Dynex Capital, Inc.
Q2 2013 Earnings Call Transcript

Published: 3 Aug 2013

[Operator:]

Good morning and welcome to the Dynex Capital Second Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Tom Akin, please go ahead.

[Tom Akin:]

Thank you operator and welcome to our call everyone. With me today is Byron Boston, President and Chief Investment Officer, Steve Benedetti, Chief Operating Officer and CFO and Alison Griffon, Director of HR and IR at Dynex. I’d like to turn the meeting over to Alison for the customary comments.

[Alison Griffin:]

Thank you, Tom. Good morning, and thank you everyone for joining the Dynex Capital second quarter 2013 earnings conference call. The press release associated with today’s call was issued and filed with the SEC yesterday, July 31, 2013. You may view the press release on the company’s website at www.dynexcapital.com under Investor Relations as well as on the SEC’s website at www.sec.gov. Before we begin, we would like to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan, and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. The company’s actual results and timing of certain events could differ considerably from those projected in or contemplated by the forward-looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks, we refer you to our Annual Report on Form 10-K for the period ended December 31, 2012 as filed with the SEC. The document may be found on our website under Investor Relations as well on SEC’s website. This call is being broadcast live over the internet with a streaming slide presentation and can be found through a webcast link on the Investor Relations page of our website under IR Highlights. The slide presentation may also be referenced by clicking on the second quarter 2013 earnings conference call link, also on IR Highlights page of our website. I would now like to turn the call back over to Tom. Thank you.

[Tom Akin:]

Thanks, Alison. During this last six months, the investment strategy of every mortgage REIT has been tested. Lethal combination of rising interest rates and increasing credit spreads has reached substantial damage to the pocket books of many shareholders. As many of you are aware, we have always advocated for a conservative leverage, higher quality and short duration portfolio strategy. We issued the purchase 15 and 30 years securities due to extension risks and chose to focus on shorter CMBS securities with credit spread risk but more certain maturity. This past quarter, our portfolio too was tested by the market as liquidity disappeared in almost all mortgage instruments and spreads widened dramatically. While our portfolio suffered some price volatility, I’m happy to report that our overall investment strategy has remained quite buyable and should continue to provide a steady stream of income to our shareholders throughout these difficult times. While, our mark to market book value at quarter end showed significant decline, our overall portfolio did not exhibit significant increases in leverage or duration that we have seen in many other levered mortgage REIT portfolios. As a substantial shareholder in DX, I share the pain with every other shareholder in this book value loss. However, our shorter duration portfolio should continue to cash flow and roll down to positively shape the yield curve. Looking forward, we do not have the complications of excess extension risk or leverage. Most of our book value loss this quarter was due to credit spread widening. Our high quality short duration asset portfolio maybe cheaper but the credit worthiness and cash flow that we can expect from this portfolio is quite attractive. While, it’s hard to predict for future spreads, the combination of a dramatic interest rate increase and quarter in illiquidity created an inefficient pricing environment at quarter end. With the improvement in the economy and the shorter maturity of our portfolio particularly in the commercial assets, it can be expected that this widening could reverse as market conditions stabilize. Finally, our interest rate hedges worked as intended. Dynex’s book value loss was about $0.50 due to interest rate increases. Since then, we have added additional protection and reduced our exposure to interest rates even further. Byron, will go over those actions in his presentation. Finally, we are confident in the existing strategy of our company. While, no one likes to report a 13% book value loss year-to-date, we feel that our portfolio and investment strategy are appropriate for the current environment. Now I’d like to turn the presentation over to Byron Boston, so that he can talk a little bit about our strategy.

[Byron Boston:]

Good morning. Thanks a lot, Tom. And I thank – I appreciate everyone for listening to our call this morning. If you got our presentation, and you can open up, let’s move to slide four and just talk about the facts from the second quarter. We won’t hit each one of them, we’ll just highlight a couple of them, earnings for the quarter. Basically we covered our dividend of $0.29. Overall earnings, $0.54 a share, adjusted diluted earnings of $0.34, book value of $8.94 versus $10.50 in the first quarter an versus $10.30 on the year, that’s basically down 13% on the year. Annualized return on equity of 13.2%, our net spread did deteriorate a slight month to 1.75 from 1.89. Average earnings assets up to $4.6 billion and the CPR of 21%. And let’s look forward to slide number five. And you can just see more of a graphical picture of some of the information that I just gave you. And let’s keep moving to slide number six. So, we’re trading at some unusual times, and such, unlike some of our past investor calls, we want to take some time to make sure we fully understand our business model. This call might be a little longer than usual, there are some technical phrases that we want to make sure that we go through and make sure that they’re clearly defined. There are three main concepts, I want to make sure that I’m very clear by the end of our investor call, extension risk, roll down and spread risk. We’ll hit each of these as we go through the presentation. First on slide six, I’d like to remind everyone about our business model. We’ve deliberately designed our portfolio to perform in a variety of market environments. We’ve always focused on a diversified business model with a focus on diversification, not only across these sectors of agency versus non-agency CMBS versus RMBS, but we also focus on diversification within these sectors, across products, maturity, coupon, credit tight and a variety of other characteristics. The second quarter highlighted the benefits of the strategy, as some portions of our portfolio performed much better than others and provided us with needed support and liquidity. If you move to slide seven, let’s now look a little deeper over our core investment thesis, which still stands today despite what happened in the second quarter. As you all know, we’ve primarily focused on short duration, high quality investments and operated using some of the lowest leverage levels in the industry. We’ve been able to consistently generate double-digit returns using this strategy. Let me explain. Our thought process behind this strategy, we are in an easy money cycle represented by steep yield curve, low funding rates, we’ve experienced low volatility prior to the latter part of the second quarter and historically low interest rates. We’ve always recognized that we’re in – we were in an unusual period and with heavy government involvement in the financial markets. As such, we’ve managed with the longer term view that this unusual environment could ultimately change in some unexpected ways. Now, to help protect against sudden market movements, we have deployed a couple of core fixed income strategies, rolling of our curve roll down and credit diversification. The first involve, selecting securities with limited extension risk and the ability to take advantage of a yield curve roll-down. The second, is investing in credit sensitive assets to offset the impacts of a sudden rise in interest rates. Now, let’s talk about these boxes. First, short duration, our short duration strategy is focused on more predictable cash flows with limited extension risk and potential to roll-down a steep treasury curve. This is why we invest in Hybrid ARMs. Hybrid ARMs are unique sector within the MBS market and in our opinion they offer a variety of advantages, limited extension risks in the rising rate environment, the loan destruction to turn it to float it at the reset date. Agency guarantee and associated ability to refinance and more importantly opportunity to efficiently roll down the yield curve. The pricing of Hybrid by nature of being a smaller sector is often driven by technical factors, supply, demand and balances. These tend to be magnified in a very volatile environment such as the second quarter. We manage our position with lower leverage and diversified assets, when we diversify it with other products, such that in recognition that this potential book value volatility may exist due to the nature of the products. However, we strongly believe the fundamental cash flow stability of these instruments outweighs the temporary book value volatility. Our RM portfolio is constructed to perform as we said, over and over again in a variety of environment. Our weighted average coupon is approximately 3.3 to 3.4, and the reset is a split about evenly between 36 months to roll the shorter, 60 months to roll the shorter and then greater than 84 months to roll. This allows for the portfolio to do well in a range of the scenarios including when mortgage rates are as low as 3.5% or as high as 5%. Similarly, we’ve also invested in the CMBS sector because of well-structured cash flows and strong credit fundamentals in this sector. Well-structured cash flows translates to efficient yield curve roll down, no extension risk due to changes in the interest rates and explicit call protection. It also provides a diversifying impact because typically as rates rise, credit fundamentals improve and support tightening of credit spreads. Let’s move to slide number eight. We’ve talked about extension risk and roll down a lot in this investment thesis. We’ve talked about it in the past, we’re even talking about it today, let me explain further. This chart you’re looking on, on slide eight, we introduced approximately three to four years ago, to help you understand why we invest in Hybrid ARMs. The major challenge in managing an MBS portfolio is that the cash flows are uncertain and can change dramatically. Let me go through this chart. We tried to put it, to give you an example of a 30-year, 3%, 15-year, 2.5% and a current coupon 5/1 ARM. If you compare over to the right the column that says, average life extension, you can see that the 30-year could potentially extend at least nine years and in some situation I think the extension could be more. The 15-year could extend three years, in contrast the ARM only extends one year. This is graphically shown above in the charts, in showing the columns. So, when you think about our overall portfolio, we’ve used this chart simply to demonstrate our reasons for not wanting to take on extension risk in our portfolio and Tom has already mentioned, a limited amount of extension risk in the portfolio due to the fact that we don’t have 15-year and 30-year securities in our book of business. Even though we don’t show CMBS on this chart, the bonds are well structured and have literally no extension risk due to interest rate movement. And the construction of our portfolio ensured that we have very limited extension risks and hence during the second quarter, extension risks did not play a factor in the overall performance of the Dynex book of business. Now, let’s talk about roll-down. This is a very, very important factor, it’s a major reason why we have chosen not to touch a 30-year security, our desire to efficiently roll-down the yield curve. At the bottom of the page or excuse me, really, if you think about the top three bullet points, the Federal Reserve is in an easy mode, intent on keeping short rates low for considerable money-time, as a result, the treasury yield curve is exceptionally steep, meaning, short rates are substantially lower than long-term rates. Now the combination of these factors, provide the investors in well-structured bonds such as our CMBS and ARMs, with shorter maturity reset dates, with an opportunity to roll down the curve. As the bond ages, it will increase in price as it rolls down the treasury curve. This occurs because the bond is valued at successively lower yields and thus potentially higher prices. The chart may give you a better example. We try to make it as simple as possible. There is actually more value potential here, but let’s just isolate the simple example that we have on this page. You can see, we’ve compared a Hybrid ARM 2.5% coupon that matures, that resets in three years, five years, seven years and 10 years. And if you take a closer look, you’ll see that the 10/1 in three years will become a 7/1. If you look at prices as of July 30, the 10/1 was priced at $98.75, while the 7/1 was priced at PowerPoint 88. In three years, the 10/1 will roll down the curve, become a 7/1, all else being equal and appreciate by approximately two points. Likewise, as you see this asset continue to mature down the yield curve to a 5/1 and a 3/1, we would expect to continue to see absolute value appreciation through time. Now let’s move on to slide number 10. We want to explain our last very important point which is spread risk. An asset spread is the market premium above a benchmark rate that reflects the relative riskiness of the asset versus the benchmark. Spread risk is the uncertainty in pricing resulting from the expansion and contraction in the risk premium over the benchmark. Spreads are impacted by the following factors, fundamentals, technicals and psychology. Fundamentals, represented by the probability of the fall, or cash flow uncertainty, technicals, supply and demand for various assets and then psychology reflects the risk appetite of the market and the perceived riskiness of specific assets. Most mortgage REIT business models are inherently exposed to spread risk. At Dynex, we focus on all three aspects of spread risk. However, changes in pricing due to technicals and psychological shifts are very difficult to predict. We manage spread risk over the long-term through our portfolio construction. And we’ve already mentioned one of a key component of that happens to be, the ability of our securities to roll-down the curve over time and recoup potential value that may have been lost in some unforeseen events. Now, let’s talk about our overall risk management process. Since we talked about these risks, at Dynex, we’re focused on managing these risks in a variety of ways that are listed on this page. And we have a specific strategy to mitigate each one of these boxes. For example, a strategy to mitigate prepayment risk is that have a band bar bell. Short duration, premium Hybrids that benefit from slowing prepayment speeds in a rising rate environment, offset by longer duration power price or discount hybrids, and CMBS product that rise in value as rates decline. And if you look across the chart, from interest rate risk, prepayment risk, credit risk, spread risk and liquidity risk, it’s important to note that we keep that we’re very precise in measuring and observing and understanding which risks we’re mitigating and those risks that we’re ultimately exposed to. Some of these risks are ultimately hedged with specific instruments, consistent with our guiding principles, while others we manage through our – from a longer term perspective to the construction of the portfolio. So, let’s go to slide 12, you’ve seen this slide before, I’m not going to hit on a lot of our points on this slide, simply to show you how our portfolio has evolved over time in our heavy allocation to the CMBS sector, which has very well defined cash flows and efficiently rolls down the curve. If you go to slide 13, most important concepts to take away from this slide is to the right, where we show you a distribution and we’ve shown you this chart in many other presentation. The distribution of maturity reset across a period of time, you can see that the majority of our portfolio matures within 10 years or 120 months. This limits our extension risk, really important for you to understand that you can see that – we’ve kind of evenly distributed our book of business across the shorter end of the yield curve, middle part of the yield curve after 10 years. And then a 39% in the percentage between seven and 10 years, a large percentage of that 39% happens to be in the CMBS sector. CMBS products duly mature in 5 years, 7 years or 10 years. Let’s go to slide 14, the most important point here is to look into our upper left graph. This is very important. You can see the way our prepayments have performed over the last year or so. We probably experienced our largest average prepayment speed this month, as you can see that the upper slope in the top blue line, up for the agency portfolio of 23.2% average and then for the portfolio as a whole, of 21%. This piece reflects the mortgage rate in April between 3.5% and 3.75% from 30-year fixed rate. Since then, mortgage rates have averaged between 4% and 4.5% making it less, less likely and attractive for borrowers to refinance. We believe this will translate to slower speeds on our agency ARM portfolio, improvement in our overall net spread and providing more price support for premium price Hybrids. This is a big story, the refinancing, the index reflects this. 70% of originations up until this point have really been all refinances with the recent rate move, we expect that number to drop off dramatically. We also expect overall mortgage growth supply to also drop off. Now, let’s move to slide number 15. We’ve talked about investment thesis. Now we want to talk about what happens in the second quarter and really how did it affect Dynex in our outlook and strategy. We think about the markets in terms of fundamentals, technicals and psychology. During the second quarter of 2013, fixed income investors experienced a psychological shift in the global capital markets in reaction to a perceived earlier than expected exit by the spread from QE3. And responses of shift in psychology, there was a technical sell-off globally in fixed income assets with interest rates substantially higher and spreads materially wider. However, economic fundamentals did not materially change during this period and the future economic picture remains unclear. Here is what’s unusual about this overall event that took place in the second quarter. Since 1980, the correlation between rates and credit spreads has typically been negative. Generally when rates rise, the economies doing better and spreads tightening, and when rates decline, generally spreads widen to reflect poor fundamentals. In this case, as we just mentioned, economic fundamentals didn’t really change, yet spreads, particularly credit spreads widening. There was a massive move of cash, out of fixed income assets globally, as we saw cash moving out of emerging markets, high yield corporate and investment grade corporates. Let’s move to slide number 16. The combination of higher interest rates and wider credit spreads resulted in an increase in investment yields by as much as 150 to 200 basis points in certain sectors. Increased market volatility, also led to a supply demand imbalance, exacerbated by Wall Street’s reduced desire to commit capital. CMBS experienced technical supply factors, dealer conduits and GSEs continue to bring deals despite market volatility. We are exposed to spread movements driven by technical and psychological shifts in the overall marketplace. Mortgage cash flows significantly extended in the fixed rate sector, and availability and the cost of financing remains stable. If you go to slide 17, we’ll give you some examples of how spreads actually moved in the second quarter. If you look across the chart, you can see the spreads move wider across the board. Some spreads move more than other sectors, specifically, please note that CMBS sector in the middle of a chart, A-rated CMBS spread to US treasuries moved out 82 basis points from 205 off the curve to 287. And then note CMBS IO spreads to swaps, also moved out from 115 to 200. We’re heavily invested in both of those sectors in an normal environment as we mentioned a second, we would expect credit spreads to actually perform differently than we observed during the second quarter. Also note that the two-year and 10-year trade spreads, you can see that the curve steepened by 52 basis points, it’s important to note that we started to add additional hedges during the second quarter, with a heavy focus on the 10-year sector, in anticipation of steeper yield curve. As such we did observe or experience that steeper yield curve, we’re happy we’d put those hedges on, they performed well and they provided some benefit. Most mortgage REIT business models experienced the impact of this spread widening. We believe this spread widening in ARMs and CMBS are overdone due to technical, supply, demand imbalances and an overly bearish market psychology. This is essentially the key reason for the book value deterioration at Dynex that we experienced in the second quarter. Let me explain, on slide 18, let’s look at the impact of the environment on DX. Due mainly to spread widening, book value declined by above 56, that’s approximately 13% for the year of 2013, and leverage only increased by half a turn, by 0.5. An estimated 68% or $1.06 of the decline was due to wider credit spreads and 32% or $0.50 was due to higher interest rates, this exposure to higher interest rates only represent about 4.7% deterioration in book value. Minor portfolio adjustments were required as a result of an already low target leverage in short duration portfolio. We sold $156 million in assets for net gain of $2 million. And I really want to emphasize at this point the structure of the portfolio allowed us to be very, very thoughtful during these turbulent times, we didn’t have a need to trade billions and billions of bonds in an attempt to keep our head above water. Our portfolio performed well throughout this period. For active hedging, helped to reduce the duration and exposed into higher interest rates during the quarter, and we continue to add hedges in the third quarter, so what have we done so far. In July, we’ve added more hedges. As we approach the first week of August, yesterday, today, tomorrow, potential for high volatility, we’ve adjusted our duration appropriately. The environment is more volatile, we’ll have to be more proactive as we manage the portfolio, it could be just as dangerous to over-hedge your portfolio as to under-hedge your portfolio. Throughout this period, we’re going to maintain a risk discipline, especially leverage and liquidity management. It’s also important to note that during the quarter, we adopted fair value accounting for interest rate hedges to better manage the maturities of our financing. Let’s go to slide 19, and let’s think about where do we stand today in our outlook and strategy. In terms of economic fundamentals and interest rates, sustainability of the U.S. economic strength is uncertain. What does economic activity imply for the level of interest rates, at this point, the market is completely uncertain as to where that level of interest rate should be. Fed does not want to see a pre-mature rise in long-term rates or rate expectation and continues to have an accommodator policy stance. Credit fundamentals should improve as the economy stabilizes. In regard to technical, technicals have been distorted by the Fed’s participation, not only in the second quarter but for the last several years. And it’s not only a U.S. issue, central banks globally have become a technical factor in the overall financial markets. Fed purchases as we look forward into the fall could decrease, while remaining stable as a percentage of the supply of overall fixed income assets. RMBS and CMBS supply should decrease with higher rates, and this is a big technical factor, let me give you an example. So far this month, we’ve had recently, within last week or so, approximately about three or four CMBS deals announced. Those deals were expected to bring $6 billion to marketplace and in fact they were all downsized to approximately $4 billion in total, so that’s about $0.5 billion less for each deal, and that’s a prime example of the technicals that are taking place. So, maybe we have an imbalance here in both the RM and CMBS market, in the month of July but as we look out to August, September, October and November, we expect for many of these imbalances to correct. And furthermore, treasury issuance could be reduced in the latter part of the year, as we’ve announced yesterday by the government. And then market psychology, psychology will continue to be influenced by perceptions of (inaudible) data and Fed policy, that could potentially lead to more increased volatility as we mentioned a second ago, we are being very vigilant because of this increased level of volatility. Let’s talk about our strategy. No material change in our portfolio construction or investment thesis that the way bit to driving point of what we’re saying today. That’s why we took our time to walk the basic parts of our investment strategy that you probably have heard before. Our investment portfolio is constructed to perform in a variety of market environments. I’ve repeated this phrase multiple times, many of you who have sat down with me have repeated it, over and over, over the last five years or so. Limited extension risk is reflected in a modest 0.5 decline book value, due to changes during the quarter. We also, this is an important part of our strategy and we’ve always talked about it. Portfolio shock absorbers against continued uncertain environment, what about shock absorbers? Investments that roll down to treasury curve efficiently, focusing on assets that could gain from slowing pre-payment speeds. And then having spread assets that should be supported by demand for short duration assets, improving credit fundamentals and I just mentioned a second ago, the rebalancing of the overall technical supply demand balances. Intermittent periods of high volatility would require more active portfolio management, and our risk manager will remain a focus, leveraging the liquidity would be key as we just mentioned a second ago. And we will continue to be very vigilant in overall measurement and structure of the portfolio. Market opportunities on slide 21, Fed continues the whole short duration role, providing an ideal environment against the rolling down the curve, stable cost of funds, pre-payments should slow, improving our overall asset yields, wider spreads and steeper yield curve will provide opportunities for investments, on private capital, is slowly being drawn in with risk transfer and asset sales from the GSE’s in spite of the delay, GSE reform. Multifamily and commercial mortgage sector deals were positive fundamental trends. Spread widening presents an opportunity. Critical to manage risk in this interim period, we’ll be able to take advantage – we’ll be able to take advantage of these opportunities, it would be very critical for us to manage our risk in a very disciplined fashion. Before I turn it over to Tom, I’d like to leave you with three main points. So, some of this would be repetitive but we are trying to make some real key point, get the couple of key points across to you. First, we constructed the portfolio in old manner to perform in a variety of market environments. Second, two important components of our strategy, taking advantage of the yield – of rolling down the curve and investing in short duration securities will be important in the future. And finally, we have the three shock absorbers that I mentioned, and I’m going to repeat them again, that’s curve roll down from the well-constructed securities of 10/1 that will become 9/1 that will become 8/1 that will become 7/1, and the CMBS securities that were also efficiently rolled down the curve. The slower prepayment speeds and the potential for spread widening, as the supply demand imbalances, I mean, excuse me, bite my tongue, potential for spread tightening and supply demand imbalance clears up in the market place later in the year. We appreciate your support and I’m going to turn it back over to Tom.

[Tom Akin:]

Thanks Byron. The next page, page 22, I wanted to point out basically our year-to-date performance since 2011, ‘10, ‘09 and ‘08. And as you can see, that managing for the long-term has always been the goal of this company. We do admit that there is a transition and the market obviously acted violently in reaction to the perception that we’re going from an ever-lower interest rate environment to an environment that might include higher interest rates. We view that transition is manageable, up because it’s going to take many years to accomplish. Longer term rates also will provide better long-term returns as we reinvest our portfolio. Because of the short-term duration of the portfolio, we will continue to see substantial reinvestment opportunity at possibly every higher rates and that is not a bad thing for our shareholders. Secondly, our portfolio and investment strategy, we believe is particularly appropriate for this interest rate environment. We expect our portfolio to roll down the yield curve as Byron pointed out, and continue to provide significant cash flow. In addition, we see the mortgage REIT model as being an attractive business model, as the FED exits the market and the GSE’s become a less dominant player in the portfolio of mortgage assets. Finally, I’d like to thank all our shareholders for their continued support and confidence in Dynex management. And we commit that all the employees of Dynex will continue to work tirelessly to justify that confidence. And with that operator, I’d like to open up the call for questions.

[Operator:]

Certainly. (Operator Instructions). Our first question comes from Trevor Cranston with JMP Securities. Please go ahead.

[Trevor Cranston:]

Hi, thanks.

[Tom Akin:]

Good morning, Trevor.

[Trevor Cranston:]

Good morning. Thanks for all the discussion about kind of how you guys think about the world and think about risks, very helpful. And just a follow-up on that a little bit, specifically on kind of the comments about spread and what caused spread widening, while rates went higher in the second quarter. Can you maybe share your thoughts about how you think about spread risk in the very near term if we were to see your rates continue to move higher? And specifically kind of give us a sense of where spreads are on your type of assets relative to they were pre QE3. If you think there is likely to be any kind of near term correlation with spread rates on the CMBS and agency orders? Thanks.

[Byron Boston:]

So, Trevor, let me start with the CMBS. And one of the more important parts of the slide, where we put all the different spreads is trying to make a point for everyone in the marketplace to understand that all spreads have moved differently. And they will in the future. So you want to consider each line item and how that spread may have moved in that sector. So let’s talk first on the CMBS on market. As June, as June preceded, CMBS spread widened, not because there were a ton of customer selling. The real sellers happen to be the Wall Street conduit and then Freddie Mac did a deal that was probably one and half times larger than normal. Those deals have to come to the market, they’re going to hit any business in the market. And as such you saw that spread widen. I don’t think there is any professional market that doesn’t think that the CMBS spreads were overdone during that period. So, since that time, spreads have actually firmed, so we might be in – let’s say on that CMBS B-line or the A-rated CMBS trances, spread maybe anywhere in, anywhere between 15 to 25 basis points at this time. So, again, it was a technical supply demand imbalance that took place. And what you had was, most of the buyers just stopped buying, because most people in the marketplace are confused over the overall economic outlook, not that the economy is better than a couple of years ago, but how much better and how sustainable is it, and then what does that mean for rates. So, everyone is still trying to figure out where ultimate rate should be. And as such, you had many buyers stand on the sideline and then you were left with the supply demand imbalance as these deals were coming to the marketplace. So, as rates stabilized, as the psychology turns and get more understanding of where rate should be, we expect spreads to continue to firm. And again, the supply, I just gave you the example of CMBS where we’ve already seen these deals that are probably$0.5 billion smaller on each deal, we expect by that to fall off, not only in the CMBS sector but also on ARMs. Now, on the ARMS side, it’s another situation where you had a supply demand imbalance meaning that you had everyone on the same side of the market. Originators sold and I think there is still a slight supply overhang in ARMs but spreads have firmed but you had large pipelines of ARMs and those ARMs came to the market as yields started to move higher. You had every dealer on Wall Street turn and become a seller and start to reduce their overall position, And then you got the normal levered players and banks that all moved to the sideline as everyone want to try to figure out exactly where rates were going to move. This was an unusual period in such the psychology became very, very negative, which was right before what I call a supply demand imbalance. It’s not unheard of but it’s not a normal environment. I could probably walk you back to it, I won’t do it on this call, we can do it off – through my career of trading since 1986 and I can show you two or three other times that I could remember this type of balance occurring.

[Tom Akin:]

And let me just add one thing to that Trevor, one of the things about spreads is that as you roll down the yield curve, spreads have a tendency to narrow. So, you almost get a double whammy and that is your overall discount rate decreases at a positively shaped environment. And at the same time, spreads narrow. So, as these assets roll down the yield curve, generally speaking the spreads will narrow as well and that’s another advantage.

[Byron Boston:]

Tom, let me add one other things, Trevor, because you did ask about that correlation. Here is what, let’s say you get through this week, you want employment number. Now everyone will start looking for the next employment number in September nock and that’s what the market is doing. One employment number to the next employment number. There are some things in between that make a difference. But as you move, get to September the supply demand imbalance will slowly heal itself, so in other words, there just won’t be as many ARMs produced. Originators will not be as large as the seller, as they were in June. And so, as that continues to correct itself, the probability of spreads blowing out when rates move is reduced. Over time, if I’m just was pointing out, again, we expect spreads to firm and especially I think the CMBS absolutely – extremely cheap. Obviously, compared to what happened in 4% high yield, those spreads also blew up, but over the last four weeks, as the market stabilized, cash has come back at a record pace into the high yield market, and the corporate market. And I think those spreads are back to a record tights again.

[Trevor Cranston:]

Got it, that’s helpful. And I guess, on the margin, given where spreads are, do you guys currently have a bias towards reinvesting pay-downs in the Hybrid space or CMBS, or could you guys give us any color there?

[Byron Boston:]

Well, I thin Trevor, I am going to be very careful about how we reinvest our capital with this type of volatile environment. So, we’re trying to balance leverage and ensure we’ve got capital available to take advantage of opportunities, but we’re also trying to get some clarity in the marketplace. I love well defined cash flows, I love the concept of rolling down the curve, I love the CMBS sector, in reality, I think the CMBS sector should always yield less than the other sectors with undefined or very unclear cash flows. And so, I’m going to always have a bias on that CMBS, if I can find them cheap, if I can buy them cheap, I’ll take advantage of it. The other asset will always a bias to is really short duration premiums, I think to give us, within a REIT I think, I think a good core asset.

[Trevor Cranston:]

Okay. And last thing, I think the press release mentioned that you guys added from Euro-dollar future is after the end of the quarter. Could you just help us understand how to think about that position, if it’s kind of equivalent to 400 plus million fixed base swap and what the duration of that position is?

[Byron Boston:]

Yeah, that’s correct, that’s correct Trevor. If we’re thinking about Euro-dollars, we’re duly thinking about five years in it. And so, let me just take an advantage, I might be a little more long than what you asked. Our hedging strategy in the second quarter shifted to a longer end of the curve, 7 to 10 years. Most of the swaps we added in fact all the swaps we added in the second quarter were except for the very end, were in the 10 year area. And that’s because we anticipated a steeper curve. We did add Euro-dollars later in June, that’s really a response to the regulatory changes that have come through. And so, we’re now diversifying some of our hedges away from the vanilla interest rate swaps, but our year rolls were really added in the 4-year in shorter year. So you should think about them the same way as you think about in terms of the overall swap portfolio to, in terms of what they provide us from a hedging capability. But I don’t think you’re going to see any particular dollars beyond five years in our hedge book, but you will see interest rate swaps out beyond it.

[Tom Akin:]

And Trevor, just to comment on the – because we discontinued hedge accounting, everything is now going to be marked on a fair value basis, sort of below our net interest income line. And so, the amount that goes into the net interest income is just the cash settle as each of these contracts expire, so these are strings of three-month contract. So it would be very little expense against our net interest margin and then there will be mark to market for the change in value of the Euro-dollar flowing below that line through the P&L.

[Trevor Cranston:]

Okay, got it, understood. Thanks guys.

[Operator:]

Our next question comes from Jackie Earle with Compass Point.

[Jackie Earle:]

Hi guys.

[Tom Akin:]

Good morning Jackie.

[Jackie Earle:]

Good morning, thanks for taking the questions. Most of my have been answered so I really only have one. But could you provide any color on permanent versus temporary book value decline that you’ve experienced during the quarter?

[Byron Boston:]

Yeah, I’ve got – man, I’ve got a real opinion on this one, Jackie. Because I think many people sitting in your seat or the investor seats are trying to determine and compare book value changes across different companies. I believe that the book value experience – the book value deteriorate that we’ve experienced through its supply demand technicals is book value that we could really gain over time. However, if you want to compare it to the book value deterioration that it’s happened in 2013, due to duration, miss-matches in the 30-year sector, meaning where you may have thought Freddy May 3 was a five-year duration when in fact it’s actually more like a 10. Or from specified pools priced off above securities, I don’t believe that our – what took place at Dynex is very different than that situation, I don’t believe that value comes back on the longer duration asset, I think it’s gone.

[Jackie Earle:]

Okay, thank you. That’s it.

[Operator:]

Our next question comes from Mike Widner with KBW.

[Tom Akin:]

Good morning, Michael.

[Mike Widner:]

Good morning guys, how are you?

[Tom Akin:]

Good.

[Mike Widner:]

So, I’m going to echo a couple of things that Trevor said actually and then I’ll follow-up. And first, I want to say, again echoing what he said, I do appreciate lengthy presentation and I think the transparency of not only what happened but what you’re thinking is great. And so, I really appreciate that. The drawback for you guys to that is because I don’t have to ask you what you’re thinking now, I get to push on what you’re thinking and sort of question whether we should all agree with it or not. So, again following up with Trevor, I want to go to page 17. And let me just take one specific line there because as you said, everything is sort of line by line. Let’s take the A-rated CMBS spread to U.S. Treasuries. And so you went from 205 to 287, so a pretty big spread widening which hurt. So, where does that stand relative to pre-QE levels. And so, again, if the presumption is, well, you’ve seen are potentially are going to tighten back up as technicals and psychology kind of unwinds. I suppose the question is with psychology wrong before, and so again, where do the technicals and fundamental stand not relative to last quarter but relative to say, the last 20 years? And so again, where does that 287 stand relative to this, I don’t know, pick a time over the last two decades?

[Byron Boston:]

Yeah, that’s Mike, I appreciate the question. I think that’s a very important question. Let me tell you why we invested in CMBS and how we did it over the last couple of years. Spread blew out in the sector in 2011. We felt as if we’re adding assets, and this is one way of managing spread risk in a mortgage REIT, right, there is no efficient instruments to just hedge spread with to give up all your income. So, one portfolio construction or management strategy is to try to buy assets at the right spreads and to have an understanding of longer term where those spreads should be. So, if you tell me that interest rates are going to go up, let’s say, use an example. 3% are going over – I mean, sorry, 10-year is going over 3%. Then you’re telling me that economic fundamentals are getting better. And if you tell me, economic fundamentals are getting better, likewise, I’m going to move and say, I think credit fundamentals underneath my CMBS sector are getting better. And so, when I expect to see my CMBS spread widened out, I’m expecting some fundamental act, some fundamentals facts around either some type of restructure recession, some type of drop-off in overall real-estate values in the CMBS sector. We clearly leaned on the multifamily sector, there are no cash flow problems here multifamily vacancies are at all-time lows. Furthermore, the demographics for multifamily continue to be strong, and there are some additives out there, saying multifamily had a great run to be sure, that does not going to be overbuilding. The overbuilding is nowhere near in sight at this point. And so, the fundamentals for me to think about this 287 spread, where should a well-defined cash flow be versus corporates which have tightened back all the way to their tightest point Mike. I believe longer term CMBS spreads should be tighter for good credit fundamentals. And the fundamentals under the fifth sector are strong, especially the multifamily. There is a demographic trend here that is taking place, that is different than many of us who have been in the business 25-30 years now may have experienced. And we have built our investment portfolio on that thesis. So, I’m not looking at a QE, I don’t think this is necessarily a direct impact of a QE situation. And likewise, we experienced this script for spread widening because the Fed wasn’t buying CMBS. If you go to the areas where the Fed was buying, you can see that there was little more back and forth in terms of overall demand, supply balance than in the sectors where debt was not involved.

[Tom Akin:]

And Michael, this is Tom Akin. If you go to our extended presentation and go to slide 35, it has a graphic of the last 15 years, 16 years of spreads for CMBS. And as you can see there, spreads got extraordinarily wide in the ‘08, ‘09 from the credit crisis. They got extraordinary wide once again in the ‘11 period of time. But historically the spreads have been inside of 200 basis points for an extended period of time. So, that would tell you that at this level of 287, we still are at – we’re not at the way – if you believe there is another credit crisis coming and that the economic issues that we faced in ‘08 are going to return, then you could see spreads widen dramatically. If you believe that the economy is getting stronger and that the overall environment for credit is going to improve, then I think our thesis of spreads do have a good opportunity to narrow would be verified by the historical nature of that curve – that chart.

[Mike Widner:]

Yeah, Tom, I actually appreciate you pointing me to that, I hadn’t quite made it that far back in the deck yet, but that’s sort of exactly what I was looking for.

[Byron Boston:]

But we’d like to include every single one of our slides going back, but that would take this one-hour call and turn it into probably a four-hour call and I apologize for that.

[Mike Widner:]

Well, you can send that to me personally, I’ll look at it offline. I guess, part two of my question, and this is sort of a broader theme, which is, you talked about fundamentals, technicals and psychology. And I think it’s very, very important not to be unaware and certainly you guys are aware. But not to ignore sort of the magnitude of the biggest technical of all which is – or really the two biggest technicals of all, which are number one, we’ve been stuck at a zero rate, short term policy for a long time which is abnormal to say the least. And we’ve got the Fed with a multi-trillion dollar balance sheet which has created all kinds of distortions that have rippled across arguably every asset class, fixed income equities etcetera. And so, related to that, that backed up I’ll go to page nine and your whole point about things rolling down the curve. Part of why this works at least in my opinion is that you have – what I would describe as an abnormal bid on current rest ARMs and again this has a lot to do with zero rate policy. But we got current reset ARMs trading at 106 right now, or 85 basis points yields. And again, I mean, maybe my question is similar to the last one and maybe you got a slide back there somewhere that shows me current reset ARM prices. But if 10/1 ARM is a long product and so, as five years from or seven years from now, you don’t have that $106 price to anchor the short-end of the curve and they’re actually going to trade back to power. What does that do to the thesis? And again, I mean, is there a danger that we’re ignoring one of the biggest technicals of all by looking at what’s going on in the current environment and thinking that that somehow represent sustainability?

[Byron Boston:]

Mike, I’m going to take in a couple of points, because you brought up also – you brought up current resets and you brought up 10/1s. When I think of the 10/1s I don’t even think that far to the point where their current reset again, I simply just look at them as moving from a 10/1 to 7/1, we’ve got a couple of points in that. And what this provides, by focusing on assets that do this Mike, we think of them as shock absorbers. Shock absorbers that add value to the portfolio over time, and so, I’m going to always want an asset that does that in contrast to – let’s call it a 30-year 3%, it doesn’t roll down the curve, but actually rolls up the curve. And then that process of rolling up the curve is a huge amount of declamation of book value that generally doesn’t come back, especially when rates are slowing, I think, so in the future they normalize and the rates would be higher. So, I’m thinking of 10/1, I was just thinking of the benefit of just rolling down to 7/1. Tom brought up another point which is the 7/1 spread curve, the actual ARMs spread curve is actually upward sloping also. And so, the benefit of just taking those roll-downs also the additional benefit of what we’ve shown on slide nine. So, we view them as a shock absorber. So it is impossible for us to predict every single future event. And as such, I’d like to have certain things in my portfolio that over time best by shear construction will continue to create value. So then, we look at the shorter reset paper and we say, well, where should a bond like that be priced, it’s a short duration bond, it’s like a money market instrument, reset either every six months or every 12 months. And so, it’s been – it’s benefited definitely by a lower short-term interest rates, at some point, the short-term of the curve will move. It would be necessary to have hedges on those that part of the curve to deal with that type of an event when it does occur. Short-term ARMs will be just like two-year or a one-year T-bill. You’re going to need to hedge those assets at that time. One of the highest probability events that always we look to the future is that we’ll have a speed curve. I don’t believe that the global economy can handle yield curve in the U.S. for sometime into the future. And as I said, our overall portfolio construction is not static. If we think the speed curve goes away then we’ll have to adjust.

[Mike Widner:]

Okay.

[Byron Boston:]

And let me just be real clear. We already anticipate – and I’m going to be real clear, because we talk about this a lot. We talked about it in our last presentation, we talked about it in the last conference call, we gave you couple of examples. We said, one thing for certain is going to happen. QE3 is going to end. But we’re not cool when it’s going to end, it hasn’t ended yet and bestselling is not going end for at least another 12 months, it’s just a psychological reaction to it. And I think over the next several months, what you’re going to see is effect, continue to pump cash into the system. So, we identified that in our past. We also identified another period, that’s the period between QE3 ending and when the Fed starts to taking short REITs. We call that kind of the eye of the storm, expecting the steeper yield curve, higher potential return opportunities for reinvesting capital. And then the third situation was whenever, sometime out in the future, the Fed starts to drain reserves. When I know a bearer market and I’ve traded every bearer market since ‘86, the Fed is either been draining reserves or about to start draining reserves, that’s not the case right now that makes this environment very uncertain. But at some point in the future that will happen Mike and we will have to adjust our hedges. This part of the strategy that is a portfolio management and that’s what I would call that – the steps we would have to take in that point on it.

[Mike Widner:]

Well, thanks. And for what it’s worth, I tend to agree with you if you were the world. But, like I said, by laying out for quarterly what you’re thinking is, it kind of forces us to push on your thinking. So, again, I appreciate that you guys are very clear about what you’re positioning for. I don’t want to quote that that’s your making but the thesis underlies the portfolio of construction so that’s helpful to me and it’s helpful to investors. And thanks again.

[Byron Boston:]

Well Mike, I appreciate you – we’re putting it out there because we want you to understand exactly what we’re doing. We’re doing it for very well research logical reasons, and we do understand this and we could have more conversations offline. But we do want all of our investors and analysts understand why are we constructing our portfolio and how we look towards the future.

[Tom Akin:]

And Mike, and let me make one final comment. One of the questions in the last quarterly conference call was what are the things I worry about the most? And my comment was that if rates stay low for an extended period of time, because our portfolio throws off so much cash and rolls down the yield that if rates stay low for an extended period of time, we are going to face an uncomfortable reinvestment environment. It’s interesting to note that now we face a much better reinvestment environment and possibly and even better reinvestment environment into the future. And I just want to point out on slide 13, that a quarter of our portfolio is going to roll off in the next three years and we have the option to reinvest that capital anywhere out in the yield curve that we want. While we have not invested in longer dated securities, 15 to 30s, it’s been because we knew this environment was going to come. That doesn’t mean that we won’t ever invest in those securities we well might do that. But we’re going to find an entry point that’s attractive to us.

[Mike Widner:]

Well, thanks again guys. I definitely appreciate it.

[Byron Boston:]

Thank you.

[Operator:]

Our next question comes from Douglas Harter with Credit Suisse.

[Douglas Harter:]

Thanks. Byron I was hoping if you could walk through – if you’re hearing what you’re saying that you think spreads are sort of temporarily wide, sort of tightly square that with the comment that you would look to take leverage down slightly from here, why not take advantage of that and sort of operate towards the upper end of your range for a while?

[Byron Boston:]

You know what, Doug, that’s a very, that is one of the challenges that we’ll face. The big issue here is not a bold market or a bearer market, it’s the volatility and the uncertainty that’s creating the volatility. So, we believe we’ll have good opportunities to invest money. But I think at two week, we get a little more clarity, I do think we’ll have better clarity as we move into the fall of September, October, November, I think we’ll get better clarity around the economic fundamentals, I think we’ll get better clarity around rates. And more importantly I think we’ll get better clarity around, really what is the mortgage market going to look like in terms of overall supply and the impact of the Feds, even if they do reduce the amounts of purchase in each quarter. What’s the impact to them in that environment? So, we think it’s prudent to stay focused here on that leverage number. We weren’t forced to have to do, we weren’t really in a force situation, there were four sellers in the second quarter. Our lower leverage allowed us to be able to manage through their process in a very calm thoughtful fashion. And so, what does the more leverage do, it allows us to say, okay, let’s crank it up for an additional dividend yield. And so, we’ve always said, we were six X leverage and if you wanted to compare our dividend yield to some of the other players the head are, just turn our leverage up one tie, go to 7X to 8X, and you’ll get the same, in fact, you’ll get higher, you would have gotten higher return if you look back probably a year or two. And we chose to stick with the 6X leverage to try to make sure that we’re prepared for uncertain events. And as such, that’s what our focus. And we get more clarity in the market, I think that gives us more leeway to think about where we place risk and taking more risk or lesser risk.

[Douglas Harter:]

Thank you.

[Operator:]

Our next question comes from Jason (inaudible) Investment Management.

[Unidentified Analyst:]

Good day.

[Byron Boston:]

Hi Jason.

[Unidentified Analyst:]

Just along those same lines, can you give us a little more clarity around the decline in interest spreads from 1.89 to 1.75, because that the asset sales and just kind of decompose that little bit for us relative to your strategy through the quarter.

[Steve Benedetti:]

Hi Jason, Steve Benedetti here. Most of the reason for the decline it’s just two fold or it is small amount in the decline in spread was from a slightly higher prepays during the quarter. But most of the decline was due to assets that we added during the quarter, we added roughly 600 million assets at a weighted average coupon or weighted average yield of just north of two. So, when you’re adding that into the prior book, that has what brought our asset yields down more than anything else.

[Unidentified Analyst:]

So, just to be clear, you added lower yielding assets in an environment where generally yields were higher?

[Steve Benedetti:]

Well, we…

[Byron Boston:]

No, that was before.

[Steve Benedetti:]

Yeah, we added the assets at the beginning of the quarter. You may recall we issued a preferred stock at the beginning of the quarter and those proceeds were deployed. Really, pre-funded if you will, pre-deployed in some in March and then some in April. So, it’s more at the beginning of the quarter than the back-end of the quarter.

[Unidentified Analyst:]

So, basically it was due to timing of the capital raise and then timing of the investments that you have made that was sort of the driver?

[Steve Benedetti:]

That’s part of it and then of course our portfolio is prepaying about $80 million a month. So, over the course of three months we’re adding couple of 100 million in assets from just reinvestments.

[Byron Boston:]

And then also on that point Jason, that early in the quarter when we added – when we were adding the assets, we were at a point where the Fed wanted more re-finances, the White House wanted more re-finances, I had spent a fair amount of time in Washington, it was a massive effort to get more re-finances out of the system. And our re-financing speeds were moving up. And so, when we looked at relative value at that point in time, we felt it necessary to diversify further our overall coupon distribution within our hybrid book. So, we don’t have this in here but if we showed you the coupon distribution you’ll see that that kind of balanced off, try to help us in case we did get a rapid move down in rates and that was really in March-April time period.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Our next question comes from Jay Weinstein with Highline Wealth Management.

[Tom Akin:]

Good morning, Jay.

[Jay Weinstein:]

Hi, how are you guys?

[Tom Akin:]

Good.

[Jay Weinstein:]

One kind of quick statement that I want to make sure I sort of have correctly and to see if it fits in the lot of the questions that people have been asking. So, I think the – yeah, I think the surprise is not in effect that your book value took those significant decline but the magnitude of it, certainly since the end of the first quarter and maybe even the magnitude compared to some of your peers. Obviously, 15% in one quarter is not something everybody really talks about knowledge real well. So, the question is, the driver of that, I would say intuitively I would have guessed before yesterday’s announcement somewhere in the pie that 10% range. And is that basically because compared to your competitors you just added a lot more CMBS exposure and those credit spreads widening essentially hurt you more than the competitors.

[Tom Akin:]

Let me, let me answer that a little bit, I know Byron wants to chime in on this as well. But if you recall in the first quarter, our book value actually increased about 3%.

[Jay Weinstein:]

Right.

[Tom Akin:]

And most of our peers saw our book value decline in anywhere in the 10% range, some of them even more than that. And you’ve seen that consistently play out in the second quarter with anywhere from oh gosh, 15% to 20% declines, I think hatter has got 22% decline for the second quarter. I think you got to look at the cumulative decline year-to-date and cumulative, our decline is 13%. I think if you put that up with everybody else, you’ll find that it’s actually quite good. Now, that being said, the decline that we’ve had, again is broken down in the presentation quite well, $0.50 of it or 5% as you pointed out was from interest rates and the fact that they move dramatically higher. We have very low extension risk but we do have some extension risk and that is going to create duration of widening which is going to create more volatility. The second part, the credit spread widening was what really caught us a little bit off guard, because one would think, if rates go up the economy is improving, therefore credits should be getting stronger and narrower. We believe that we’ll eventually play out but for the time-being there was an absolute sort of unwillingness by anybody to buy bonds to June 30. Now the magnitude of the move from Benedetti comments May 22, is pretty striking and created a very illiquid and possibly illogical pricing structure which we think will straighten out. So I guess simply put, yes, it was because of the CMBS and that we had a ton of it. It didn’t affect us in the first quarter because we didn’t really see the spreads widen in the first quarter. But the timing of the June 30, mark to market. And again, I just want to point out, that is a point in time that is just one day that we had to price everything and in the uncomfortable-ness of that environment prices I think might have been a little lower than they might normally be. Byron, why don’t you ride ahead?

[Byron Boston:]

I think that was excellent Tom. I’m just going to add Jay just couple of the facts which is on that spreadsheet on slide 17, you can see, CMBS really did take a much heavier broader widening than other sectors. And it was unusual on a relative value scale. Likewise, in the ARMs sector, you had a similar type of movement. On a relative scale, it’s unusual to see that type of moving, except for understanding the technical supply imbalances.

[Jay Weinstein:]

And I understand and the truth is from what I said, you guys didn’t really disagree with me and I just like I said, I want to make sure that I?

[Byron Boston:]

That’s correct. And I’ll tell you one of the other reasons I put this spreadsheet on here Jay, one of our goals today is trying to get you, every investor, especially our long-term investors to really understand or better understand in what we’re doing and how to track our book value. I’m hoping that what you’ll do is take that credit spread chart and just track those spreads over time. You’ll have a pretty good idea of what’s happening to book value. Likewise, at the end of the first quarter, I had several people approach me and say, oh my, I’m surprised about your book value. And I’d say, all you have to do is track the spreads. There is CMBS IO, there is CMBS SA ready traunches, CMBS AAA paper, there is Hybrid ARMs. If you track those spreads you’ll get better idea in terms of where being able to track the overall book value.

[Jay Weinstein:]

Thank you. That’s helpful. And then, as the previous caller commented to the – in terms of the capital rates with the preferred is under reinvestment. That was just simply bad timing, I mean, I assume the assets that you added at that time also – also didn’t help, I assume they were not quite?

[Byron Boston:]

No, Jay, no, no.

[Jay Weinstein:]

No, it’s not there, okay good.

[Byron Boston:]

No, let me tell you what happened here Jay. As we move again, I was trying to explain that a second ago. As we moved into March, and moving into April, the White House wanted more re-financings, they were trying to get a mill right in, and they were pushing hard but every single borrower in the country to re-finance. The Federal Reserve Bank with the biggest balance sheet wanted more re-financings and they are trying to push the mortgage down. Interest rates were moving lower, we were at a point where things – prepayments were moving higher. So, over the last five years, they actually were – if you’d look at Washington, they were doing a pretty effective job of pushing and broadening the base of borrowers that were re-financing. What we did was, the same thing we’ve done every other step as rates have come down, as we diversified our book further to ensure that we had some balance of some lower coupon bonds, we didn’t take the lowest coupon bonds. But we did take some bonds that were less as we would call it, less in the money to try to balance our higher coupon securities.

[Jay Weinstein:]

Okay, that’s helpful.

[Byron Boston:]

This is a diversification move.

[Jay Weinstein:]

Okay. I want to thank you, I appreciate it.

[Operator:]

(Operator Instructions).

[Byron Boston:]

Operator, I think that’s fine. Why don’t we move to conclusion here.

[Operator:]

Sure, thank you.

[Byron Boston:]

All right. Well, I would like to thank all our shareholders for participating in the call today. We’re clearly at an inflexion point in the interest rates and the direction appears to be uncertain but very positively could be higher. We continue to believe that we’ve got the strategy and the portfolio to perform in this environment. And as we look forward, we expect to see more clarity in the lot of the questions about rates and credit moving forward. And we look forward to next quarter earnings call. And we want everyone for attending today. Thank you.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.