Release Date: October 21, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Dynex Capital Inc (DX, Financial) reported a 7% economic return for the quarter, showcasing strong performance in a challenging market environment.
- The company announced a 15% increase in its common dividend, reflecting confidence in its ability to deliver shareholder value.
- Dynex Capital Inc (DX) is strategically positioned to capitalize on favorable market conditions, with declining funding costs and a steeper yield curve.
- The company has a disciplined investment process, leveraging deep expertise in managing mortgage-backed securities and adapting to market changes.
- Dynex Capital Inc (DX) raised $56 million in new capital, maintaining ample liquidity to take advantage of market opportunities.
Negative Points
- Mark-to-market book value decreased by about 1% at the quarter's end, indicating some pressure on asset valuations.
- The company faces near-term event risks, including potential market volatility from the US elections and geopolitical developments.
- There is ongoing volatility in the repo market, which could impact financing costs and liquidity management.
- Prepayment speeds in higher coupon mortgages could affect leverage and hedging strategies, requiring careful management.
- The company must navigate potential challenges from the Federal Reserve's quantitative tightening and regulatory capital constraints affecting repo rates.
Q & A Highlights
Q: Can I get an update on mark-to-market book value?
A: Smriti Popenoe, President and Co-Chief Investment Officer, stated that the mark-to-market book value is down about 1% this quarter end.
Q: What factors are you focused on for potentially increasing leverage?
A: Smriti Popenoe explained that the primary considerations include near-term event risks such as the election season and market volatility. Economic considerations like marginal ROE and spread levels are also important.
Q: How does the switch from treasury hedges to swaps impact the net interest margin (NIM)?
A: Smriti Popenoe noted that the switch allows them to earn an extra 40 basis points and lock in forward financing costs, which is favorable even if the Fed does not cut rates.
Q: How would an increase in prepayment speeds affect your approach to leverage and hedging?
A: Smriti Popenoe and T.J. Connelly highlighted that despite faster prepayments in higher coupons, the portfolio's specified pool holdings mitigate impact. They see opportunities across the coupon stack and in Agency CMBS.
Q: What are your thoughts on the volatility in the repo market and its impact on mortgage repo rates?
A: Smriti Popenoe explained that repo rate spikes are due to balance sheet traffic jams at quarter ends, not liquidity issues. The Fed is monitoring these conditions closely, and the market remains healthy.
Q: How are you positioning the portfolio in anticipation of potential rate movements due to the upcoming election?
A: Smriti Popenoe and T.J. Connelly stated they are prepared for volatility with liquidity and leverage capacity. They anticipate a terminal Fed funds rate between 3% and 4% and are focused on the yield curve's shape.
Q: How does the current bull steepening scenario affect portfolio performance?
A: Smriti Popenoe mentioned that their portfolio performs well in steep yield curve scenarios, benefiting from the opportunity to earn carry.
Q: How does the dividend increase affect your capital raising strategy?
A: Smriti Popenoe emphasized that the dividend increase reflects confidence in generating returns exceeding the dividend level. They will continue to assess capital raising based on macro conditions and investment opportunities.
Q: What form of capital raising do you find most attractive in the current environment?
A: Robert Colligan indicated that the ATM program is likely to be the primary source, but they remain open to block trades if priced attractively. They aim to raise capital at or above book value.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
