Dynex Capital Inc

NYSE:DX

Greetings, and welcome to the Dynex Capital, Inc. First Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Alison Griffin, VP, Investor Relations. Thank you. You may begin.

Good morning. The press release associated with today's call was issued and filed with the SEC this morning, April 21, 2025. You may view the press release on the homepage of the Dynex website at dynexcapital.com, as well as on the SEC's website at sec.gov.

Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. The company's actual results and timing of certain events could differ considerably from those projected and/or contemplated by those forward-looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks, please refer to our disclosures filed with the SEC, which may be found on the Dynex website under Investors, as well as on the SEC's website.

This conference call is being broadcast live over the Internet with a streaming slide presentation, which can be found through the webcast link on the homepage of our website. The slide presentation may also be referenced under Quarterly Reports on the Investor Center page.

Joining me on the call today are Byron Boston, Chairman and Co-Chief Executive Officer; Smriti Popenoe, Co-Chief Executive Officer and President; Rob Colligan, Chief Financial Officer and Chief Operating Officer; and T.J. Connelly, Chief Investment Officer.

I will now turn the call over to Smriti.

Thank you, Alison, and thanks to all of you for joining us on the call today. We have viewed and continue to view this environment as being favorable to our business model. The yield curve is steeper, asset prices are now reflecting higher risk premiums, financing costs are lower, and our ability to generate an above-average dividend yield remains largely intact. However, we must manage our business through the rapid transitions that are happening across the global and U.S. economy. My goal for you today is to leave our call with a better understanding of Dynex, our long-term approach to the business and why we continue to feel comfortable owning Dynex stock in our personal portfolios.

From the very beginning of our time here at Dynex, we've been very disciplined in our approach, not being swayed by the hot investment ideas that crop up from time to time. We recognized very early in the last decade how investing in global markets continued to become more complex. We focus on the multiple demographic, social and political factors that are interacting to create potential surprises. This thought process is the foundation of our approach to the markets and the management of our shareholders' capital. So what we're experiencing now is not unfamiliar territory for us. It's a moment we have planned and prepared for.

Over the past several quarters, we have deliberately positioned ourselves for a more dynamic macro environment. We've taken decisive steps to build resilience, including raising capital at attractive terms, preserving liquidity and adding flexibility across our portfolio. This proactive approach has given us optionality so that rather than react to market shocks, we can make strategic decisions from a position of strength.

To give you a better sense of the environment and how we're responding, I'm going to ask and answer a series of questions, and after that, I'll turn it over to Rob and T.J., who will give you more details.

Let me start with why do we feel comfortable owning Dynex personally? It starts with the team and our process. Our experience and our mindset and discipline continue to serve us in making clear decisions. Our investment strategy is simple. And yes, we must make the right decisions through volatility. We are relying on our experience and our processes to do so. Finally, the dividend: it cushions a lot here. In these moments, dividend-paying stocks, particularly Dynex, where you can rely on the asset quality and the team, really shine.

So what happened in the last 3 weeks? The April 2 tariff announcement was a shock for the markets. As announced, it was larger than anticipated and if implemented, could be described as one of the most significant trade policy changes in many decades. We've seen an immediate derisking to reflect the degree of uncertainty that this posture brings. Deleveraging of the riskiest positions such as treasury basis trades drove some of the moves. Many companies exposed to tariff uncertainty have experienced large declines in share prices. Credit spreads in both investment-grade and high-yield bonds are wider. We also saw that long and treasury yields unexpectedly rose, reflecting some type of selling, and the dollar experienced weakness versus major currencies that has only been seen during times of severe crisis.

So what did Dynex experience during this time? Most of the turbulence directly affecting us was in the treasury and swap market. And as T.J. will outline, it had some impact on our book value. Besides that, we followed our normal discipline. We have made minor adjustments to the portfolio. Margin and cash collateral changed hands in both directions as markets gyrated. Repo availability is excellent, and short-term fluctuations in interest rates seem reflective of the flows. We have had no trouble terming out our financing, and we remain engaged with our major counterparties as we have always prioritized openness and proactive communication.

Next, how is your portfolio constructed today, given the global complex backdrop? First, we are long-term investors, and we've constructed the portfolio to perform in a variety of market environments. Second, our strategy is simple: to extract the spread between Agency RMBS and our hedge financing costs. Both instruments are dollar-denominated and they're relatively correlated. The most important decisions we make are our hedge ratio, how much liquidity to hold and how much leverage risk to take. Our track record shows we have extensive experience and success making these decisions in some of the most volatile moments in markets over the last decade.

In 2019, we began operating with a significantly higher liquidity position, a feature of our risk management process, which remains to this day. It's a core part of how we are able to withstand volatility like what we've just experienced without making significant adjustments or crystallizing losses. We are entering the coming period with a robust liquidity position and a liquid balance sheet, allowing us to remain agile even as the external environment shifts. We have also operated with generally lower leverage.

Next question, why are you invested in Agency RMBS? Will there be changes to the GSEs? And what should we expect? So we have been up in credit and up in liquidity for several years now. We believe that Agency MBS are still an excellent choice in terms of where to allocate our shareholders' capital. T.J. will give you more details on how we are positioned within this market.

In terms of a change to the GSEs, here is our current thinking. The U.S. housing finance system has underpinned the American dream for over a century, helping millions of families build wealth and economic security through homeownership. It stands as one of the most effective and dynamic in the world. Agency MBS remain a foundational component of the U.S. financial system, central to bank balance sheets, retail money market and bond mutual funds, and an integral part of the wealth of average Americans. With over $8 trillion in Agency MBS outstanding, any disruption to the current guarantee structure would have immediate and far-reaching implications for capital markets, mortgage rates and systemic risk. We are preparing for the possibility of accelerated policy action around the GSEs, evaluating outlier scenarios for market reactions, and we will take proactive steps to protect shareholder capital across our exposures. Regardless of the pace or path, our focus remains disciplined risk management and real-time adjustment as the regulatory and political landscape evolves.

How are we thinking about the dollar and the demand for U.S. fixed income assets? Will that go down? How does that impact Dynex? The answer here is that it depends on how policy evolves. As it stands today, U.S. equities and sovereign bonds represent 70% of total global market capitalization and outstandings. So while investors could start to sell dollar assets in the short term, it will take a lot of time to move into other currencies because there just isn't enough out there to move into. We do believe that the trend will be towards some caution on the U.S. due to shifting policy. So you could see some selling of bond holdings, including MBS, but that could present a more durable opportunity for Dynex to step in and earn those extra returns.

Next question, how are we preparing for changes across other fronts such as the structure of the Fed or other policy changes? Look, we recognize that change is not only inevitable, but it's accelerating. From tariffs to monetary policy to regulatory shifts and power dynamics, we are preparing for potential transitions across many fronts, often with little warning. Our strategy acknowledges this reality. We're not waiting for stability to return. We're actually building for agility. That means maintaining a wide field of vision, engaging in disciplined scenario planning, keeping an open and flexible mindset and ensuring our capital is protected and ready to be deployed when opportunities align with our risk framework. As we always say, we don't predict, we prepare.

Next, will the global financial and economic environments continue their volatile trend? The short answer to this question is that we are prepared for yes. We have talked about this for the last 11 years. We expect the future will be full of surprises, and we will be managing our business from this perspective.

Finally, how are we thinking about the dividend? The dividend is a long-term decision that we make very carefully, and we have made it in the context of a capital risk management decision. We set our dividend based on many factors, including our view on long-term returns, availability of capital, yields on comparable instruments, liquidity risk, overall risk and taxable income. We raised our monthly dividend in February, reflecting our confidence in our continued ability to generate attractive returns. In the long term, we're operating at the intersection of global capital markets and the U.S. housing finance system. This is a business we feel is strongly supported by demographic trends. In the shorter term, we believe Agency MBS are still an excellent choice in terms of where to allocate our shareholders' capital, and we are managing our risk in this sector with the rigor and discipline I have outlined for you thus far.

I'll now turn it over to Rob and T.J.

Thank you, Smriti. We have several highlights this quarter that we'd like to share. First, as you can see from our results, net interest income continues to trend up as new investments carrying attractive yields are added to our portfolio and financing costs continue to trend down. Despite another quarter of volatile rates and a 70 basis point intra-quarter move in the 10-year treasury, the mark-to-market impact of our MBS investments compared to our hedges was close to neutral.

This year, we've significantly strengthened our capital position. Year-to-date, we've raised $270 million of new capital. And given the strength in our stock during the first quarter, we raised capital at a premium to book value, which is accretive to shareholders. Raising capital above book value has allowed us to grow, achieve scale and deploy into an attractive market. We have invested some of the new capital into the agency portfolio, which T.J. will cover, but we also continue to keep ample levels of liquidity to maintain flexibility going forward.

Similar to last year's first quarter, this quarter, we had an accelerated vesting condition for equity compensation. The impact of this acceleration compared to a standard vesting schedule was about $1 million during the quarter. While expenses are up this quarter, I do expect expenses to level out and trend down over the course of the year, and combined with our equity growth, we are planning for a lower expense ratio this year compared to 2024. We continue to have a commitment for expense efficiency, which drives shareholder value over the long term.

I'll now turn it over to T.J. for the investment portfolio outlook.

Thank you, Rob. I'll cover our performance and decisions for the first quarter before addressing quarter-to-date changes and our outlook. Our 2.6% TER was delivered during the quarter with significant swings in rates. Current coupon mortgage yields, for example, moved over 70 basis points high to low and the yield curve moved 20 basis points flatter before steepening again. This performance validates what I have long emphasized about this market regime. Skilled investors can earn substantial risk premiums from mortgage-backed securities, while effectively hedging interest rate risk. The portfolio generated a solid total return despite mortgage spreads widening from around 138 basis points on the current coupon versus 7-year treasuries to around 144 basis points by the end of the quarter.

As Rob mentioned, we raised a significant amount of capital and regularly deployed it. We invested about 2/3 and held the balance to allow us to remain flexible, which served as a cushion during the post-tariff market turbulence. We also chose to shift our exposures down in coupon towards more duration stability, added some call swaptions and maintained our portfolio bias towards neutral duration with a curve steepening bias. Most of our hedges are concentrated in the long end of the yield curve. By quarter-end, our leverage had declined to 7.4x.

Turning to the current quarter. The April 2 tariff announcement was a vol event, not a mortgage event. Initially, we saw a classic risk-off reaction that started with equity price declines and then interest rates dropping sharply. However, this quickly evolved as investor concerns about potential de-dollarization and treasury selling caused yields to spike. We also experienced a tightening in swap spreads as some hedge funds were forced to unwind overleveraged positions. Some of the price action in these markets was very volatile, indicative of poor market depth. By last week, realized volatility has subsided modestly and uncertainty still remains high.

Agency RMBS spreads widened sharply this month. Spreads have ranged from 145 basis points to 160 basis points over treasuries or nearly 200 basis points over interest rate swaps. Trading in the Agency RMBS market has been orderly. While bid offers widened during certain periods, we have not experienced the gappy price action we saw during the COVID crisis, the LDI crisis or even the volatility of October 2023.

Our book value as of Thursday's market close was estimated between $11.55 and $11.65 per share. Leverage to total capital was at 7.8, up 0.4 since quarter-end due entirely to lower book value. We have followed our disciplined, liquidity-focused risk management process. We continue to keep an open and flexible mind as we navigate the markets. Our robust liquidity position placed us in a position of strength where we were not forced to crystallize losses or adjust positions amid the volatility.

We are actively managing several risk factors. First, volatility risk. The April tariff-induced volatility underscores the importance of our hedging strategy and liquidity management. We expect options will be a core part of our hedging strategy going forward. Second, prepayment risk. This has intensified following Rocket Mortgage's acquisition of Mr. Cooper, creating a formidable originator servicer capable of offering expedited refinancing. We've adjusted our portfolio to focus on specified pools with strong prepayment protection, and we shifted our exposures towards lower coupon mortgages backed by borrowers with lower mortgage rates. Third, GSE transition. The FHFA continues to implement changes at Fannie Mae and Freddie Mac that could introduce spread volatility. Our team remains engaged with Washington policymakers to stay ahead of these developments. Finally, regulatory changes. The regime is changing rapidly, and there is scope for sharp movement in assets as capital requirements for banks evolve in both the short and medium term. In the short term, we could see changes to the supplemental leverage ratio that could make it easier for banks to hold treasury securities. And there is also scope for broader changes that will lessen the bank regulatory burden and ease capital treatment for many of their assets.

Looking ahead, the recent volatility and spread widening have strengthened our conviction in the opportunity to earn attractive returns through the spread premium available in Agency RMBS. Mortgage spreads to swaps and treasuries remain close to historic wides, offering double-digit ROEs, positioning us to generate solid returns even without spread tightening from today's historically wide levels. The supply and demand balance in the market remains healthy. While money managers saw redemptions as investors reallocated from bonds to stocks after the equity price decline, we expect a broader trend in fund flows towards income-producing assets to resume. Demographics still strongly support a need for income in portfolios. Moreover, there is scope for bank demand, which was strong early in the first quarter to reaccelerate as the monetary and regulatory policy environments become less uncertain.

Spread tightening from today's levels will be a function of a reduction in overall macroeconomic uncertainty and policy uncertainty. If we enter any type of recession as expected by many in the market, Agency RMBS should outperform credit-sensitive assets as investors rotate away from default risk. In this scenario, lower financing costs could also support strong returns. While our portfolio can generate outsized returns from spread tightening, my optimism is tempered with a deep respect for the complexity of the global macroeconomic environment.

Even in quarters without a major vol event like we've seen this month, we expect realized volatility will remain above average. In addition to insulating our portfolio from these moves by adjusting our exposure [ to that ] and adding swaptions, as I mentioned, we have continued to pursue opportunities in the Agency CMBS market, where we can add credit-protected bonds with much more certain durations. We added exposures to Fannie Mae DUS in the first quarter and expect to make further additions in the coming quarters as opportunities arise.

Financing markets were remarkably stable throughout the recent volatility, and we expect repo rates relative to SOFR to remain in a tight 15 basis point to 20 basis point range. Availability of funding is good with nearly $7 trillion in money market fund balances.

Our disciplined approach to leverage and expert management of liquidity, hallmarks of Dynex Capital, will be needed to navigate us through this environment. That is something this team is very proud to have demonstrated over more cycles than any other publicly traded mortgage REIT.

With that, I'd like to turn the call to our Chairman and Co-CEO, Byron Boston.

Thank you, T.J. Our goal today is to give you a clear picture of the complex environment in which we currently invest. For our shareholders, we would like to leave you with the reinforced impression that you can continue to trust your capital with this management team. We came into this decade believing the globe was complex. We have continued to make deliberate decisions for capital management, personnel, technology, risk and investments with this mindset. Let me reiterate, we continue to see a compelling opportunity to invest in agency residential mortgage-backed securities, but we must manage our company through a rapidly changing landscape. We have ample dry powder to protect our capital and take advantage of attractive investment opportunities as they develop.

Second, it is important now more than ever to be able to rely on our team. We have been building our bench for the long term, and the experience we have will be critical to developing the strategy and navigating this complex environment. It's also important to have transparency in your investments. The Dynex balance sheet can be clearly and cleanly valued. All of our assets are marked and reflected in earnings and book value. We do not have any held-to-maturity investments or other unrealized losses that are hidden from sight. These are essential aspects in assessing not only who manages your capital, but where your capital is invested. We take responsibility as managers and stewards of your savings very seriously.

The Dynex team is personally invested alongside our existing shareholders, and we will continue to manage risk and invest as we see value. As stewards of your capital, we want you to know we're in this together. The executive team collectively owns nearly 2% of the company, making us the fourth largest shareholder with a significant portion of our personal net worth invested alongside yours through long-term incentive grants and direct ownership, aligning our interest fully with yours for the long haul.

I thank you for your trust, and I look forward to updating you on our performance and the environment next quarter. I'll now open the line to questions. Operator?

[Operator Instructions] Our first questions come from the line of Bose George with KBW.

The first question is just on the repo. I guess it sounds like the availability remains strong. Can you just provide more color on repo funding costs? Have you seen much in terms of increases?

Repo funding costs have been very remarkably stable between 15 basis points and 17 basis points over SOFR across -- maybe on the longer end. Now, of course, the forward SOFRs are moving quickly, but maybe on 6 months, you're 3 basis points or 4 basis points wider than where we were before this. But overall, it's been impressive how much availability there is in the financing markets, and it's a testament to the plumbing of the system working very well.

Okay. Great. And then, just on the hedging side, given the volatility, is there anything that changes your views on whether to hedge with treasuries versus swaps? Yes, any change there?

I'd say, broadly, swaps tend to be a more natural hedge for a mortgage portfolio. We are very comfortable with how we're set up at this point in terms of the hedge composition. There is some room for us to adjust in both directions as opportunities arise. But I think where we are today is a very natural position for the portfolio at this point.

Our next questions come from the line of Jason Weaver with JonesTrading.

Maybe for T.J., I was wondering if you might be able to frame the investing opportunity you see today versus historically. Steeper curve and wide spreads seem to imply some really high ROE potential. But how do you frame that against what is increasingly a more volatile interest rate backdrop?

Yes. Great question, Jason. As you said, the steeper curve environment, spreads are wider. We're out to around 200 basis points versus interest rate swap hedges. There's opportunity for significant ROE. And against the volatility -- to your question, how do you balance it versus the volatility, some of it is really -- number one, there's no better free lunch in the marketplace than diversification. So we have a nice opportunity to diversify the portfolio across the coupon stack, as you've seen this quarter, or last quarter, rather. And that enables us to get a little more duration certainty into the book. And now, at this point, you also have opportunities arising on the Agency CMBS side of things, which I think is increasingly interesting. So, yes, to your point, it is a great environment for things going forward with a lot of positive carry.

Got it. And just one follow-up. I was curious about your sort of pace of capital deployment from the ending of the first quarter into the second, if it's been relatively even?

Jason, so I think we announced that the leverage had gone up from 7.4x to 7.8x, and that was entirely due to book value decline.

Our next questions come from the line of Doug Harter with UBS.

Just first off, hoping to get a clarification on the book value update you gave and how that factors in the dividend that goes ex this week.

Doug, the dividend is -- the book value I stated includes the dividend accrued through Thursday, through that day where I quoted the book value.

Great. Appreciate that. And as you just mentioned, leverage is at 7.8x. How do you think about the right range of leverage in this environment where things are volatile, spreads are wide? How do you think about that and in the context of kind of earning -- attempting to kind of earn the dividend?

Doug, yes, thank you for the question. So this is really like a tale of 2 situations, right? One is the good situation is that you have mortgages at [ 200 ] over swaps. These are really good returns. On the other hand, you're managing through a world in transition. And so, one of the things we respect, as you know, as long as you've been covering us, I think we've been saying the globe is complex and managing our business in this environment requires a great deal of respect. So yes, there are returns available, and we must manage ourselves through this environment. And so, for now, what I would say is we're watching and seeing how things develop. The bar to add risk here is quite high. So I would say that's something definitely a mindset in which we're operating. We have operated with lower leverage coming into this quarter. And so, that just is reflective of our stance on this environment.

And I guess, along the lines of the bar being high to add risk, how do you think about continuing to use the ATM to add to the portfolio at these spreads?

Yes. Once again, I think we've always followed the discipline of when there are risk-adjusted returns that are available to us that we feel are accretive to the cost of capital, we should raise capital and deploy that capital. We are looking at the risk environment with -- somebody else just asked a question, how do we see these returns in the context of historical returns? These are very, very good long-term returns on capital. So, that is driving some of our thought process with respect to capital raising. And as you can imagine, raising capital above book was very good for us in the first quarter. As the stock has declined and book value commensurately, you can see -- you expect us to adjust our thought process around that as well. We've been very disciplined generally in terms of when and how much capital that we're raising. And really, we think of it as just us doing the same thing on the equity side as we do on the investing side. So we're opportunistic about that as well.

Our next questions come from the line of Trevor Cranston with Citizens JMP.

I appreciate all the color you guys have given this morning. I wanted to follow up on your commentary around kind of how you guys approach risk and thinking about your scenario planning. Two of the things you mentioned were potential for changes at the GSEs and also some potential for foreign selling, including in MBS. I was wondering if you could just provide some context around kind of how you think about those scenarios and how much sort of incremental spread widening they could cause in MBS from where we are today?

Yes. Thanks, Trevor. Yes, of course. So I'll tackle the GSE question first. As I mentioned in my comments, it's very interesting. This is a market that is not only big in the U.S. economy in terms of its size with respect to just housing, but it's also super embedded in the financial system, right? So banks own $2.8 trillion of Agency RMBS. The Fed owns another $2 trillion. And any changes to the guarantee thought process in and of itself is going to have consequences, directly affects the mortgage rate and so on. So logic would have it that when something is so entrenched and entwined in the system, there would be a fair amount of caution with respect to changing those things, right? And so, if you think logically, yes, things could go just fine. And so, what we're preparing for is if things don't go fine. We're looking to scenario analysis to say how much could mortgages really widen? Should there be some kind of announcement that changes the level of pricing? You can look to the non-agency market as an indicator there in terms of that spread. So we've thought through those types of scenarios. And in reality, what our framework is that there will be an announcement of some sort that maybe the market doesn't like. The market reacts to that, and then there's an adjustment in the policy. So it's what the market prices versus what actually happens. That's something we really focus on in terms of the framework. So I hope that helps you understand how we're thinking GSE-wise. Logic would have it that things would be well thought out, and we're just prepared for some kind of shock in the event that it isn't.

On the second question that you asked about kind of selling of MBS or just negative sentiment on the dollar, et cetera, et cetera, there's a short, medium and long-term aspect to these things. In the short term, obviously, there's been a knee-jerk reaction. The dollar is selling off. We've seen some mutual fund selling or bond fund selling of Agency MBS. But again, in the long term, as I mentioned, it's super difficult for large investors to really reallocate away from the dollar and reallocate from dollar instruments. So over time, could that happen? Will that happen? We're actually preparing for that to happen. And then, on the spread widening side, very difficult to really say how much that could widen spreads. And again, we run scenarios for all of this stuff.

Yes. And I would just add on the supply and demand balance there in the mortgage market, as we forecast out the year and look at supply relative to potential demand this year, we really were not assuming anything in the way of demand from foreign investors. And I expect that selling -- and I don't think we'll see much selling, right? Their portfolios, even on the treasury side, official portfolios anyway, are fairly short in duration, and they can just allow a lot of these securities to mature and roll off. And on the mortgage side, we really haven't been very active players for some time now.

Our next questions come from the line of Eric Hagen with BTIG.

Maybe just a follow-up on the portfolio here. I mean, how much yield do you think you pick up in the current coupon in the TBAs? And is there a scenario in which you would actually maybe crystallize the losses in these lower coupons and reinvest in the current coupon? Or are we basically sitting with those bonds at this point? And is there even a scenario in which you'd add to the lower coupons at this point?

Yes. I think the lower coupons actually offer a lot of value. They have tremendous amount of duration certainty to them at this point. The -- to speak as a mortgage guy, the convexity of those securities is very compelling relative to the rest of the coupon stack. And I think there's a place for those in our portfolio, at least as far as I can have an outlook on things at this point.

So in terms of yield available, you're talking about 155 basis points or more of spread to treasuries, [ 205, even 210, 220 points ] of spread versus the interest rate swap curve. So yes, that -- I think there's a tremendous amount of yield available to be earned and a lot of cushion. Really, when you think about that yield, it's a tremendous amount of cushion relative to any sort of duration uncertainty, sort of the classic metrics that at times can make it difficult to manage a mortgage portfolio. So -- and some of those -- the other thing I'll point out is relative to some mortgage portfolios in our space, we have -- we do have a bias towards higher coupons because we're very cognizant of the prepayment risk on the higher coupons. We saw kind of what I'll call a refi wavelet in September, and it was really nasty. And to be honest, that's some of what our economy needs. Those borrowers who are sitting with rates that are 6-plus percent are consumers, and they're being pinched in a big way. So they're going to need to refinance at some point in order to continue to drive the economy forward. So I think it's a very reasonable probability at this point. So yes, highly diversified coupon stack makes a ton of sense, avoiding those borrowers who could be the fastest to prepay, and the overall yield spread available today gives a tremendous amount of cushion for the mortgage market.

Got you. That's really helpful. All right. Just to maybe drill down a little bit on the capital and liquidity, I hear you on the leverage and where that currently stands. But of the $240 million that you raised last quarter, how much has actually been deployed up to this point? And what's your current liquidity after these last couple of weeks of spread widening? And then, I've another follow-up. I was going to say, is there an internal philosophy for how much liquidity you guys keep as a percentage of your capital base? Or how are you benchmarking your liquidity right now?

I'll take [ that one ].

Go ahead [ and take it ].

Well, just the last question because I think that will help you with the detail. So yes, we have been running a higher level of liquidity in general versus our total capital. That is how we think about it. We also think about it in terms of how much cash we have relative to unencumbered assets. In times like these, you'll see us run with a higher level of cash as a total of unencumbered plus unencumbered. And then we'll also -- you also see us running somewhere between -- we try to target between 6% and 7% of equity over time. And that's typically how we think about liquidity as a level of -- versus capital.

That's really helpful.

[ That's versus ] assets actually. It's versus assets, right, yes, not capital. 60% to 70% of equity. That's...

Of equity, right, yes, exactly. And in terms of the amount that we've deployed -- I think about 2/3, as I mentioned, of that capital was deployed, and the remaining has been a buffer for liquidity. And I'll note that some of the reason you carry so much liquidity in a portfolio like this is because there is a lot of margin movement between the assets and the liability sides of the portfolio, and that has been functioning extremely well. So again, it's another part of the system that has been very healthy throughout all this volatility.

Our next questions come from the line of Jason Stewart with Janney Montgomery.

Can we go back to the GSE question for a moment? Pick your number in terms of where spreads would go to. But what are the ways you are preparing for that potential price action?

So really, there's -- it starts -- the #1 thing is having the liquidity available to withstand a price shock, right? So pick a number, 25 basis points, 30 basis points, 50 basis points. One of the things that we do is we stress our liquidity to make sure that we can withstand a significant degree of shock. The second piece is just our mindset as we're coming into this situation. We are operating with lower levels of leverage. We are thinking about dry powder. And there has to be, as I mentioned, a very high bar right now to raise levels of risk in the portfolio. So the #1 defense against any of this stuff is the ability to withstand a shock, and that starts with our liquidity position.

Okay. That's helpful. And then, obviously, it's an uncertain environment, but is there any marker that you're looking at in particular for this acceleration in GSE policy action?

I mean, it's interesting. I think there's a massive recognition by people in charge that how big the mortgage market is and what an integral part it is of the U.S. economy. I think there's also been a stated objective of bringing mortgage rates down. So those are things that -- if we listen to the rhetoric or what's out there, those are things that go in the favor of saying, okay, there's some recognition of how important this is. On the other hand, there are steps that could be taken that get misunderstood by the market. And that's the part that we really get concerned about more than sort of a deliberate policy in one direction or another. So that's what we're really preparing for more of like a surprise for the market that then gets adjusted somehow.

Got it. Okay. And then, on the hedge portfolio, were there any notable changes since quarter-end to the hedge construction?

We've made very minor adjustments is what we mentioned on the call.

Okay. And so, it looks like -- I mean, it looks like 4-plus rate cuts are priced in. Historically, you've taken the opportunity when forward rate markets price in a substantial amount of cuts to lock in some of that lower funding costs. Is this a particular -- I guess, maybe just speak to how you think about maybe forwards on the short end of the curve, the hedge portfolio and how you see that evolving and the hedge portfolio moving going forward.

Yes, we're thinking a lot about that in terms of where we position the repo portfolio. And there are opportunities to extend out. You also have a lot of uncertainty coming this summer. We still have to deal with debt ceiling, things of that nature. So we're considering all of those when we think about where and how to position the repo book. And in the context of that, the nice thing is we have the opportunity to hedge across the spectrum of SOFR futures and interest rate swap options. So it is a great environment in that sense. There's been a lot of opportunity both up and down to lock in lower funding costs over time.

That does conclude our question-and-answer session. I would now like to turn the floor back over to Smriti Popenoe for closing comments.

Great. Thank you, everyone, for your attention today, and we look forward to updating you on our call next week -- next month -- next quarter, I beg your pardon.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines. Have a wonderful day.