Robert Cauley - Chairman and CEO Hunter Haas - CFO.

Christopher Nolan - Ladenburg Thalmann David Walrod - Jones Trading Roy Nada - NatWest Markets.

Good morning, and welcome to the Third Quarter 2018 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, October 26, 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 Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead sir..

Thank you, Operator. Welcome everybody this morning. I hope everybody has had a chance to either download our slide deck off of our website or I was looking at electronically.

We’ll begin the slide deck on Page 3 which obviously is the table of contents I just to kind of give an outline of what I like to say today and at the end of our slide deck we’ll then open up the call for questions. As usual I’m going to start off with a quick synopsis of our financial highlights for the quarter ended September 30, 2018.

I’ll then go to our market development that occurred during the quarter to kind of give us a backdrop of what was the environment that we are operating in then I’ll go into our financial results a little more.

But given the developments in the fourth quarter and the extreme volatility we've seen so far in the month of October, I’d like to spend a fair amount time talking about what's happened in early Q4 and we’ve done, I think it’s very important.

And then I’ll come back and talk about the portfolio characteristics positioning and so forth and how we see the world going forward. Now turning to Slide 4, these are the financial highlights for the quarter. We generated a GAAP net loss per share of $0.06.

This was composed or comprised of $0.39 loss per share on net realized and unrealized gains and losses on our MBS and derivatives instruments inclusive of net interest income and interest rate swaps. Earnings per share were $0.33 excluding the same unrealized and unrealized gains and losses on MBS and derivatives and interest rate swap income.

Book value per share was $7.56 in September 30 a decrease of $0.30 from our value at $6.30 of $7.86, We paid three monthly dividends totaling $0.25 per share which generated an economic return of negative $0.05 or negative 0.6% for the quarter 2.5% annualized.

Turning now to Slide 6, I'll walk through the background of [utility] market that we are operating in for the quarter before going into our results in little more detail.

On Slide 6, we see a slide that we’ve been focusing on for quite some time now basically it shows a continuation of this trend that’s been in place which is flattening of the curve but it's a bear flattening.

So is the yield curve flattening both the treasury note or note curve but also the dollar swap curve not only is it flattening but rates are moving higher. As you can see in the chart the blue line basically in both cases represents the level of range or swaps beginning of the year.

The red line was the end of the second quarter and the green line is the end of the third quarter. So modest dramatic move in Q3 but the curve continues to move higher and flatter. Turning to Slide 7, this is a more focused look at rates maybe the 10-year about the 10-year treasury note, 10-year swap very important for mortgage investors.

As you can see over the course of the quarter, rates were moving somewhat sideways until August. In late August in particular rate started to move higher. This was triggered by a few developments. The first one was probably the developments with respect to a new NAFTA.

The Trump Administration reached an agreement in principle with Mexico and by the end of the quarter with Canada. So the new NAFTA as it will be known as the U.S. MCA looks like it's going to be made progress and hopefully come to fruition and this definitely spokes to selloff.

We also had very strong data throughout the quarter and at the very end of the quarter on September 26, the Fed meeting we had a hike and we would characterize that as a hawkish hike. I have more to say about that later. So, you see 10-year rates both swaps and also we were moving higher in the quarter.

Turning to the next Slide, something we've been showing again for some time. This is just another picture of the shape of the curve. In this case it's a slope between the five year note and a 30-year bond. And as we note here – we reached a little flat if you will on September 18 at one point or 18.5 basis points.

Since quarter end that has actually steepened, but there's one thing that's worth noting here. One) is this prolonged period of a curve flattening but two) we're getting pretty close to zero. And that matters because absence of the prospects of an imminent inversion of the curve we're kind of getting as flat as we can. Turning now to Slide 8.

We talk about some other markets namely the [bond] market. On the left-hand side what we show here is the normalized volatility on a one month option on 10-year swap and the same thing with a slight different moneyness of plus 50 basis points.

And as you can see over the course of the year really volatility has been drifting low and we did have a slight uptick later in the quarter. And that's obviously a result and I just mentioned in the Fed group.

On the right hand side of the Page, we see - this is the mortgage – performance of various 30-year fixed-rate mortgages versus a 10-year hedge ratio. We are using JP Morgan's 10-year hedge ratio in each case. And as you can see the lines at the bottom of page barely 3.5 and 4s and 4.5s especially 4s and 4.5s have had a rough curve.

So up in coupon has suffered over the course of the year on a hedge adjusted basis. The green line represents Fannie 3s and they appear to have done much better and they have.

But keep in mind that beginning of the year Fannie 3s were trading at about a par dollar price and over the course of the year as they traded into a discount dollar price it really just attempted to trade to the duration. They really extended about as much as they can.

Well as other securities namely 4s and 4.5s have certainly not reached that point and that's probably reflected in their price versus their hedge ratios. This is just meant to be a comment on the general mortgage market, not indicative of the way we hedge the portfolio, just wanted to add that comment.

On Page 10, we take a little deeper dive into the specific coupons. As you can see in the top left corner, Fannie 4s and 4.5s had a rough quarter both were underperforming by almost a point. Dollar rolls have generally been subdued although they had showed some life later in the quarter.

One thing I do want to point though, and this is very important for the market this kind of reflected on the right hand side. What we've seen in the TBA deliverable or new issue securities is kind of a meaningful deterioration in the quality of those securities.

So the spread between the gross and net VAC, they have become quite large for reasons really not relevant for this call, but needless to say that the convexity of those securities appears to be diminished. Also the securities tend to have higher FICO scores and loan balances.

So, all three of these characteristics kind of make for poor hedge adjusted carry and they have impacted the results of mortgages generally and certainly TBAs. As a result, specified pay ups have held in fairly well at least on a hedge adjusted basis.

I mean obviously they are down given the level of rates but probably not as much as you may have suspected, in the cycle early in month of October they actually performed quite well. Slide 11, is just another depiction of where we are with rates. Obviously front end rates continue to move higher.

What we show here on the bottom is a spread between the one month OIS swap, which is just a proxy for Fed funds over the next month versus one month LIBOR expense via proxy for funding costs and you can see there's been some volatility but relatively stable versus the front end month LIBOR set.

Slide 12, is a new slide for our deck and it's kind of an interesting picture what we show here. In each block what we're showing in the red line and these dates are by the way correspond to Fed meeting. So it's basically a two year look back if you will. The first block is September of 2016, in another words right before the election.

The second block on the bottom left is March, which is kind of March of 2017 after the election. Then we show September 2017 and September 2018. And in each case the red line represents the Fed, the meeting of the Fed's dot plot released at those respective meetings. And the blue line is the Fed funds futures contracts.

So I want to just make a few points because it's kind of relevant for where the discussion will go after these pages. On the top left you can see this as I said is right before the election. And remember in the summer of 2016, we had Brexit, the 10 year treasury reached an all time low yield.

And at that time and really this is reflected in what conditions have been like for several years at that point, The Fed, each meeting talked about their growth forecast, they envisioned GDP growth hitting 2%, inflation going back to 2%, and as a result the need to hike. And as you can see here, it shows several hikes approaching 2.5% or so.

But the market was completely in disagreement, is reflected in Fed funds futures. And the terminal rate there is barely 1%. So, obviously it was a significant disconnect between Fed thinking and the market.

And as I said, that had been the case for some time and for investors such as ourselves, which hedge using instruments impacted by these measures, it meant for significant hedge under performance.

That all changed obviously in late 2016, when the Trump Administration surprised the world in one and then all of a sudden we had a very significant probe business administration in place.

As you can see in the bottom left, all of a sudden Fed funds hiking just a little more robust but more importantly the market starts to move closer to the Fed, and I think at this point the terminal funds right near 2%. But that was March of 2017. Things didn't go so well early in the administration's first year.

They tried to repeal the Affordable Care Act that failed miserably. And basically people started to fade the Trump optimism that we have seen, and that's reflected in the top right where you can see the market pricing of Fed hikes is eased back again.

But after that, there was a second wave there in late 2017, the Tax Cuts and Jobs Act was passed, and in early 2018 the Bipartisan Budget Act, those of which were sources of fiscal stimulus. And the economy started to reflect those developments associated with those and got much stronger.

And as you see in September of 2018, now Fed funds on dot plot side are north of 3% but importantly market pricing has moved much higher.

Come off there somewhat recently but it's interesting to note over the course of this two period how much the world has changed from a hiking perspective and maybe we're getting to a point whether too many hikes priced in. Turning now to our financial highlights on Slide 14.

On the left hand side, as we have in the past we show our - basically the results of the portfolio net interest income and expense with the interest expense and our various expense items in the middle column, there it just shows you the mark-to-market. So we're trying to separate those out. And we'll get to that the second on our next chart.

But to point out, as you can see the realized and unrealized gains and losses on MBS is a large number reflecting the widening of mortgages, and the fact that those underperformed our hedges and result is a net negative mark there. Interest income, we did have a slight decrease in interest revenue.

However, realized yields for the quarter were up 19 basis points. On a slightly lower portfolio with a higher yield, as a result interest income is down slightly. Economic interest expense, which is kind of a proxy for our hedged funding costs, moved up from 1.97% to 2.20%.

In this case the recall balance was slightly but the significant increase in rates resulted in an increase in interest expense. The net of the two is a slight decrease in our net interest margin from 218 basis points to 214. On the right hand side, we show results by our strategy, our pass-through versus structured.

As you can see, the pass-through strategy generated a negative 0.68% return. It's obviously much larger than structured portfolio, which had a positive return. The net of the two was actually zero. So just looking at the performance of the portfolio in that regard, we had a washable return.

On Slide 15, this is a slide we - so many times before you can see the three lines on the top, the blue line is the yield on the portfolio, the red line is our funding costs, as I mentioned was hire 2.20%. And the NIM, which is the middle, the green line, as you can see is at 2.14%.

And what I want to point out here is, we talked about how the curve has been flattening. Obviously that impacts our spread and it's reflected in these numbers.

But it's also noteworthy that as I mentioned before the curve is not inverted but it's become very flat, it seems to be somewhat flattening if you will And our net interest margin appears to be doing the same. In fact if we go back five quarters, the net interest margin was 219 basis points and the end of this quarter was 214.

So it seems that borrowing and inversion it seems like it's flattening some. Slide 16, we just show the separation of our earnings per share between the blue line, which is the actual reported earnings per share and the red line, which reflects the earnings per share less those expenses. And as you can see, it's down slightly.

Basically the product of slightly lower leverage in portfolio side and a slight decrease in net interest margin, but the rate of decline appears to be slow. Finally, on Slide 17, we just show the allocation of our capital, basically did not change much. The structured securities portfolio increased relative size modestly.

And as I mentioned previously, on the right hand side we show kind of the roll forward of the portfolio if you will. And it's down from little under $3.7 billion to a little over $3.5 billion. So, that's kind of a quick run through of the market developments and what happened in our financial results. Now, I'd kind of like to talk about Q4.

I suspect everybody is concerned about that, given how much has happened. So, really just to kind of quick run through of what has happened, it all started on or about October 3rd. That was the date we got some data in the morning. The first thing was the ADP Employment Report. And the second was the Non-Manufacturing ISM report.

So, those numbers were both extremely strong and far above expectations. Those in conjunction with the fact that the week before the Fed had raised rates and the Fed chairman seemed to be very hawkish in his comments and outlook on the economy, so the two combined to cause a meaningful sell off in rates.

We also were just below key technical levels in the treasury market. We broke through those with a lot of momentum. Word from the Street was there was a lot of real money involvement, it wasn't just perhaps money and therefore lend credibility to the move. And we moved to significantly higher rates.

In fact in front end the curve hit multi-year high levels, and the market began to price in more highs. That was kind of the first leg and that took place over a course of about a week or so. And then there was a second leg, which was the equity markets reacting to that.

So what was the effect if you will of the initial impetus from data, the sell-off in rates causing corresponding sell-off in equities. And then of course kind of the quality fall on rates rally back and that's of course today we're back to the point now where equities are wiped out.

Most of their year-to-date gains and treasuries are back in the range that they had previously broken out of. Further we've had as we go to earnings season, obviously given what's going on in the stock market, no surprise there. The guidance hasn't been great.

There's been a lot of talk about the effect of higher rates, the effective tariffs especially everybody in the Company that's involved in international trade, and higher import cost, which is meaningful both energy and other prices that have been moving eventually higher as a result of tariffs. So where does that leave us, where we go from here.

Well, it's hard to say obviously given all of volatility and the uncertainty in the market. But I think if you look carefully, for instance, if you look at inflation. Inflation has just now reached 2% and for the most part it's been driven by housing. Housing data, it's been strong; house cost appreciation has been strong, owners equivalent rent.

It really been driving the inflation data. But the recent data shows that that market is rolling over. On the other hand, some of the other components of inflation have been taint. They shows signs, as I just mentioned, of accelerating. So we're starting to see as a result of tariffs and so forth increases in those prices.

So the net of that, it's hard to say but it's - I suspect it means we'll probably keep the inflation rate at or near 2% as we move to the next year kind of as housing declines, as a driver in other sources become more prevalent. So, we'll probably see inflation somewhere in the neighborhood of 2% plus or minus over the next year or so.

And what's the significance of that? Well, I think if you see inflation stick to around 2%, the economy still is growing 3.5% GDP growth today, the labor market is very tight, consumers are very healthy, even with a weaker housing market I think that keeps the Fed on pace to continue to hike and in all likelihood as we approach the end of 2019, Fed funds will be approaching 3%.

Does the curve invert? I think it's hard to say but I think it's probably a little early for that. So in all likelihood we'll probably see a bear flapping for the balance of the next year, so with Fed funds moving slower. So what does that mean for us and what can we do to address that? That's what in fact we're going to see.

With that, I'll turn to Slide 19. So what I would like to do now is talk about our portfolio positioning both at 9/30 and the steps that we've taken since then in response to what's happened and then kind of summarize it from there. Slide 19, shows the portfolio.

As you can see, the allocation across Hybrid/ARMs which is very, very small for the most part a fixed rate in the apps whether they be in structured form, CMO's or 15, 20 or 30 collateral.

What I’d like to point out is the steps that we took this quarter been very much focused on and its really continuation of prior quarters trying to remove as much extension risk as we can from the portfolio.

So we bought shorter fixed-rate CMO's, they are generally front sequential, so they don't have much extension risk and we move that allocation from 14.7% to the end of the second quarter to 21.6.

15 year securities again was less extension risk than 30 years from more essentially 20% at the end of the second quarter to 22.6% at the end of the third, and we reduced 30 year exposure from just under 55% to little over 45%.

So, we definitely take a meaningful steps to reduce the extension risk of the portfolio and minimize the exposure of the portfolio to movements especially in the long end.

Since quarter end and I'll let Hunter talk about this a little more in our outlook but we have made meaningful changes to the structure of portfolio since then but we have done is on the hedge side, I’ll just kind of skip to Slide 20 which is just as historical information, there is nothing really new in that.

Slide 21 show our repo counterparties in our leverage ratio.

The leverage came down slightly this quarter both on a gross and a net basis and by net basis I mean our leverage ratio less tedious shorts since the end of the quarter we have added slightly to the TBA shorts more on that in a moment, the net leverage ratio is probably a little while you see there.

And now Slide 22, this shows all of our various hedge positions on the top left our Eurodollar positions and you can see the contract notional amount by contract, weighted-average entry rate and then of course the effective rate which would be the rate as of that date and the dollar amount and that is where you can see all those contracts are in the money.

Bottom left shows our five year treasury note short. On the right side we show swaptions TBA hedges and swap agreements in that order on the right-hand side. I’d like to point out that as of 9/30 our repo balance was 3.32 billion.

So thinking from the perspective of funding at the time end of the quarter we had swap in Eurodollar positions of about 2.76 billion. In the case of the swaps, the effective rate was 1.7% and on the Eurodollars 2.4% both of those in each case the underlying indexes three month LIBOR.

Today three month LIBOR set at 2.52%, so those hedges are on the money is reflected in the open equity on this page. Since quarter end we have added to those hedges at least in the case of the Eurodollars.

If you see the contracts laid out there on the left in the case of the September and December 2019 contracts, in all of the 2020 contracts, we've increased the notional from 1.5 billion to 1.8. As a result the weighted average entry rate on our 2019 contract has moved from 2.16% to 2.25%, in the case of the 2020 contracts, with 2.64% to 2.74%.

We’ve also added a slight TBA hedge where we short 30 years and a long 15 years and I’ll talk about that more in a moment.

That was done in a not duration neutral, it's the net short and we've also put on some of the money swaptions on better the market in the case the market rallied back since the time to put those on the market house again I’ll let Hunter talk about that some more. Just to summarize then where we sit today.

As I mentioned on the asset side, we've taken out as much extension as we can we not made meaningful changes to the portfolio in the last two weeks but on the repo side and funding hedge side, we're again about 3.32 billion repo and now the Eurodollar and swaps are at 3.06 billion plus these other hedge instrument.

So pretty much all of our what we would call hedge - funding hedge interval will certainly be in the money if our outlook for the economy is right in our even state or frankly.

With respect to our long end exposure, as I mentioned we had a slight increase in the net TBA short we continue to own our IO securities, our swaptions with a long tail in other words exposure along the curve and again as I mentioned much less extension risk in the portfolio curve and again as I mentioned much less extension risk in the portfolio.

So that kind of concludes the wrap. I will say - I suspect many people concerned with our - the net effect of the market move as I mentioned earlier our book value at the end of the third quarter was $7.56.

We estimated the current time as of Wednesday's calls, we are at about $7.43 that is an estimate that is not subject to review our examination by our auditors and obviously it's not the end of the quarter.

So we won't be reporting another number until year-end but that is a rough estimate of the book value that we have been able to put together in the last couple of days. With that, I will turn it over to the operator for questions and presumably at that point Hunter will get a chance to talk a little more about portfolio changes in more details.

Thank you.

Operator?.

[Operator Instructions] Our first question or comment comes from the line of Christopher Nolan from Ladenburg Thalmann. Your line is open..

Bob when you mentioned removing extension risk from the portfolio, if I am looking at that correctly should we think about you increasing your capital allocation to IOs more?.

Well, it is slightly higher but I'll let Hunter talk about this. It is more on the securities themselves that's it's all - what I was referring to was how we changed the composition of the assets in the structure the passive-side. I’ll turn over to Hunter to talk about that..

With respect to the extension risk question, what we've done and really it's a continuation of what we've been working on for a couple of months - couple of quarters I should say. At the end of last year, our allocation to 15 years in sequential practically zero and now that represents just under half of the portfolio.

So the ideas really sort of rooted in improving the convexity of the portfolio both for a rising rate environment and a declining rate environment.

So, the focus on removing extension risk is centered around taking away allocation from a 30 year - 30 year fixed-rate bucket market into 15s and the front sequential Bob alluded to - the primary focus there.

We've also added on the hedge side - we continue to replenish IOs as they’re brought off, the capital allocation hasn't changed dramatically but those IOs that we've added do have more negative duration than some of the assets that are running off.

A big component of what we did and something has been very helpful for us in damage control, I guess in this most recent selloff is earlier in the year we increased our allocation to pay our swaptions pretty substantially.

So we are long know just around 850 million basically won three months by tenure at this point, a pair swaptions that has added a lot of convexity into the sell-off as well. We move the strikes around from time to time to try to minimize costs and enhance the return profile into the list scenarios and buckets that we have our IOs.

But also want to add the down in rate scenario was something that we're focused on as well. So as we've been adding to 15 years for sequential's and even to a lesser extent, 20-year mortgages we've been shifting our balances into what we feel like are relatively cheap forms of call protection.

So buying a lot of 85k max 15 year force for example, 20 year for shifted our generic into 85k max. So we expect the portfolio to have a little bit better convexity profile on that same note. We've added some receiver swaptions recently as well. So, we are certainly mindful in fact that basically we just don't expect rates to stay for very long.

So we're trying to improve how the portfolio performs on the wings and those are the actions that we've taken..

So Hunter, if I heard you correctly based on what you said we should expect further allocation to the 15 year?.

I think we're about where we want to be now with respect to the 15 years. I would say that if we have an opportunity to, something Bob hasn't really touched on yet, if we have an opportunity to buy stock back this quarter, I would expect that we would be liquidating some 30 years to buy that back.

So in that respect the allocation may increase a little bit..

Final question and I'll get back in the queue.

What you guys are thinking about leverage? Leverage has some room to go up, are you waiting for some sort of opportunistic moment to lever up or are you just sort of happy where you are?.

I would say probably happy where we are. That kind of to me is kind of came to the question of whether you think the curve continues to bear flat or inverse. We start to see signs of the economies rolling over. I mean that's the time when you take the leverage up.

The other option that might present itself and we've seen obviously mortgages had a rough at late, I tend to look at the spread of the current coupon 30 year fixed rate mortgage to this 10 year, which is an index on Bloomberg. And as of last night it was about 86 basis points.

That's just wide as it's been since the summer of 2016 after the Brexit and subsequent rally, but still not as wide as it was after the taper tantrum.

I suspect if we had a meaningful blow out in mortgages and you got north of 100 on say for instance on an index like that where mortgage that just looks so cheap that it might make sense to just figure it's a great buying opportunity and take the leverage up..

Just to chime in on that, mortgages certainly look a little bit better than they have but are still - I would characterize them as still being sort of on the tight end of the sum. They look good on absolute basis, sure if you - but the fact of the matter is we wouldn't be comfortable taking on hedged risk here.

So that doesn't really do us a lot of good..

Our next question or comments comes from the line of David Walrod from Jones Trading. Your line is open..

Couple of questions. Your prepays were down this quarter. How much of that do you think is due to seasonality and how much do you think it's due to the increase in rates..

Well, they both helped. No question we're entering the seasonal slowdown and we have the uptick in rates and really the uptick in rates didn't occur at actually October, which means you're probably going to have a very slow rate environments over the course of the winter.

That being said, our portfolio tends to be new, low, and as a result - they're not as subject to the seasonality there. So there's two factors at work with the new mortgages. One, is the seasonal, the other one is that it just gently moving up the curb off of zero.

But we definitely have and would expect to see slow speeds for both of those reasons going into the year. The other thing for us, as you are familiar, we have this notion of premium loss due to pay down which obviously affected by speeds but it's not just affected by speeds, it's affected by the price of a given security.

So I'm like say available for sale accounting were, where you amortize purchase date premium subject to quarterly revisions using the retrospective. But for us, we mark all of our securities to market each quarter and then calculate the premium loss to the pay down based on that price.

So as rates have moved higher and the prices of our securities have moved lower, there's less premium to advertise. As a result, our premium lost due to pay down, I had the numbers in here somewhere, but it dropped pretty precipitously over the course of the quarter and we probably would expect it to stay low..

I would just add that the - Dave, I think where we have room to see more further slowdown is in the IO, inverse IO portion of the portfolio. Overwhelming majority of loans in that portfolio are now solidly out of the money.

So I would expect going into - especially into the seasonal part of the year that you referred to, the seasonal slowdown, I would really expect to see little bit better performance on that side..

And then I guess Bob, can you expand on whatever Hunter was alluding to about the share buyback?.

Well, we kind of have an unofficial threshold of 10%, and based on where the stock was trading when I walked in here this morning, we're in a position where we would be looking to buyback shares. Discount is official on where the stock is trading at the very moment. But I think it was down odd $0.40 when I came in.

So that would mean that we would be looking once we pass out of our window, black out window, to look to be buyback some share..

[Operator Instructions] We have a follow-up question from Mr. Christopher Nolan from Ladenburg Thalmann. Your line is open..

Bob, how much do you think the yield curves are reacting to the stuff happening with the EU? I mean everything economically sounds okay in the U.S. generally speaking.

But on the EU side it sounds like the long end of the curve might be reacting to risk from there?.

I think it's possible. There was the ECB meeting yesterday. And they say they're going to end their QE program in a not too distant future. I think it's in December and then they had to pay hiking sometime late next year, the economic day. There been somewhat mixed but they seem to be not sufficiently weak to cause them to change their plan.

But it's definitely impacts the term premium and there's obviously been a huge spread. When we watch spread say currently between 10 year treasury note and 10 year bond but those are very highs, they are the high end of the range lately. I'm not so sure today that's as relevant.

Today, everybody seems to be more focused on inflation and whether or not we're going to have any units. Therefore it should be a term premium for that reason. Who knows, the market seems to be - the most recent date has been tamed, the GDP data came out today; core PCV was I believe 1.6%. So it's come off of the 2% level.

That's going to be even no matter what happens in Europe, it's going to be hard for that term premium to get much higher with the inflation data doing what it is. But as I mentioned, if you listen to the earnings call more than equity guy, I do have CNBC on in the office and it's across many industries are talking about pricing pressures.

There was the Kansas City Fed ISM number yesterday, and the Bloomberg story I read had a lot of anecdotal reports. There definitely is a lot of talk about rising import prices, not just jet fuel and airlines, it's tariff related and otherwise. There's definitely increase in pricing pressure in the pipeline.

And the big question is, do they absorb that or they pass it through? Nobody knows, but certainly it's not all going to be absorbed. So it'll be starting to get pass-through's. You're going to see price pressure but is that enough to really cause a big uptick in the term premium? Hard to say.

I think at this point most people think the Fed is probably going to have to consider pausing maybe sooner than they thought. So that would not mean that that's going to cause the term premium to go up..

[Operator Instructions] We have a question or comments from the line of Roy Nada from NatWest Markets. Your line is open..

I just wanted to elaborate a little bit on kind of the inflation side that's clearly a big impact to all our businesses. Productivity it was kind of touched on a few times by some of the Fed members over the last week.

And obviously where we are with employment and kind of where we are in the cycle, do you guys see productivity making a step change from here to kind of counteract kind of pricing pressures? What do you think it's going to stabilize?.

I wouldn't expect it to increase. Although the CapEx component of GDP wasn't so great but I think if you look back away from the super high frequency data and look at the year-over-year trend, it's still increasing at a decent rate.

I believe about a month ago Kevin Hassett, the Chairman of the Economic Council, Administrations Council had a very good presentation showing clear break in the trend in all of these various measures of CapEx spending that have occurred over the last two years and those have been on a significant long-term downtrend for years for whatever reason, weak economy, excessive regulation, whatever.

And that certainly has to affect productivity. So I suspect that it's rebounding after all the Tax Cut Act was aimed at doing that at least for the first two years. So in spite of whatever is showing up in the data very recently, I think it will continue to occur if for no other reason pent-up demand because it was so good for so long.

So yes, I do think productivity will come back and that will take even more pressure off pricing pressure in terms of driving inflation and wages possibly. So, yes, I think the sustainable growth rate can recover and all the more reason that you don't necessarily have to worry about is inflation.

Inflation is marching, and unfortunately that means term plan will be more stable as well..

The data this morning certainly supported that thesis. GDP was robust again and inflation was very tame..

[Operator Instructions] I'm showing no additional audio questions in the queue at this time. I would like to turn the conference back over to Management, for any closing remarks..

Thank you, Operator. Thank you all again for your time. To the extent you have any other questions you didn't get a chance to ask or you listened to the replay and want to ask a question, we're always here to answer your questions. Our number here in the office is 772-231-1400.

We're always willing and able to take your questions, otherwise we'll talk to you next quarter. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day..