Good morning, and welcome to the First Quarter 2021 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, April 30, 2021.

At this time, the company would like to remind the listeners that the 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 the 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 and good morning everyone. I hope everybody as usual has had a chance to download our slide deck, which we put up on our website last night, and I'll give you a second to get ready and then we will as always walk you through the slide deck.

As usual, I'll start on Page 3, just kind of go over the table of contents in other words set the agenda for today's call.

Now, the first thing we'll do is as usual just go through a summary of our results for the quarter, spend some time talking about market developments that occurred throughout the quarter and then go through our financial results and then spend the bulk of the time talking about our portfolio characteristics, hedge positions both with respect to what happened during the quarter and what has happened since quarter end, if anything, which in those cases we did do some things and then just give you some comments on how we see things going forward and just some more high level comments on the performance of the company for the quarter.

So with that, I'll turn to Page 4. For the quarter, ended March 31, 2021, Orchid reported a net loss per share of $0.34, net earnings per share of $0.26 excluding realized and unrealized gains and losses and our RMBS and derivative instruments, including net interest expense on our interest rates swaps.

We had a loss of $0.60 per share from net realized and unrealized losses on our RMBS assets and derivative instruments, again including net interest expense on our interest rates swaps. Book value per share was $4.94 at March 31st, a decrease of 52% – $0.52 or 9.52% from $5.46 at December 31st of 2020.

In the first quarter of 2021, the company declared and subsequently paid $0.195 per share in dividends. And since our initial public offering, the company has declared $11.915 in dividends per share, including the dividend declared in April of 2021. Total economic loss for the quarter was $0.325 per share or 6%, 23.81% annualized.

On Slide 5 and 6, we present our results versus our peer group; the peer group is defined at the bottom of the page. The first page is as of March 31, which is using stock and dividends to calculate total rate of return as usual we’ll present this fall.

When they look back date as of 3/31, so one year back from 3/31, two years, et cetera and then of course each calendar year as well. Slide 6 dose the same thing that for book value as always the case we do not know all of the book value numbers from our peers.

So this data is presented with a one quarter lag, so it would be through the fourth quarter of 2020. Now with respect to market developments, I think by this point some of this news is somewhat old, so I am just going to summarize most of this, but I will make some comments with respect to anything that's germane for purposes of Q2 and beyond.

With respect to Slide 8, as you can see, the difference between the blue line and the red line on either side graph here is the change in rates that occurred during the quarter, so a very substantial move and a substantial steepening of the curve.

Since quarter end rates have backed off, this green line you see there is as of last Friday, actually today that line would be slightly closer to the red line, so we have seen rates back up somewhat more.

But noteworthy in the magnitude of the steepening of the curve here in the case of the tenor cash now it’s almost 80 basis point move in rates over the course of the quarter.

Slide 9 presents the same kind of data only looking at certain points on the curve, the ten year treasury and the ten year swap rate, there's really nothing more to be said about that.

With respect to Slide 10 note that even though the curve has flattened somewhat in Q2 in the case of the 5s-30s curves it's only been a couple of basis points, in 2s-10s curve about 10, the curve still remains very, very steep and well off the trough that we saw back in 2018.

With respect to the mortgage market on Slide 11, what we showing on the top left of the page is a slight different approach and was done in the past. I will basically normalize the prices of all the security, so you can see the relative performance.

So in this case what we're doing is we're taking the price at the beginning of the quarter and selling it at 100, not that they were priced at par, this is just 100% of that beginning price. And as you can see the red and the blue lines there, which represent the lower coupons, have declined the most in price.

In the case of 2s, down a 117 ticks, 2.5 were down 94.25 ticks, but as you can see a clear differentiation between those lower coupons and the higher coupons, coupons that are materially more in the money, but also not the ones that the Fed purchases.

Those were relatively unchanged and in fact in the case of 4s, we're actually up in price, almost 17 ticks. With respect to the roll market, this story remains the same. The Fed is aggressively buying lower coupon, production coupons and those rolls do very well and all the rest are at or near negative levels.

With respect to spec pay ups very meaningful development this quarter. As you can see in the top right, in our case here we're showing representative pools, these are 85K low loan balance, 3, 3.5s and 4s, and you can see those pay ups have dropped dramatically.

They're actually back to the levels that we observe before the pandemic in some cases slightly lower mirroring what we've seen in the ten-year treasury. New coupons still command relatively substantial pay up. The backlog is not really as relevant with respect to Orchid.

On Slide 13 or 12 rather, you can see using this proxy for volatility in the market as is typically the case when we have a sudden substantial movement in rates vol increases obviously a very high levels here almost as high as it was back in March when the pandemic first hit the market.

Since quarter end, vol has come off some, but still remains just at the bottom end of this range that's been established since middle of the second quarter. One final point here which is very, very important with respect to the mortgage market on Slide 13, we show here the OAS, LIBOR OAS of the various TBA coupons and note how tight they are.

These numbers are in many cases negative numbers. And we see that in a lot of securities that traded in the market with negative LIBOR OAS numbers, the mortgage market is very tight and for obvious reasons we have the very substantial support of the Fed buying on a daily basis.

And as we heard this week, the Fed has no intention of tapering those purchases anytime soon and as a result, the market remains well fed and we also have large other investors non-fed buyers in this case banks who were also very supportive of the market.

So, one takeaway from this slide is that the mortgage market is trading at very tight levels on a historical basis. Slide 14, this kind of gives you a snapshot of what happened with respect to fixed income sectors. And this is all of the aggregate index components.

As you can see, all fixed income components were down with the exception of high yield and high yield is always has kind of an equity component to it. It's not purely a bond like instrument and of course, equity has been very, very low.

Mortgages were on a relative basis somewhat better than most other fixed income instruments, but still negative for return. And this is absolute by the way on an excess return versus either treasury or LIBOR swaps. It was negative as well, a negative 30 basis points. With respect to 15, Slide 15, a few important points I want to make here first.

If you look at the bottom of the page, the refi index, which is the blue line versus the percentage of the mortgage markets that's in the money, very substantial move over the course of the quarter. We went from being in a situation where approximately 80% of the market was refinanceable. Now, we're down close to 40%, a very substantial move.

One of the things that's offsetting that though, if you look at the top right, this primary, secondary spread, we've talked about this before on our earnings calls, it's very important. This is basically the spread between a mortgage available for borrower and a theoretical current coupon mortgage.

It has gotten a very wide levels and it's been tightening for some time now as you can see it continues to tighten even in the first quarter.

So the significance of this, it tends to mute the impact of higher rates on pre-payments and of course differently as rates have moved higher over the course of the first quarter rate available to borrowers increased, but much less so. As a result the rates available to borrowers are still not that unattractive. They're still quite attractive.

In fact, the various proxies, the Freddie Mac survey rate or the Mortgage Bankers rate are still in the very low 3s, so on a historical basis still quite attractive. As you can see on the top left, the refi index, of course, has come off versus mortgage rates, but it really only moved from the mid 4,000 range to the low 3s.

It's still at a fairly high level. So, refinancing activity has come off, no question, but not off a cliff for sure. Turning now to our financial results. Slide 17, on the left-hand side, we disaggregate our results basically showing you the mark-to-market effect on our earnings.

As you all know, we use fair value accounting, so all fluctuations in market value of any instruments shows up in our earnings. As you can see, just looking at that center column, the realized and unrealized losses on the assets exceeded those of our hedges.

And that was because of the positioning of the hedges we had in place at the beginning of the quarter obviously, and as we can see there's a substantial underperformances would gave rise to the quarterly loss. Absent those, you can see that we still generated an income of $0.26 per share, more to say about that in a second.

With respect to the sector allocation of the portfolio between pass-throughs and IOs and inverse IOs, as you can see unsurprisingly the pass-through portfolio had a fairly meaningful negative return of 9.4% with an average capital allocation and the IOs and inverse IOs has had a very strong to positive return of nearly 30%, again not surprisingly given the movements in rates.

Now with respect to kind of a historical perspective on page 18, at the top of the page, we show these same three lines that we've shown for many years. Now, the blue line is the yield on our assets. As you can see, it's at 2.66%. The red line represents our economic cost of interest. It's down to $0.62.

And then the difference between the two is the green line, which was at 2.04%. It appears now given the events of the first quarter of 2021 and now when you move into the second quarter that both – the yield on the portfolio and the economic cost of interest are probably at or near trough.

And so we would expect those to level off and potentially rise in the future. But importantly, the net of the two remain quite stable now for several quarters and it stayed in around that 2% range. And that's of course meaningful from the perspective of our earnings and dividends.

That's also reflected on Slide 19 where you can see the blue line, which is the actual reported earnings per share versus the earnings per share excluding those mark-to-market gains and losses, you can see it's been very stable.

And so – and then looking at the $0.26 reported this quarter, it's very much in line with the results we've generated over the last several quarters. Turning to Slide 20; the allocation of capital on the left-hand side, there was a slight uptick in the allocation, the structured securities from 6.7% to 10.1%.

We'll get into this in a little more detail in a moment, but since quarter-end that number has continued to increase and in fact is close to double what it was at the end of the quarter. So we are increasing our allocation of capital towards IOs in a way from pass-troughs.

The right-hand side, just kind of walk you through the changes to the respective portfolios that occurred over the course of the quarter, as you can see there was one – we did add one verse IO. That's represented the bulk of the increase in the allocation to that sector.

Otherwise you can see our pay downs, which we'll speak to in a moment with respect to pass-troughs was a very subdued number, again representing or reflecting the asset allocation that we continue to employ. Now I'm going to walk you through kind of what I generally considered most needed conversation.

The portfolio positioning, the first thing I'm going to do is go over – the steps we're taking, the changes that were made in the quarter. Then we're going to talk a little bit about what transpired since quarter end, and then as I said I'll make some more general comments about the results for the quarter and then how we see things going forward.

So first on the asset side here, I'll get to the hedges in a moment, but just want to focus on the top of the page. As you can see here the portfolio is still heavily concentrated in 30-year securities. We did not make a meaningful change in that regard either during the quarter or since quarter-end. We did add somewhat to our 15-year positions.

They increased fairly substantially in absolute terms, but still only represent less than 6% of the portfolio. We also increased our allocation to 20-year securities, but again not meaningful enough to change the overall characterization of portfolio. The more meaningful changes occurred within the 30-year coupons.

The 20-year allocation increased slightly, but recall at the end of last year, we had a fairly substantial long position in TBAs and those coupons that was taken-off during the quarter. So now the exposure that coupon is strictly in pull from and as I say in a few moments, we've actually reduced that since.

The biggest change was to the capital allocated to the 30-year three coupons. We did raise capital during the quarter on two occasions, and most of that was deployed in that coupon. So the allocation to three increased by approximately $1 billion. We did sell some 30-year 3.5s.

What we were doing there was just take – reducing exposure to very high coupon spectacles, mostly in New York 3.5s with respect to higher coupons and more or less unchanged. The change on the quarter just reflects runoff. And then as I mentioned, we did add to the IO portfolio and we did reduce the TBA loan.

Since quarter end we've continued some of these same trends. We reduced our exposure to the 30-year 2.5 coupon allocating most of the proceeds in the threes all on a net basis. It was a reduction in outstandings' by about $150 million. And then we did add a few higher coupon load balance pools in more recent options.

So now I'll just kind of walk you through the balance of the slides in this session, and I'll come back and talk about the hedges. Slide 23 this is a slide that we've been using quite a bit lately, was very germane during 2020 when prepays were at such a high level.

The red lines are allocation to high-quality spec pools and as you can see, it's come down dramatically. And the reason is simply the fact that we no longer need those assets, because prepayments have come-off with certainly different environment, and that's reflected in the rate available to – or the refined index has come down.

With respect to Slide 34; we are about generating income and earnings, and therefore we're very much focused on minimizing our premium amortization and that's reflected here. The thrust of our efforts are in security selection.

We tend to use more spec pools than TBAs, as opposed to say some of our peers but we do focus on security selection and we had very good results.

As you can see just by the bar charts for each of the respective months in the quarters, but also with respect to the pass through portfolio in the second – the first quarter prepaid in the aggregate just under 10 CPR and the overall speed of the portfolio were down a little over 40% for the quarter.

This is also reflected on Slide 25, as you can see with rates backing up, we've maintained our pay-downs as a percentage of our outstanding principal balance within a very low range and again, this is still lower than the level we were at in 2019. Finally, before we get into our hedges. Our leverage is running at about 9.1 at quarter end.

There may be some changes to that slightly in the horizon. I'll get into that in a moment. I just want to point out, if you look at your slide you can see the last few quarters, the range is round between say 8.8 and 9.9. We remain near the low end of that range.

With respect to our hedges, this is further more substantial changes occurred during the quarter. With respect to our swap book it was increased with the movement in rates and how we're positioning going forward, kind of drove our decision-making. We had some older five-year swaps that had been on the books for awhile and roll down the curve.

They were less than a full-year year so we actually terminated those swaps and added approximately $800 million of five-year swaps. And I'll get into the rationale for that in a moment. And we also added about 200 million of 10-year ultra swaps. We've also changed the TBA position.

We were only short $328 million at the end of the last year, and that's now a $1.3 billion. We've added, of course, to the quarter a short and 2.5s and then the rest of the increase was in threes.

Then with respect to swaps, there was one that rolled off and we've added, or refreshed on the levels on several pair of spreads that we have on – these are designed to allow us to economically put on protection against movements, neither the belly of the one that had occurred by using the combination of long and short positions.

And then from time-to-time we refresh as well as the level as the market moves just for efficiency purposes and then we've also added a curve four as you can see. Since the quarter end we have covered the 2.5 shorts that's no longer on.

Some of these hedges that we put on were somewhat expected and we're trying to reposition those two make more economical. The three shorts has been reduced by roughly half, and we've actually added and replaced that with some shorts in the features market combination of five-year or [indiscernible].

And then also we did put on another five-year payer spread. So that's kind of the gist of what we've done in the portfolio. And now, as I said, I want to make a few general comments just about our results and how we kind of see things going forward. Well, the first thing is, let's state the obvious. Obviously we had a very large book value change.

That's not something we're happy with, but at the same time keep in mind that the way we run the portfolio is very consistent since our inception. There's not been a meaningful deviation at all over that period.

We tend to run through with respect to our peers at the high end of the – highest end of the yield range and a higher leverage ratio than our pears, and that's been applied very consistently. And as a result, when we had [indiscernible] like we did in the first quarter, we had a huge movement rate; we tend to be exposed to that.

And that was the case in this quarter; it was also the case in the fourth quarter of 2016. But outside of that, the results are very good. In fact, if you look at the slide deck that as I mentioned earlier, you can see our relative results, a very strong versus our peers.

So while we occasionally have this quarter, and it's unfortunate over long periods of time the results and the strategy is very, very good, very positive and as a result, we do not have any intention of changing those. Now, with respect to our positioning as I mentioned, we did make some changes especially on the hedge side.

Some of these hedges are so much possibly, but we were able to do them very quickly and efficiently at the time. Going forward we did suffer some mark-to-marked – negative mark-to-markets on the portfolio, but most of those are unrealized.

Very few realized, as a result what's left in the portfolio has been marked down, which means that going forward with respect to premium amortization we're advertising the lower premium amount. And given that we expect speeds to remain below the levels we had last year, this means we should have slower premium amortization.

And the second thing we've been doing, as I mentioned alluded to earlier and continuing to do so since the end of the quarter is replaced several desire hedges with IOs. IOs that may have less desirable yields now, but in the event of any kind of a sell-off will actually be very attractive and positive [indiscernible] meaningfully so.

So on balance while the hedge costs are higher based on a repositioning; we think that these are offset substantially, if not entirely by slow amortization and the IOs we’ve added to the portfolio.

And we were also being replacing some of the dollar rolls, I mentioned that we took off simply because those were very attractive and should be supported by the fed going forward, at least until they ultimately taper. Kind of in some would say this portfolio is positioned defensively. It's positioned for higher rates.

Since the rates varied modestly since quarter-end, our book value is down modestly, probably 1% or 2%. But as I said, we think going forward; the path of rates is going to be generally higher.

So to the extent that rates surpassed the levels that we observed at the end of the quarter, you would assume that we would recoup some of that book value, and the implications of that, our leverage ratio obviously that would be beneficial since it would be lowering our leverage ratio, it just all else equal, but even if that doesn't occur, we'd be our leverage ratio at acceptable levels I've mentioned before, we're around 9.1%.

Now with respect to the future, how we have been seeing things going forward and obviously the economy is recovering at a very rapid rate, and even though they insist they're not going to do so anytime in the near future, I think it's pretty safe to say that whatever your horizon is, whether it's the balance of the year or next year, or even into 2023, that eventually the Fed is going to taper their quantitative easing and mortgages are going to whine.

It's hard to argue that that's priced in the mortgage market giving where they trade today. So we certainly see room for mortgages to widen over the course of the next year or two. And that's some of the rationale for adding to our IOs because we think IOs will be much less susceptible to that widening.

And that's why in addition to replacing some of the hedges with IOs, because they're more cost-effective, but also because we want to try to avoid some of that widening.

So you will probably see in Q2 results a much greater allocation to IOs and in fact continues that will probably ultimately reflected in our leverage ratio, since we apply leverage to the passions and will to the IOs just to really monetizing for cash purposes. So you should probably see the leverage ratio remain on the low end of the range.

And then the second thing is the fact that we've made that eventually even after the Fed tapers, they will raise rates. And the consequence of that will be a flattening of the curve.

And I mentioned that we had put on a lot of hedges, especially in the five-year part of the curve, either whether it was specked to swaps or futures and that's the reason. We expect the next major move in the curve to be in the [indiscernible] the five-year area and we want to be positioned for that.

We also put on it at some curve floors again, to protect earnings when this occurs. So we feel in some, very well positioned going forward. Our income has – our ability to generate income has being preserved. And we had the IOs we expect the greater allocation of those to be a very well when an SEC widening in the pass through portfolio.

And that's pretty much it. Operator, that's the end of my prepared remarks. We can open the call up to questions..

[Operator Instructions] Your first question comes from the line of Jason Stewart from JonesTrading. Your line is open..

Thank you, and thanks, Bob. How are you? Thanks for the as always comprehensive overview. I was – two questions with regard to net economic spread.

Could you give us a sense of where that's ended the quarter and just remind us how hedges like futures or so our TBAs would roll into that number that's being reported?.

Yes. But it was probably not meaning for giving what I just discussed, with respect to how those affect and, obviously, I'll just go through a laundry list. I'll turn it over to Hunter, because he'll have more to say. With respect to paying fixed on swaps, obviously, that's pretty straightforward.

You're just paying whatever that rate is in the case of the 10-year swap; obviously, it's much higher than the five-year point in curve, given how steep the curve was? With respect to futures, as you roll through time, remember futures are March, June, September and December as you walk from contract to contract, there is a drop, and we use that component to do as an expense.

With respect to TBAs, it's the drop we have used the threes because the drop was negative. That's no longer the case that's why we reduce those. And swaptions is basically the premium you pay..

Yes, I would just add. We didn't add meaningful amount of what I would characterize is expensive long end rate hedges.

So it was a modest increase to 10-year part of the curve, both through paying fixed on swap or 10-year part of the curve, as well as putting on a handful of altruist, which do have a rather large negative carry component to them when you're shorting them, just because of the shape the curve is so steep.

We've subsequently, as we've increased our allocation to IOs, we have pulled back some of that hedge and done so at levels where we're not going to really earn out that negative carry so to speak.

With respect to the TBA position most of what we rolled into April and May was down at negative levels, right? So the TBA performance of Fannie 3s has been so poor over the last several months, that just because cheapest to deliver the quality that keeps deliver collateral that coupon bucket has been so bad that you actually can short the coupon and clip a little bit of carry in a positive manner.

So we've taken advantage of that where we can, it's justifiable to do so, because we own a lot of 3% coupon, specified pools, and in fact, we own a lot of times – we own a fairly large position of what we would characterize as a low payout pool.

So to the extent that their performance decreases over time and they become more like the cheapest to deliver, we can always just cover their shorts by delivering pools into them and clip the carry on the specified pools while they're still a superior asset.

So I think for those reasons, I agree with what Bob said about not being materially different at the quarter end than it was in the presentation..

Got it. Thank you. That's helpful. And then on the capital raises during 1Q, can you give us a sense for how much those were either creative to book value or the approximate book at the time of the raise? Just trying to get a sense for how that impacted book value per share..

The first one was slightly dilutive and the second one was right at book..

Great. Thank you..

And then at that time, yes. Those were deterioration in the quarter came and the last three weeks of March. So we'd have a small decrease in book up to that point. But, yes….

I would just – I mean, I'm sure you're thinking about this. Book value for the month of January was probably up very modestly. February probably hung in until mid-month. Then we started to go negative, maybe slightly negative by the end of February.

And I would say at least 75% of the client in the quarter occurred in March and really after, I forget what day it was, whatever the day non-farm payrolls was released. I want to say, it was on March 5th. It was really after that.

I mean, one of the big drivers of that was and also you may recall was when Powell made it clear that he was comfortable with higher rates. That's kind of like green-light in the market for way to go much higher and we kind of crushed it right at the end of the quarter at 331, just sort of 175 and 110s..

Okay. That's helpful color. Last one for me and I'll jump out.

You just tie the – give us a reminder on the metrics there, KPI you look at to set the dividend and remind us, how that interplays is moving through with all the changes that were made in the portfolio towards the end of the 1Q and then as you're continuing to evolve in 2Q? That would be helpful. Thanks..

Sure. We look at just to start big dividends and obviously, an artifact of taxable income. Well, we don't really look at taxable income. It's basically what we call economic income, which looks a lot like GAAP with two minor adjustments.

So one, we look at more of our economic cost of interest expense which in therefore reflects hedge costs, because we didn't each hedge accounting for purposes of GAAPs.

So all of the changes in the market value of our hedges are reflected in our earnings, but not all of that would necessarily be attributable to the current period, if we were using hedge accounting. And then the second one is just to try to capture premium amortization.

The one thing that's unusual about the fair value option that contrast sharply with available for sale, available for sale. That will help for you buy an asset and at the time you booked yield and you use that yield assumption to amortize premium. Every quarter, you may refresh that level and then call that the retrospective adjustment.

But in contrast to what we do, when we use our value every quarter. We mark portfolio to market, and that resets the level you use for premium amortization. So we reported on earnings released something called Premium lost due to pay-downs. But remember that's reflective of the levels that existed at the beginning of the quarter.

So if you have a year like 2020, when asset prices are very elevated, it's going to make it appear like you're advertising a lot more premium that actually existed, maybe at the time you bought the asset. So that is just one nuance of our accounting, but otherwise those are the two adjustments that we make to look at for the purposes of adjustment.

Now, I will say that I mentioned, we took off some of our TBA loans. We intend to put those back on. There were some adjustments to the head book and then subsequent adjustments to that and through replacing IOs.

So there's a lot of fluidity here and the net interest margin if you will somehow calculated on a daily basis, you would probably see fairly meaningful fluctuations as we go through this process.

But we expect when we come through the process when we're done and we're almost there that it should look pretty much as it did for the average of the quarter. As I said taking off some of these hedges, putting on the IOs and so forth, we still think that net of all this is going to be about awash.

The unknown as it relates to the way we look at dividend policy is really going to be how much speed slowdown over the next month, two to three and we'll observe that.

We're pretty bullish about the outlook for higher coupon mortgages and the IOs that we own, which are tend to be off of slightly cuspier assets, at least the ones we've been adding are off of cuspier coupons. And then we own another slug of high negative duration in the money loans, which we also expect a slowdown.

So over the – we really are just positioned to – I think The Street is really just – at the point where it's expecting a slowdown and speeds maybe next sprint, but certainly over the next couple. And we'll see how we settle in with respect to the slowdown and speeds as a result of higher rates..

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

Hi, Hunter, on your comments just now, I'm bullish on speeds, is that for the market in general or for Orchid Island specifically?.

For Orchid specifically. I think, all the models we use – I look at and all The Street research shows a significant slowdowns in speeds especially for higher coupon collateral that would be a big part of our portfolio, so 3s, 3.5s, 4s. I mean, we have some loan balance 4s that are paid in the mid 20s.

And I think the expectation is for those to slowdown into the mid-teens over the course of the next few months. So that's not an enormous position for us, but I think it's a good example of what has – developments that have not fully played out yet..

And what is – can you share with us what the allocation of capitals to IOs in the second quarter so far?.

We added about $46 million in market value. So at quarter end, Chris, it was 40 – just over $40 million, which was 10%. So we've added 46. So it's approach, it's probably 20%. So it's 86 in the calculator. We have 86 divided by 4.60 is or 4.65..

Close to 20%..

It is probably getting a little higher still..

Great.

And Bob, in your comments in terms of steeper curve, I mean, higher rates, do you mean by that a steeper curve?.

The curve is steepening now, and the Fed keeps doing a very effective job of talking to market [indiscernible], whenever it starts to price in any form of policy removal in the near-term. They generally did it this week, but I think – so the curve will stay fairly steep as I mentioned this quarter to date.

We've kind of backed off the highs in rates and we've flattened, but really modestly. I think the curve is going to stay steep for some time, but in the camp that the Fed is not going to be able to wait that long to start tightening. I think – and I'm sure you hear the same things as I do. Anecdotally, there's evidence of inflation.

It's not obviously the baseline effect. So like if you look at today's number PCE looking back at April of 2020, it's a very low bar, so the number looks high. That's transitory. I agree with the Fed 100% on that. But when you hear Procter & Gamble and other entities that are raising prices and Amazon is going to give raises to 500,000 employees.

Those aren't transitory. And then The President's speech on Wednesday night to the extent he's successful with these programs, the systems already awash with liquidity. I don't know if anybody follows the RRP market that's the reverse repo that the Fed runs. So that's where people are trying to get rid of cash and taking the assets.

That's at zero or very close to zero. Yesterday, the Fed did, or the treasury did a one month bill option at zero, maybe they eventually go negative, but we're just awash of liquidity.

So the combination of pent-up demand, substantial demand for goods and services COVID induced supply shortages, whether it's labor because people aren't coming back to work or all the other things you hear about bottlenecks commodity prices, chips for automobiles and everything else, a combination of huge demand, constrained supply, and then a fed/treasury that is flooding the market with liquidity, I hope they are writing its transitory, but I'm beginning to think that that may not be the case.

And they are overly sanguine with respect to their concerns with inflation. So I just think it's hard-pressed for that not to play out that way. And the Fed as much as they say that they're not going to tighten them, at what level could inflation run where they had to change their mind, 4%, I don't know.

But I would expect non-farm payrolls to be very robust, retail sales to remain robust. Everything is going to be very strong.

And over time I just think that they're going to have to move their timing forward and then you're eventually going to see the curve flatten, and they're going to start pricing in hikes than they're eventually going to have to..

Yes, Chris, that's potentially germane as it relates to our fourth quarter results. We saw a steepening of the curve, mortgages selling off, and then really in March that full sort of convexity effect started to hit the portfolio where we started to see the deterioration in pay-ups of specified pools and an extension in mortgage assets.

And as you know, we have for several years preferred to shorten the belly of the curve and we just didn't get as much satisfaction being in that point because it hasn't moved yet. The two year is still very much anchored near zero. I mean two year treasuries are in the near 15 and 17 basis points.

So the market is not pricing in higher rates on that part of the curve yet, which ultimately affects the belly of the curve hedges that we have on such as the five and even to a lesser extent the seven year swaps we have on. But that I think we will sort of have our day at some point when the market feels like the Fed can't stay on hold forever..

Okay. That's it for me. Thanks guys..

All right thanks, Chris..

[Operator Instructions] There are no further questions at this time. I turn the call back to management for closing remarks..

Thank you, operator. And thank you everyone for joining us today to the extent you aren't able to do so live then you listen to the replay and you want to ask a question or if you have another follow-up question from today and you did listen, feel free to call us as usual number in the office is (772) 231-1400.

Again, I thank you for listening and I will look forward to speaking to you at the end of the second quarter. Thank you..

Thank you everybody for joining today. That concludes today's conference call. You may now disconnect..