Robert Cauley - Chairman and CEO Hunter Haas - CFO.

David Walrod - Jones Trading Christopher Nolan - Ladenburg Thalmann.

Good morning. And welcome to the First Quarter 2018 Earnings Conference Call for The Orchid Island. This call is being recorded today, April 27, 2018.

At this time, the company would like to remind the listeners that statements made during today’s conference call relating to matters that are not historical facts are forward-looking statements, subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Listeners are cautioned that such forward-looking statements are based on information currently available on the management’s good faith, belief with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements.

Important factors that could cause such differences are described in the company’s filings with the Securities and Exchange Commission, including the company’s most recent annual report on Form 10-K.

The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. Now, I would like to turn the conference over to the company’s Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir..

Thank you, operator. I hope everybody had a chance to download our slide deck off of our website as we have in the recent past and the earnings call basically consistent, I mean walk you through the slide deck and at the end of the, of those comments, we’ll open the call up for questions.

I’ll start with slide 3, which is a table of comments, this is basically an outline on how long going to proceed today. As is always in case, we’ll start with just a quick overview of our financial highlights for the quarter.

And then to really give us an understanding of what happened to, in the markets, what happened to us for the quarter, how we see things going forward. We’ll discuss market developments then we’ll briefly go to our financial results, we’ll touch on the portfolio of characteristics, our hedge positions, our funding positions.

And then we’ll go to an outlook and strategy section, I’ll give a very brief overview of our history, simply because I think it’s meaningful this juncture. And then we’ll take a look and how we see things going forward and how we’re positioning for what we see on horizon. Turning to slide 4.

Our financial highlights, we had a GAAP net loss of $0.31 a quarter, per share for the quarter. As usual, this includes our mark-to-market gains and losses. We had losses, net losses for the quarter of $0.72. This includes premium loss due to pay down under our accounting treatment. We do not use a straight-line amortization method.

We take all of the amortization of premium through gains and losses and that was approximately $0.903 for the quarter. The net of all of this is earnings per share of $0.41 excluding these realized gains and losses. Book value for the quarter at the end of the quarter was $8.9 such a decline of $0.62 or 7.1%.

We pay dividends of $0.31 for the quarter and this resolved in an economic return of minus $0.31 or 3.6% for the quarter negative 14.2% annualized.

Now, I’d understand, why these results and we get up sense of what this meant for us in the market and how we positioned going forward, I’d like to go into the two primary markets that affect mortgage portfolio. The first is the rate market, interest rates, it’s swap and of course the second one is mortgage backed market itself. Starting on slide 6.

On the left-hand side of the page. This points to one of the two primary developments that took place during the quarter. As you can see rates were both higher. The red line represents the level of rates on the treasury curve at 331, the blue line is at year end 2017.

So, you can see that rates moved higher in the case of the 10-year treasury approximately 35 basis points but the rates were higher on the front end.

If you look at the slop curve, you can see this development was even more pronounced especially on the front end, some of this was due to some developments in the [indiscernible] social funding markets, we will discuss that a little more in a few minutes. But obviously rates were higher for the quarter.

Looking more specifically at the 10-year point of curve on slide 7, on the left side you see what happened in the quarter both in the US treasury -- tenure to US treasury and the dollar swap. Obviously, both were up in the quarter, although they both finished below their peak which occurred in February.

But in order to get a little more perspective, we have included a slide on the right-hand side of the page which go back two years and two years is a very convenient time period because it shows a lot of meaningful developments that have taken place and gives you the perspective of where we are today.

In the case of the treasury as you can see in the middle of 2016, after the surprise Brexit vote, the 10-year treasury closed on June 3rd is the lowest level ever. That’s a meaningful statement and made for a very challenging market at the time.

That’s started to change in the fall of 2016 with the surprised election result the Trump administration came into power, rates slowed up meaningfully. There was a lot of optimism and enthusiasm for the markets. Trump was assumed to be a very pro-market.

This enthusiasm waned as we moved into 2017 primarily because the Trump administration did not have much success. Their first legislative agenda item was healthcare reform and it failed. However, late in 2017, things turned around. They passed a tax package and then a funding package early in 2018.

The bottom-line is that interest rates have moved an awful lot close to a 100 basis points from the low of 2016. Now let’s turn to the slide 8 to talk about what I consider the most meaningful of the developments in the quarter, especially so for levered fixed income investors. What we see here on the top chart are two items.

The top one is the 30-year treasury and the second one is the five-year treasury over the five-year period, basically the five years of our existence but also very interesting timeframe when you consider what’s happened. Looking at the bottom, you see the spread between those two rates.

If you go back to the 2013 in the left, that’s the time when the taper tantrum. The spread in the curve was substantially high, almost 254 basis points. Fast forward till today, at the end the third quarter its 41, today it’s much less than that, we are in the 30s.

That’s a meaningful development for fixed income investors, especially levered investors. That’s a decline of over 200 basis points. And developments like that have ramifications. Turning now to slide 9, we will look more specifically at the mortgage market. In the top left you Fannie 4s and 4.5s.

These were and have been for some time our two primary holdings. And as you can see, there were significant price movements. In the case of 4.5s they went from a mid-$106 price to a high $104 price. So, in our province we say there was a handle -- two handle changes from 106 to 105 and 105 to 104. That’s a lot for a quarter.

In the Fannie 4s, similar developments. At the bottom left we show the dollar roll market. As you can see dollar rolls have become quite healthy at the end of the third quarter. This basically reflects of another thing the fact that these two coupons, while previously being very high coupon premiums are now the production coupons.

As a result, there is a lot more focus in the coupons, the cheapest to deliver is a much greater concerned to the market and those rules reflect that. There are some other developments we will just like to dull our markets as well, get to those in a moment. On the right-hand side, we see the pay specified pools. As you can see, it’s quite volatile.

But one thing, I do want to point out in the top right in the case of 85k Max pool is even though rates at the end of the third quarter were at or near the high of this 5-year period, these pay apps are not, they’ve been quite resilient.

And they reflect the fact that prepayment concerns are still at least people willing to pay for them, even if realize speeds or quite well.

On the bottom right, we see the payoff for a new security and this is just really here to give you some perspective of the range and payoffs for the various forms of call protection from the worse which will be the new to the highest, which is 85k. Well, [indiscernible] we go into some developments in the quarter specifically.

At the top, this was a very interesting development that occurred. That was in the short-term funding markets. You see two lines there. One is a green line, one is blue. The green lines reflects the spread between three months LIBOR and three months OIS. OIS is overnight indexing swap, it’s a proxy for fed funds features.

So basically, it’s the markets pricing of expected the movements in Fed funds. Typically, these are highly correlated in this spread is relatively stable. As you see it moved quite substantially in the quarter crested at nearly 60 basis points has since come up to around 53.

And the reason that just did so, was there were short-term funding pressures, which impacted much of all the short-term funding markets, but mortgage investors as well. The reason, we had so much pressure several factors were mentioned.

On the one hand that most recent tax legislation resolved in corporations repatriating funds have been stranded overseas. Those funds were source of supply of cash into the short-term funding markets. To the extent they are repatriated and not lent out anymore, you decrease the supply of cash.

At the same time, the treasury, because of the tax package is running larger deficits. The government has opted to fund a lot of that in the short-term treasury build market. So, you had substantial supply of builds or demand for money. In the case of March, it was very high, most of the bill options in March were the largest ever.

Of course, that’s March, we move into April, the government is now taking in funds for tax collections. Those bill options have shrunk in the short-term -- that once short-term funding pressure is removed. That was really beneficial the movement in LIBOR for us. Because, there is a lot of your dollar shorts payer swaps and swaptions.

And we would see three months floating back. So that was very beneficial for our hedges. So, the second line there is our funding cost, that’s a repo. As you can see, it also spiked around quarter end and that had an impact on the mortgage market obviously, because that’s how people such as ourselves fund our positions.

It pressed it over quarter end, it’s also year-end in Japan, has since come up, never quite out to the extreme levels that we saw in the LIBOR market. Turning now to the bottom of the page. If you look at the performance of 30-year fixed rate coupons 3s, 3.5s and 4.5s.

The data we have here is their performance versus their hedge ratio using JPMorgan's head ratios. As we mentioned the curve flattened substantially, shorter duration mortgages, which were the higher coupon mortgages did very poorly hence our hedge ratios.

The other hand longer duration mortgages did much better in the case of 3s as you can see, they still had really mediocre performance in that, they underperformed their hedges but they did far better than higher coupons.

So, what is this -- what is the consequence of this? Well using data from Goldman Sachs, the agency mortgage market had a return for the quarter of minus 1.6%. That’s the first quarter result, worst first quarter result in over 20 years.

We also had a spike in vol during the quarter, volatility is obviously a bad thing for mortgages because we’re short of prepayment option. So, you have mortgage widening, a flatting of the curve and an increase in funding cost. All of these conspired to impact in a very negative way the mortgage universe. Now I will touch on our financial results.

Slide 12, on the left-hand side this is just a decomposition of our earnings per share between realized and unrealized gains and basically everything else which is the net interest income of the portfolio less our expenses. As you can see asset, the gains and losses of negative $0.72, we earned $0.41.

On the right-hand side, we show the decomposition of our returns by the two sub portfolios that we run. The pass-through portfolio as you can see had a negative return of 720 basis points. Realized and unrealized gains and losses were negative 87.5 million.

Our derivative gains of almost 41 million were not enough to offset those and we suffered a negative 720 basis point loss.

The structured securities which are our hedge instruments amongst in addition to our rates hedges, generated a positive return of 640 even though that number is relatively close to 720 because the capital allocation was skewed towards pass-throughs, the resulting return was negative 3% for the quarter.

And as I said that generally reflects the bias towards pass-throughs. Turning now to slide 13, we look at spreads. Interest rates on our portfolio or the yield on our portfolio versus our hedged funding cost.

If you look at this chart on the far-right hand side, you can see that as of the third quarter of -- the first quarter of 2018 the yield on the portfolio was 427 basis points. That’s the highest yield our portfolio has ever had throughout our history. Unfortunately, our funding cost is 203.

That’s also the highest with the experience in the life of the portfolio. So, our net interest expense is 224 basis points. If you look to the left specifically September of 2014 you can see that the spread was 329 basis points. That’s the highest we’ve ever experienced. It’s since come down to 224.

Looking to the bottom of the page, you see our dividend. Not surprisingly at the time that our net interest spread was the highest our dividend was a lot higher than it is today. The fact that the dividend has come down merely reflects the decline in the net interest spread in the portfolio.

Turning to page 14, we will look at the numbers in terms of earnings per share. The top-line the red line is just the earnings per share absent gains and losses. And as you can see, it’s been declining as the curve has been flattening. Once again, if you go back to September of ‘14 you see that we earned $0.66 in that quarter. We are not at $0.41.

That decline is consistent in relative terms what’s happened to the dividend. So, what have we done, position and to adjust the portfolio to reflect what’s going on in the market. On slide 15 we show you the capital allocation. We will get into this in greater detail in a few moments. But just to point out some highlights.

We have increased the allocation to the structured portfolio, which is the more defensive portfolio from 26.5% to 35.4% and reduced the pass-through portfolio accordingly. The capital deployed in the pass-through portfolio has dropped from 336.6 million to just under 271 million and the structured portfolio has dropped from 121 to 148.

On the right-hand side, we provide a roll forward. As you can see the beginning and ending values of portfolio and the components of the changes to each. Now we’ll talk a little more detail about the portfolio, about where it's today or as it was at the end of the quarter and where we see it going forward.

On slide 17, we show the composition of the assets, the portfolio, obviously if you look at the IO component it’s higher. With respect to the fixed rate portfolio, it really hasn’t changed much as of this point in time. The weighted average coupon, which is in the second to the last call among the right was 427 basis points that fell slightly.

The far-right column shows our prepayments speeds, we realized on the pass-through portfolio approximately 7.5% CPR, that’s in April for speeds pertained in March. As you would expect with rates much higher speeds are very subdued and our prepayment speeds have remained in the upper-single-digits for some time now.

Slide 18 just gives you some long-term perspective on our capital allocation. Top left just shows structured versus pass-through and each subsequent slide just breaks that down a little bit more granularly, that’s just some perspective. On slide 19, couple of things here.

Our repo balance, as you can see, we have a number of counterparties, they’re diversified, our funding is very diversified. So, the institutions, we have a lot of domestic institutions, European institutions and Asian institutions. On the right-hand side, we show you the trend on our leverage.

As you can see at the end of the third quarter, the first quarter was 8.5. Today, that number is about 7.8. So, it has started, this downward trend has continued. Slide 20 goes through hedge positions.

And with this flat curve, that requires a different type of positioning and the one primary difference versus maybe where we were in the past was that our hedge coverage ratio in other words the notional amount of our hedges versus our funding is at approximately 100%.

So, we have been taking steps to increase our coverage, this is the fact of rates are higher and our funding costs have continued to rise and may continue to rise. So, our liabilities are essentially covered 100% as of the end of the first quarter. Turning to slide 22.

As I said, I wanted to give a brief history of our company not that it’s -- I’d like give a history lesson, but I think it’s relevant to gain perspective of how we see ourselves today given these developments in the market and what they mean going forward. When we do the IPO for ORC 5 years ago.

We were faced in the time, in the more or less the aftermath of financial prices, which had a profound impact on the market, interest rates were at lifetime lows, had been for some years. The mortgage finance industry had been meaningfully impaired by the crisis.

And this meant that the refinance function if you will in the mortgage universe was very muted in other words borrowers response to refinance was much lower than it has been historically. And this drove how we positioned our portfolio by that, I mean we positioned our portfolio to take maximum exposure to prepayment risks.

So, we owned a lot of high coupon fixed rate mortgages. We owned a lot of an aisles. Given the fact that the refinancing was so muted, we had very high realized yields with this portfolio. This was particularly the case in the first quarter of 2014 when we did our first secondary offerings.

This is at the end of the taper tantrum and rates had risen substantially. So, this was when it all started. This is how we positioned the portfolio. And this allowed us to pay a very high dividend relative to our peers.

This high dividend stream which we’ve had up until very recently, allowed the stock to trade for long periods of time at a premium to book. Now when you start out as a very small REIT, in our less than $50 million market cap, the early phase of growth is the most challenging.

Typically [REITS] in this growth phase through very, very expensive secondary offerings, very dilutive offerings. Because of the positioning of portfolio and we had a high dividend stream, the stock often traded above book value.

This allowed us to utilize our aftermarket program so that we could not only issue stock at a very low-cost relative to a secondary, it also allowed us to do so accretive to book from those for that period. As a result, we were able to grow from a $50 million market cap company to nearly 400 million.

If you look on slide 23 you see that the stock relative to the red bars which represent our book value traded above book for most of our history. This allowed us as I said to take advantage of the ATM. In contrast, if you look at slide 24, the blue line is here is Orchid stock as a percentage of book value, the red line is that of peers.

The peer group is listed on the bottom of the page, it AGNC, Anworth, Armour, CMO, Cyprus, Dynex, MTGE and WMC, for the most part, traded below book. As a result, when you look at slide 25, we were able to raise capital throughout this period, for most of this period. Other than a short period in 2017, most of our peers were unable to do so.

So, this allowed Orchid to grow at a time when by and large the market was close to other agency REITs it allowed to reach a certain level of critical mass and in a very efficient way to have very low cost of capital.

And allows us to be much better position going forward than we probably would have been otherwise as we have the same capital rating experience that our peers have had. But now let’s look and see what the world looks like today. If you turn to the next slide, a couple of things just to summarize what’s happened.

As we mentioned in the first quarter, at the top left we show volatility slide, so we had spreads and mortgages widened. Funding costs have risen dramatically. Volatility was at its all-time lows and was reversed. The term premium in the market is multi year low, 10 year low. And we may finish the prospect with continually flattening of the curve.

So, what does this mean? Well it means that we have to take a different look at how we position the portfolio. As I mentioned, our hedge coverage is at a 100%. The opportunities in the market are no longer at the long end of the curve. They are more in the belly of the curve or even the three to five-year period if you will.

And so while we haven’t done much of it on the asset side as of quarter end, since then we have -- Hunter in a moment will give you some of the details of that in terms of exactly what happened, but suffice it to say that we are repositioning the portfolio to position for this curve environments which we suspect to be this way for a quite a while.

We have very little term premium funding costs are probably likely to rise the curve is flat returns are not all that great. We positioned the portfolio accordingly, it has had a negative impact on our earnings, but we’re hopeful that we’re able to maintain the stream. What are the risk to that.

Well going forward, the curve could continue to flatten, some of the developments have light have probably influenced that, growth moderated in the first quarter, not just in the U.S., but in Europe. The spread between 10-year treasuries and 10-year bonds has gotten quite wide.

And prospects for growth at least for now or somewhat less and they were not so long ago.

If that were to change and growth starts to reaccelerate and that spread in the long end of the curve between domestic and foreign yields starts to compress we could see it move higher in longer term rates, so that would bring within a rising volatility, which would be beneficial from our perspective as an investment, because mortgages might cheap enough some, that would be a positive development.

On the other hand, if we have a continuation of a flattening trend, it will continue to be a challenging investment environment. So, in short, going forward the shape of the curve will be critical, mortgage spreads and volatility will be key to determining how attractive or reinvestment opportunities are.

In the interim, we have positioned ourselves to do as best as we can in this environment and we just kind of wait to see how it plays out. And Hunter, if you want to give a brief overview of what we’ve done in the portfolio and a lot more detail and then we’ll open up the call for questions..

So just, I think we’ve been over some of the details n, as far as a portfolio change in the first quarter. And I will just highlight that, a lot of the focus there was adding negative duration both in the hedges trying to improve the [indiscernible] profile of the portfolio into a rising rate environment.

And the substantial increase in our swaption positions were long, shorter one year and with tails in the long end of the curve, mainly but not in 10-year part of the curve. We added a fair amount of IO in the first quarter and into the second quarter.

So those are largely, I think they’re all actually, IOs off of 4% coupon MBS some of the jumbo mortgages, some or just as we brought an excess servicing deal to came out as well. The focus there as we think, while IOs are certainly on the tighten into the spectrum.

We feel like the speeds that they have been, speeds in the first few months of this year don’t reflect, what we feel like the speed will be in the current rate environment. So, they’re still paying double-digits and are now out of the money versus where borrowers can finance their homes now.

So, they’re no longer re-financeable or at least not re-financeable to a point where it would make economic sense to do so unless you’re taking cash out or moving or something to that effect.

So, with respect to the rest of the portfolio, the past of the portion of the portfolio we’ve been focused on selling longer duration again bonds that are going to perform poorly into the next 50-year 100 basis points increase in rates.

Some sold approximately $565 million worth of securities that we modeled would be decreased by about 5% and up 100 [REIT shock]. And we’ve replaced those with IOs and short pass-throughs and structured securities to the tune of well roughly the same amount 555 million that we purchased versus 565 million that we’ve sold.

The duration on those are much lower. The yield is marginally lower but the risk adjusted return we feel like is much better. So that’s going to be a continue -- where we’re going to continue to focus to the extent that we continue to shift the portfolio be it similar types of assets.

Up a 100 shock when I looked at on what we’ve added versus what we’ve sold is what we’ve added we expected would be down 1.75% and up a 100 shock versus what we sold as I mentioned be like -- more like down 5%.

So that is going to be the focus going forward and we had too much detail as to what exactly we’re behind because we probably want to continue to buy a bit more of it. But with that, I’ll turn it back to Bob..

Thanks, Hunter. Operator, I think at this point, we’ve concluded our remarks and we can open the call up to questions. .

[Operator Instructions]. Our first question or comment comes from the line of David Walrod from Jones Trading. Your line is open. .

Your leverage, you mentioned that it ticked up a little bit in the first quarter as you said now more like 7.8 and in written commentary you’ve mentioned that leverage will continue to come down.

Where are you targeting leverage going forward?.

We don’t have a specific number in mind but I would say the high 6s is probably a stretch probably 7 would be -- that one -- we don’t really look at it with a number in mind.

It’s more with the composition of the portfolio with the model sensitivity of the portfolio and then to the extent it will have to be tweaked to get it to a number we’re more comfortable with we adjust it. And that involves allocations between pass-throughs and IOs to the extent we added more towards IOs since they’re not levered it will come down.

It usually falls out of the allocation decision, if we’re at to fund a specific target where we sit down until we’re going to get to this number. But I think 7 is probably a reasonable range plus or minus. .

You might note in the presentation with the leverage at quarter end was 8.5 we had I think net 130 million of securities that had not settled but had already been sold. So, the risk if you will at quarter end was lower than what’s represented here. If we had to adjust that number, it would be somewhere like 8.1, 8.2..

Can you give us some thoughts about where book value is today relative to the end of the quarter?.

We don’t have a specific number but the positioning that we’ve taken has shown up in the results. So, we mark our portfolio on a daily basis that we’re using a pricing service. So those marks are not the same as we might do for quarter end. But so far, I would -- ballparking it $0.05 to $0.10 down. .

Okay.

And then I guess my final question will be your thoughts on the share buyback that you referenced in the -- in your commentary?.

Yes, we would -- we wanted to use that. It’s an efficient use of capital to the extent we are able to buy shares back at a meaningful discount. I don’t know what the stock will close today but in the last month or two, the stock was trading north of, comfortably north of 90% trailing book.

And we didn’t really view that as all that attractive, we actually expected after the last dividend cut at the stock would trade at most substantial discount, but it hasn’t. So, it’s on the table, we have an allocation for up to 10% of outstanding shares.

And as the stock trades, I think, someone mentioned on our last call, we first introduced they said what's your threshold, and we were saying something around 90% or high-80%, that’s probably still the case, the stock as of yesterday was not trading there. It was several percentage points above there.

So, I guess the answer is the same going forward, we will use it. But we prefer to maximize the benefit of the program by doing it at a more substantial discount to book. .

Our next question or comment comes from the line of Christopher Nolan from Ladenburg Thalmann. Your line is open..

As a follow-up to Dave’s question, on the buybacks, would you considering doing a tender?.

We have not having discussions in that regard, I think the stock is liquid enough that we can do so with just typical share buyback program. And I think it was a bigger discount, if we were stay consistently trading 80% of book and we can do a large sluggish stock in one [indiscernible] we probably would give that serious thought.

But I think the way we’re position now with the stock trading in the low-90% range of book, I don’t know that would be well for a while at the moment..

And then can you give us some idea of what the duration of the portfolio is currently?.

As you mentioned, we’ve done since quarter end and we’ve taken some steps in that regard, do just one moment. I’ll just speak to the way we have this modelled. So just, the duration of the portfolio is about 355. But when we look at the shocks and again that’s just the mortgage assets.

When we look at the shocks, which is what we prefer to do we modelled that we would be with hedges roughly flat and down 50 and off about $0.20 in an up 50 scenario. So, you can get some sense of where not only the duration is, but what the convexity of the portfolio looks like, which is what we’re trying to improve into that up 50 up 100 scenario..

Okay.

And then give that your 100% hedge on your liabilities, what’s your assumption in terms of further rate hikes or is it more just thinking about where LIBOR goes?.

Well, I’ll add 2 points to that question. First of all, LIBOR, our funding does not track LIBOR that closely. It may have in the past, certainly in the first quarter did not. LIBOR had life of its own. Repo funding today is still in the mid-190s is that for one month. .

Yes..

And one-month LIBOR about 190, 191 today actually. As far as rate hikes, I mean, it looks to us like it’s probably going to be at least 2, probably 3 I think in the meeting next week.

Even though, they probably won’t take any, there won’t be a press conference in the hike rates, but I wouldn’t be surprised if the wording of the statement tries to cut the market for they view the rest of the year. Certainly, we expect them to hike in June.

The key will be is there anything in that language which lead you to believe it’s three more hikes versus two. We are probably leading towards three. A little more uncertainty with respect to next year. There may be some cracks in the wall a little bit, some of data in Europe has been -- actually a lot of data in Europe has been consistently weak.

A little bit of stress in the corporate bond market and so forth. Are these the kind of things that have been cause of the fed to slow down but certainly for the balance of the year two to three hikes I think is a very high probability. .

And given that you are migrating more and more towards the IOs, I presume that you are just assuming that we might see a flat continued -- flattish but rising yield curve, slowing prepay speeds.

I mean anything else here?.

No, I mean the one caveat and what we saw actually starting mid last week when the steepening took place, does that reflect fundamentals or does that reflects some character of the market, it flattened so much so quickly. I think it was more of a ladder.

What could cause the curve to re-steepened you certainly have to see the data strengthened appreciably I think you start to see inflation data, mid 2% done well beyond that that might cause a volatility to spike up a little higher which is good for reinvesting. But absent those things, I think you just kind of grind this way.

I don’t know if the curve necessarily inversed this year but it could continue to flatten and move higher. Don’t forget, we just talk about fed hikes, two to three hikes, the two year has been on a very steady increase for quite some time now, its perhaps 250 [ph] probably on its way to 3, the 7 here is not far from 3% itself.

So what does that mean for the 10 year, everybody is hyper focused on the fact that it broke through 3 and some people think this represented a double top and we are going to rally from here while we’re going to rally meaningfully from there, it’s not going to far before you see initially 7s, 10s and 5s invert because the feds looks awfully hellbent on raising this year and that’s going to drive front end of the belly of the curve higher still.

They are not that far from 3% as we sit here today. So, is the 10-year going to meaningfully rally? I think it’s just going up because it’s being driven higher by shorter tenures frankly. So, I would not be surprised if it did hit 325 but that still could be relatively flat curve.

And who knows, we may finish this year with two years, 10 years and [30] years, all at the three handle. But so, it’s not going to be a great investment environment, never is.

We filled calls for investors and people -- [lay out in] the dividend, really reach our counter cyclical stock, they tend to do well when the economy is not doing well and vice versa, well the economy is doing very, very well and the feds are aggressively raising rates. So, it’s going to compress our earnings potential.

We position this absolutely best we can for that otherwise you wait it out and wait for the next cycle, down cycle and the fed eases and curve steepens and it’s a phenomenal investment opportunity. .

Specific to the IOs I would just add that when we reach the point we feel like the value has been fully extracted out of those positions. We won’t hesitate to sell them and reduce our exposure to that sector. Right now, we feel like there is fair value and then because speeds are continuing to decline.

But as we sit today, 90% of the mortgage market is not refinanceable. So, we think throughout this summer and in the next fall, we’ll see a continuing decline in speeds, that should be supportive of that position.

But once they have no upside left and then we’ll focus our upward rate hedges on different type of products, we can use it straight derivatives or some other form of protection. .

Thank you. [Operator Instructions]. I’m showing no additional audio questions in the queue at this time sir. .

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