rents, repo post relief

to all waiting today, that till quite honestly way the make are assessment. that folks Some

be very So rates. at in this we've making to to really in and patchy very best shifting the But price the cuts active had very, sure getting people's the willingness we're with to respect has terms of been it around point. book really Fed

it how is faster on than have messages we the will be a factor factor the depend much Going down. – rates last two We That's two continue forward, think quarters. to bill really come may the to Fed come I a today. been going obviously has see it quarters. And down in next LIBOR

clear might If you message, these spreads. you have see that repo into really a pop

we're in message, again. clear a have the don't boat you If same

in with the is this the So of point uncertainty we’re to margin. this at having live kind

Trevor Cranston

Thank helpful. very that's you. Okay,

Operator

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

is open. line Your

Christopher Nolan

answered. have questions my been Hi, Thank you.

Operator

Matthew comes Perfect. line [Operator of the from question next Your Instructions] Hallett with Nomura.

Your line is open.

Matthew Hallett

Byron for view that questions. take guys experience. my make taking Hi up your thanks the you and Byron, really just I and your appreciate global

cycles launch Fed easing ago global was different one most? the you've to in during the was guess easing a crisis I using we seen seen wave If of financial this than might – a be we’ve refi does it will about is or lot look first this less and years at cycle or point the XX it can then what just start us like you like XXXX. the ever So cycle

Byron Boston

believe Well went are we're is first too is saying What an this in point. opinion, not cycle at off XX though far. Fed that that points the saying we we're we easing this our basis

the first that's So point.

Matthew Hallett

Okay.

Byron Boston

that I’m asked me basis you all your You Jerome know cut et of Powell, the What's we globally, we to And XX advise points, the say cetera, year rates last And you went back you the should now. what's far. at some et going is if to cut XX see it could too should being that cetera, them being dollar there, of creating. havoc downside? Jerome the up where end

is XXXX, points. of cut XXXX the simply people which saw all period most period, basis XX was It scenario. created was call the in you XXXX, easing insurance. about Interest rate that that pointed cycle couple out as time I when even early XXXXs, in our as it probably years today So ago, the not in a XXXX or

We cutting last And term that's balance ginormous an central these economy being point. crisis debt sheets. going at to global do believe financial some be global huge up mode of in increase since held longer by all-out there’s the bank – the and a is simply off, based

got you more have economy, will of multiple I'm out point fruition surface because They some XXXX back there. global underneath in And at of the you we to ask had those time. eased in sure of the business XXXX, gone had come over a would do times, of and Bernanke out of you that have Ben Bernanke, wish business They If look they that gone look cracks If did business. to eased Ben REITs should here Thornburg of we couple out XXXX. there ease. had gone if him, out pointed are cracks. are And we

Fed can or cut basis now XX in our should too they So say far. right points is that we would opinion points, whether went be should ease, the most the this XX today day because basis they it's September

Our the long-term with The gold on Fed the global down. is will view The top. sustain debt. be have will rates can't of debt don't, amount longer bring more to this piled higher handle, they rates that

Matthew Hallett

on the to that to And I appreciate that. XQ back at bit about And is that triangulate earlier get Steve's missed just to just, the talk get to Dynex. earnings sort to a power, little I want XXXX, that scenario? will was margin. the but I that if – the bip margin to back potentially comments margin was under said regards XX in where what it of just

Steve Benedetti

Hey Matt sure.

XX borrowing by by prepay little of spread points you a essentially you of basis bit, about sort look bit despite of swap was basis actually at benefits. a the lower mortgage So costs quarter are up rate the higher And yields deconstruct third higher. environment asset if XX and offset are little that net modestly XXXX, our that And environment. if points faster

if of just go of reverse spread, towards right. XXX back from you XXX today back right, basis that that sort basis points mentally points So out, you

some be what profile asset with and the well LIBOR. that as on performance, Obviously if basically month hedge relationship into as one we dropped book So that do month, between three to of just depended happens. our may earnings the forward going that's going

But I if move certainly spread basis close sort of as Fed extrapolate the back that can near that we're you quarter. to or going think to points the of the net mentioned XX off that, Byron third directionally, be in of takes size sort those

Matthew Hallett

cut go And the that's ROE stability guidance, everything and X% don't could the Dynex's rates to want I may over [indiscernible] potentially. cycle. this I just in to sort be – mean, could business this to the give why into do this of a XX% where a mortgage ROEs seen we've where get we I quarter, do of kind clearly that's long-term in mean, guess bips know increase I ROE substantial – focus did just I And you you if mean, Byron, this pointing in from ROE rate? XX I

Byron Boston

and when talked with as understanding overnight what going the misunderstood costs them financing the is our one-to-one – this, thing pointed macro rates talk do. Fed totally has investors every to I So increased our that of which been about with that costs there to Steve our view the costs. financing about attached our drive to kept And rates I emphasizing facts one that financing first why are think back has time versus a I've our not higher. I the I to was costs And just out ultimately real most relationship financing because happens Feb

just curve takes in costs, actually when bring fall start So realized to longer points costs. going that term the from start potentially the a basis basis to and place, XX first. financing more time you will of ultimately a We you believe points be see down to financing see over you're our XXX matter

the So we model. be very that will believe to beneficial business that overall

So give it financing direction down. I costs come our guidance, really is I trying but when to not exact powerful in you am trying a am lead shows that forward to you how

up. position when mean gotten leverage But it the costs we we the will in positioned be financing beneficial where portfolio. drop. think see What we by that we is is definitely So we've ourselves

You So I you has that Does don't. she? specifics. hope gives – few more Smriti a

Okay.

Smriti Popenoe

basis then see long-term your XXX XX say at times, that basis, spread I points that over and on is thing only looking you would nominal mean, double lever a the net you're mortgages between the long-term that The digit ROE. hedges if over I the

Trevor Cranston

Right.

Smriti Popenoe

your fast that would how net That's XXX is that to point about how costs And key you of to basis the driven level. how by I soon financing the is spreads actually all that that get it. think get

Trevor Cranston

Repricing Go okay. well, rates Byron. as ahead

Byron Boston

talk months spring, fall. the inverts. largest summer ROEs. is over and about? financing coming see long-term, look be the that's where, business where REIT when when the Hey, in that's out year, I when always And mortgage And cycle to is you one performance, that's when down. of long-term to winter And curve seasons are at winter the then largest months costs you the Matt And time best want ROEs. when costs. I of and worst you the can what [ph], happy happens Dynex I once be always you winter, increasing the cycle Fed we've mortgage summer, The throw you compare And the the the to and our that to summer happens investor to like financing in in would part that include long-term we that be a REITs been you you'll months, go very the Capital. through urge

Trevor Cranston

cut dividend you're think doesn't what a I people positioned I might look, with you Fed for forward. signaling that the as tell certainly anticipate the looked any that. doing, it I appear – from in – negative I model think, what going have just just And I limitation signal. at portfolio Right. But can the the don't here

Byron Boston

uncertainty Now let the what and globe. across for say the of have to doing risen we're showing is politicians environment the we're who What respect, we’re we're the seeing. me stage the respect showing global

injected not nine capital let's so that side. six And of has we view on Or politician global give of simply the we our our into process. in months, on that short amount the our philosophy, the to say, uncertainty lean back been term some cut could respect dividend, system shareholders can

environment the the it the – through think the we confident. back about and near both long-term, only Not political levels, how becomes term economic global reverberates I'm pretty telling asset But that we're price when side, unpredictable.

us because And too carrying not show we're it's dividend be So better. be the we things levels we for the we challenge when get that it better positions they can cut the future also as of increased cut in respect that term. pure we much have that short can believe and know dividend,

Trevor Cranston

the appreciate Thank I really color. you.

Operator

now for time. And Mr. I questions at no Boston this further remarks. will to we over turn closing any have back Byron the call

Byron Boston

appreciate joining we're our questions. to have all, book. We for of open us. We So like you, do a but philosophy. an may be always, thank like a we explain ourselves, I do you as for always longer some calls to the on

us. depth. anything Thank for conference call you. next We'll Please call happy in our Thank again, you and please you. more call. discuss to us quarter We're join

Operator

concludes call. today's conference This

You may now disconnect.

Dynex Capital (DX) 31 Jul 192019 Q2 Earnings call transcript