Q4 2023 Orchid Island Capital Inc Earnings Call

Participants

Robert Cauley; Chairman and CEO; Orchid Island Capital, Inc

Hunter Haas; CFO; Orchid Island Capital, Inc.

Mikhail Goberman; Analyst; JMP group Securities

Christopher Nolan; Analyst; Ladenburg Thalmann

Jim Fowler; Analyst; Kingsbarn Capital Management.

Presentation

Operator

Good morning, and welcome to the Fourth Quarter 2023 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, February second, 2024.
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. Our forward-looking statements subject to the Safe Harbor Provisions Private Securities Litigation Reform Act of 1990.
Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith beliefs with respect to future events and are subject to risks and uncertainties that could cause actual performance or results 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-10K. 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 statement.
And now I would like to turn the conference call over to the Company's Chairman and Chief Executive Officer, Mr. Robert Kelly. Please go ahead, sir.

Robert Cauley

Thank you, operator, and good morning. I hope everybody had a chance to download our slide deck because, as usual, I'll be going through the deck over the course of the next 30 minutes or so, giving everybody a moment to pull up the deck.
I will as usual, start on slide 3, just kind of give you an outline of what we'll discuss are. The first thing we'll do is go over our financial results briefly hit on the market developments. What occurred during the quarter, which obviously shaped our results and then talk about our portfolio and hedging positions and then give you an outlook of how we're positioned and how we see things going forward.
So without that, I'll turn to Slide 5. These are the high-level critical metrics for the Company. For the quarter, Orchid reported net income of $0.52 per share for the fourth quarter of 2023, our book value increased approximately 2% from $ 892 at the end of the third quarter to $9.10. The total return for the quarter was 6.05%, and we declared and paid $0.36 in dividend. As you recall, the dividend was reduced late last year, $0.16 to $0.12.
Now turning to slide 6, kind of the second level metrics and these are to a large extent, reflect steps taken during the quarter. I won't spend too much time going through the details of what happened in the quarter, as we all know, in October when rates were selling off very violently and the outlook for rates going forward was a lot different than it was the last two months of the quarter.
The market pivoted severely turned around and rallied November and December, but nonetheless story in the third or doing October with the market selling off the way it was in order to maintain our leverage and liquidity, we had to reduce the portfolio. So if you look at the top left, you can see that the average balances down, that's slightly misleading because we did reduce the portfolio by almost 16%. And I'll get into the details of how we did so but done fairly decent size reduction, and we also brought the leverage down from [8.5] crore to 6.7. sic refer the page number 22
In our liquidity, we took steps to raise our liquidity over the course of the balance of the quarter. We did not change a lot with respect to the hedges, and I'll get into that in greater detail in a few moments but in any event, those are the big picture view of what happened. Our speeds declined slightly.
That just reflects seasonal declines. Nothing of low perspective that Slide 7 just shows our financial statements. We have not yet filed our case. So these are still somewhat preliminary, although we do not anticipate changes, I will leave those to you for your review. And I will then move on to Slide 8. We've been incorporating this slide of late.
This kind of shows you our net income, our focus on net income focus. We're looking at the NIM. here, we're trying to take into account the effect of our hedges and discount accretion of premium amortization. The idea here is to make this data looks a little much more like our peers who also report either core income or earnings available for distribution. And as you can see on the top right, these are dollar amounts of the bond interest represented in person or per share amounts.
The headline number was relatively flat. But if you look at the interest expense on repo, you can see a decline that reflects the decline in the size of the portfolio. But what's noteworthy is that the income number did not change very much. And the reason the income did not changed particularly much a couple of reasons of why even though we did reduce the portfolio, we did so kind of mid-quarter. And also the third quarter is somewhat misleading because we added a lot of assets late in the quarter. So we did not have a full quarter's worth of income, but nonetheless, the combination of the two leaves us with a relatively attractive, ma'am, as you can see discount accretion was actually larger. That simply reflects the fact that as we calculate accretion based on the market value at the end of the previous period with the third quarter sell-off values of assets were down, discounts are larger. So even though prepayment speeds were slightly lower, we had larger accretion.
And then the effect of the hedges continued to move in our favor. The bottom line is there's a fairly substantial increase in adjusted net income. Again, this is non-GAAP. We're presenting this just for comparison purposes to our peers, and we're trying to, as I said, take into account the effect of hedges and discount accretion, which under our method of accounting, we do not use in the fair value option. So on a per share basis, you can see income was up fairly substantially even with a slight reduction in the portfolio.
And just wanted to say a word or two about the numbers on the bottom. As you can see, we have been paying a $0.48 dividend earning less. And now that's kind of flip and just to go back to where we were at 2023, we were at the time willing tools steps, but the lower current income because we wanted to own securities that we had. We thought we had much better total rate of return potential loan, mainly lower coupons, especially if the economy was going to pivot and turn around and we were going to end the tightening cycle and potentially go into an easing cycle. So we were willing to make that sacrifice on the events in this last quarter, we had a decision to make in terms of reducing the size of the portfolio.
If it was easy, we could shed basically TBA like 3% coupon securities that were had a negative NIM. and in fact, increase the income of the portfolio, it still leave us with a decent overweight to that sector. So to the extent that we do get a move in the other direction, rate-wise data, we stand to do quite well. So we're very happy with this positioning. We have very comfortable level of income and we still have the potential to do well in the event of a rally, although today's numbers may call into question How soon that's going to happen, but I'll say more about that later.
So anyway, moving on just to discuss market developments on the top left is interesting because this shows you the interest the curve over the course of the last few months. As you can see the red line there, September 30th, the green line is the end of the quarter. And the blue line is actually where we were last Friday. If we had done this at the end of close of business yesterday, that blue line would have been pretty much on top of the green line and we did it close business today. It might be right back where he's so of the loan goes a long and short of it is that the market still remains quite volatile.
The outlook continues to change. The data this week obviously is very significant, but we also have developments away from that with respect to regional banks and we had a Fed meeting. And so we've been very, very choppy. And the volatility that we've been experiencing for a couple of years continues if you look at the bottom right, you can just see the kind of a proxy for the shape of the curve.
And I'd just point to the bottom right, you can kind of see late in the year, we had a fairly significant move from where we had been at the end of October and then it just kind of reversed. And now we're going the other way. So even the shape of the curve continues to gyrate as data comes in and out factors outside the market continue to impact the shape of the curve and rates and so forth.
Turning now to slide 11, the top line is one of our favorite kind of just shows you the proxy for the attractiveness of the mortgage sector, the basis, if you will, as you can see, we've been at very wide levels. If you look at the right side of that chart, you can see us November and December, we tightened the end quite a bit. Just wanted to make two points on this on one is it quarter to date, we've kind of traded sideways. We really haven't tightened much or wind much. But that being said, we're still at very attractive levels. And so the mortgage space is still as attractive, still very anxious to be able to put money to work in this environment because we are very excited about the retain opportunities that are out there.
With respect to just the metrics on how mortgages performed on the bottom of the page. We are, as I said in the past, we normalized prices just to give you a feel for how it changed over the course of the last quarter. Obviously a very strong performance into the end of the quarter and to a large extent, has been maintained into the first quarter of 2024 roles on the bottom right, these are all conventional rolls. These are very, very weak. Are there are certain rules that are attractive there, Jenny rules, Jennie Mae securities. We typically don't traffic in that space, but the rules in that space are attractive and they really presented a slightly different picture than what you see here.
Moving on just some more market color volatility on the top. This is kind of a more recent look back upon going back one years and three points I want to make here one at the time that this was presented as of last Friday, we were kind of at the local levels. With respect to the last year, we have certainly bounced this week are heavy data this week has been choppy with respect to either incoming data, the Fed meeting or the regional banking knows. So it's definitely bounced off of that.
And if you look at the bottom chart, which is a much longer look-back period, you can see that while still is fairly highly relevant, relatively high levels on a historical basis and even more so this week versus what's depicted here, a few more slides and then we'll get into the portfolio of top of slide 13, you see the red line. You can see that the mortgage rates kind of rallied into the end of the year. But still at extremely high levels, still around 7%, probably if anything going up from there.
So one thing that is worth noting, if you look at the top right, primary secondary spreads are still on an historical basis, fairly elevated. And the takeaway from that is that in the event of a more welcoming market, no mortgage originators, if they were to tighten those spreads in could definitely enhance refinance ability right now that doesn't look like it's going to become an issue. But the potential for that to happen in the future is definitely there.
So now just moving through the fact of Slide 15 just gives me a chance to go into a little more detail what we did during the quarter. Obviously, as mentioned just high level. We had a very severe turnaround in the market from October into November and December at the time in October when it looks like the rates were going to be sustainably above 5%. The Fed was going to keep rates relatively high through the balance of 2024, then that violently reversed in November and December. And in our view, the market got quite far ahead of itself, and we took steps to address that.
But nonetheless, just to go through some details on the left side, we mentioned that we did reduce our allocation to the 30-year 3% coupon by 38%. We did add some higher coupons and doing so in conjunction with we've done in prior quarters, we continue to raise the weighted average coupon. It's up to 4.33 and the realized yield is up to 471.
Also of note, and I'll get into this more in a moment. If you look at the bottom left, this point we make here, our economic net interest spread increased quite a bit. And the reason that that happened is because we reduced the portfolio during the quarter in October precisely, but we did not reduce the hedges nearly as much. And so that we got to a position where we're more fully hedged. But we also did in such a way that these are swaps, which are really our most effective funding hedge, became a higher percentage of the composition of our hedges and as a result, we had a meaningful pickup that in conjunction with the higher coupons on the portfolio, a much wider economic net interest margin. And that kind of explains why in the prior slide when you saw the $ 0.54 versus the $ 0.36 and $ 0.38. So that's kind of where we sit going forward.
On slide 16, just kind of shows what we've been doing in the portfolio and pictures. And as you can see, we've been kind of adding to the higher coupons and reducing our exposure to threes all the while keeping a fairly decent overweight, which means that in the event of a rally, we have the chance to do quite well. And that same time maintaining very good hedge coverage and various solid levels. I mean, on slide 17, this is what we've talked about, our funding in general, as I just mentioned, if you look on the right side, the blue line. The reason that that ticked down is because as I said, the hedge portion of our or the swap portion of our hedges has become larger because we reduced the all of the hedges, but the swaps less.
And so the swaps remain a larger percentage of the total. Those are very effective hedges from a funding perspective and our average paid fixed rate is quite low as a result of that, in conjunction with the higher coupons, our net our economic interest income is higher and our funding costs are lower. Just a few points on the left side, our funding levels, obviously relatively stable with the Fed pretty much done hopefully. And then with respect to the average days maturity relatively stable, the big change there is the economic cost of funding, which has improved on.
slide 18 goes into the details of the hedging positions. And I just don't want to again reiterate those points that we're now more fully hedged. A reason being we thought that the market had got ahead of itself into the end of the year. Looking back that we feel pretty comfortable that decision that's proved to be very fortuitous. The portfolio is pretty much rate neutral and in fact, most of the book value increased during the quarter was more a function of mortgage basis tightening than just being native long. And we left this to ourselves in a very good position where our income is quite attractive, and we have upside going forward so quite comfortable that just some details.
On Slide 19. And one thing we did do late in December, we added some sulfur futures trying to lock in at where at the time, extremely aggressive market pricing for Fed easing. And so that should bode us well going forward.
And then since quarter end, with respect to the TBA hedges, we have moved those around slightly. The belly coupons of the mortgage stack have become quite rich generally in January. And so we moved some of those hedges into the 4.5% coupon. So some small position and 3%. The balance are in what we call the belly coupon. So, the 4.5% and 5.5%, they've done very well. And so we view them as having more in the fall.
And then finally, just like I mentioned, with respect to the swaps, we did not reduced as very much in the paid fixed rate is actually even better now than it was at the end of last quarter. And that's also contributed to the improvement in the economic cost of funds and the economic net interest margin Slide 20 just shows you some shocks with respect to the various coupons. We tend to look at these on a relatively frequent basis, gives us a feel for how these different coupons would do in different scenarios and helps us in our decision-making process with respect to how we construct the portfolio, as you can see it, I would expect the lower coupons do the best in a rally or bull steepener in the worst of Bear Flag or sell off. But this is just kind of nice to know information that we use, but up. This is not really relevant for the purposes of the balance of the discussion.
So I'll just move on Slide 21. Again, just to mention that we think we have a portfolio at a fairly rate neutral position. Our hedge level is quite high and it's reflected in the bottom right. You can see the numbers. Those are changes in the value of our equity with a plus or minus 50 basis point rate shock. And you can see it relatively benign reaction to those moves and we get we put that in place more or less in December because we thought we had more move, it move higher in rates than further down and turns out for the most part that's been the case, although it's been choppy on
slide 22 to discuss to our prepayment speeds by coupon. We're just trying to give you a more granular data with respect to the portfolio versus just reporting a portfolio-wide level. I'll leave that for you to review. We'll go through that in detail and then moving on to kind of a wrap, if you will,
On slide 23, just want to make three points on the obviously them probably a very pivotal quarter and a fourth quarter with the change in direction from October into November and December. We thought the market got ahead of itself. In retrospect, it looks like that may have been the case, but the positioning of the portfolio from any current income perspective is quite attractive. We think that we have potential upside in the event the Fed does ease, not sure when and if that's going to occur now given the events of the last few hours, but that being said, inflation still does appear to be moderating. And as long as we don't have a reacceleration in inflation, it's probably likely that the Fed will slowly remove the tightening bias if they were to do so that gives us opportunity for our net interest margin to expand even further.
To the extent we did have a recession, obviously, we could do even better because, you know, given the positioning of the portfolio, we would do very well in equal steepening. But even if we stay put say as we are all we're in a very good position from an income perspective. We think the very severe book value pressure that we felt for the last two years is probably over and we're very comfortable with how we are situated going forward. Just one final point before I turn it over to questions.
On Slide 25. This is just some anecdotal information we provide every quarter if you look at that blue line, that represents bank holdings of mortgages, and that is a welcome development we have seen of late, and that is that banks have started to come back into the mortgage market a little bit. They can play a very significant role. The Fed obviously is continuing to wind down their portfolio and banks have been doing the same, but that has changed a little bit of late of this all, notwithstanding the events of this week with respect to any regional banks. But prior to that, we had started to see banks reemerge, and that would be a very welcome development for the sector because they can play a very strong role in supporting the mortgage market. And I always welcome that.
So with that, operator, I will turn the call over to questions.

Question and Answer Session

Operator

Thank you. And at this time, if you would like to ask a question, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, you can press star one. If you do have a question at this time, simply press star followed by the number one on your telephone keypad. And we'll pause for just a moment compile the Q&A. Thank you.
Your first question comes from the line of Mikael coBRIM Min from Citizens JMP. group. Your line is.

Mikhail Goberman

Hi, good morning, guys. Just a couple of questions here on. Could you give an update on where your economic leverage stands currently and sort of piggybacking on that assuming and we don't get any rate cuts till the second half of the year, and we cannot stay at this sort of level of primary secondary spreads? And what is your appetite for that leverage kind of going forward? I know obviously leverage went down come meaningfully in the fourth quarter and also if you go a book value update as we stand now.

Robert Cauley

Thanks for your help out with a quick question and I'll turn over 100 of the leverage is, if anything, slightly lower our product just paydowns for the month, not being reinvested on our book value was more or less unchanged as of yesterday of up or down a few pennies from where it was at year end. And with respect to primary secondary spreads, that's a tougher one to call.
I'm not sure how that's going to evolve from today, kind of threw a monkey wrench into the outlook because I think where we were at the close of business yesterday, probably still thinking the Fed would ease at some point, maybe not March, but the as long as inflation kept trending down that even if nothing other than that, to keep real rates from getting too high, that they would slowly ease. But if we do see an acceleration from here in versus wage growth. And then there's the risk that you would have a wage price spiral that that starts to change things. So, our view is to probably taken leverage back up a little bit.
But right now, we may have to just wait a minute just to see kind of how things shake out here from here on out and then yes,I think we'll look to Ligand a little bit into the leverage up to do so and sort of a measured pace as we as we see how the data develops we've we came into it the tightening in the fourth quarter that occurred from kind of the wides in the beginning of the quarter into the third pretty defensive.
And so we took the economic leverage down. We sold a few bonds at sort of the, as you know, though, at the sort of the height of the crisis, a peak of the of the of the widening that occurred in the second half of the year, which was unfortunate, but we've been looking for opportunities to come increased basis. You know, our basis exposure a little bit tick off some of the TBA shorts as well as just potentially adding some of the some pools to the mix. So I think that will kind of be measured about that opportunities like yesterday and today, mortgages are definitely cheaper.
And so we've had our eye on a few things, and we can we could let again, but slowly, I guess is, and I think we're in general, I think we're neutral issue on the basis in general. Obviously, some opportunities present themselves to to incrementally add, and we've been more focused on sort of rate hedges than anything else year to date. So through the end of December and really since the December Fed meeting the market, we felt like way ahead of itself in terms of pricing in some some sort of eases a very quick pace through 2024, we took some steps to sort of lock that in, if you will, through funding hedges and have been waiting for a better opportunity to expose explicitly at on the asset side. So that's how we'll continue to look at things I think.

Mikhail Goberman

Yes, John, obviously, we're going to get a portfolio update in a week or so. But I guess we can expect you guys to keep adding same sort of coupons at the margin that you've been adding last couple of months?

Robert Cauley

Yes. I think the like you said, the belly coupons have been kind of the most favored location because they're kind of right below par they're fairly far away, and we're fairly far away from rates from them extending significantly, but they're not affected by prepayments too much. So they've been very popular destinations, but they're pretty rich, pretty full.
So it's kind of hard to add there. We just said we added shorts there, so we would probably look to add, maybe I would have said this close of business yesterday with the rally some higher coupon simply because of the magnitude of the rally. And they've gotten cheap today that I'd have to kind of reassess based on how things shake up the balance of the day, but basically away from probably on the other side of that of the stack. So the higher coupons will be looking to add because that barbell has been working for us lately.
And as you know, we came in to last year, we had big bias towards lower coupons. Some of the legacy portfolio items into some of the more pronounced widening points throughout 2023, we were really shedding things that had been acquired in a much slower rate environment, but that were more or less TBASH. So we don't really feel like from a relative value perspective, we were really giving up too much there. If we want to put, we sold a number of threes.
If we want to reestablish some of those, we can do that pretty easily in TBA form the pools that we sold over the course of last year were not really meaningfully adding to the income. They were more of a of a trade that we put on in the event that we saw. We saw a tightening in the basis, we felt like those basis expressions are best made in lower coupon space, but it started getting a little bit noisy because money managers are sort of in and out of the of the index. So we'll continue to kind of monitor how the index performs, whether money managers are generally sort of underweight or overweight. I think that's going to be the theme for this year with respect to those lower coupons, you know, it's going to be kind of student body left student body, right? As money managers come in and out of that space.
And so, to get away from that and to also stay away from our peer group, I think has been really heavily focused on belly coupons. They've sort of been driving performance there lately, they look a little on the tight side. So we've opted to continue to hold some of those lower coupons, which are right now relatively wide. In addition, to some higher coupons and like mindset, take that sort of barbell approach as opposed to chasing after the really lower risk from a premium perspective, belly coupon type trades that are in and around par.

Mikhail Goberman

Great. That's really great color, guys. Thank you. And as always, best of luck going forward.

Hunter Haas

Thanks, Mathieu.

Operator

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

Christopher Nolan

Your line is because I'm sure I heard you on the two, Bob, Bob, the comments that you made on your full cost of funding were interesting. Should we imply from this that your negative spread or thing of the past going forward

Robert Cauley

On a hedge basis, they are yes on we're pretty fully hedged. And I like I mentioned, I said a couple of times, you know, with all the swaps we have in place in particular that on an absolute CapEx this year it was negative because we don't use hedge accounting and we don't amortize premiums and discounts. So on the face of the income statement, it will still appear negative. But as we disclose is particularly in the deck when you take into account the effect of the hedges, it is far from negative, and it's actually north of 200 basis points.
So the only thing that could change that I mean really isn't anything. I mean if we were to say it's sort of growing the portfolio substantially and had to add new hedges on even if that you still can get attractive funding. I'm just looking at the screen yesterday with the rally, 10-year swap spreads were around three 50. So, if you were to, for instance, no add any coupon, no north of 3, 3.5, you can get positive spreads. So it's not really hard to maintain that and expand. It might be hard. But I would say, yes, I think you're right. That we're in pretty good shape, and we've got locked in funding hedges that should keep our spread in a fairly attractive level going forward.

Christopher Nolan

Okay.So that's positive for further for the dividend in terms of incremental decreases?

Robert Cauley

Yes. I mean, like I said, if we did get it eases in pretty much all upside from there, right, because it is taking the absolute repo interest expense down, and that is almost at the bottom line.

Christopher Nolan

Great. Final question on the comments you made on the banks were interesting and given that we're facing, could be potential carnage in commercial real estate, depending on who you talk to what in your experience, what has been and the performance of mortgage backs when you're when the banks are going through commercial real estate.

Robert Cauley

I don't know if I have any specific news is in Miami, typically the credit, the lack of credit exposure in the sector tends to bode well for the sector and those types of environments when you have a credit event, whether it's commercial real estate or corporates, high yield investment grade, the asset sector, especially from the perspective of a multi-sector asset manager usually does well.
In fact, we were on an Argos at a conference last week and there were numerous investors, different types and one of the panels they had where people who manage stock either endowments or pension funds, and they were quite bullish on mortgages. Asset managers are fairly overweight mortgages.
This group we're still finding quite attractive and as any type of credit credit evolution, a negative one just makes them look all the more appealing because they are attractive from a historical perspective and they have no credit risk. So I would think that would bode well for us the the negative with the bank.
So is that a large large number of banks acquired a lot of mortgages, especially lower coupon mortgages. And as you found out last year, to the extent they were very far underwater and they were forced to sell them, there's a source of potential selling pressure that's why lower coupons had a rough day the last two days, just because of this, the New York Community Bank issued, if they were forced to liquidate, they might be selling some mortgages. So that is a bit of overhang to the mortgage market. So if they were forced to liquidate, that's a problem. But just having losses in from the perspective of asset managers who are not banks, it's a positive for the mortgage sector.

Christopher Nolan

Now I've just had that in our last three really sort of pronounced episodes, if you will, like for agency rates? No, we came out of that global financial crisis and the early days of the pandemic. We certainly had funding pressures, spread-widening liquidations occurring and taper tantrum as well was sort of a point. And agency mortgages always performed relatively well, even if there were some very dire days during the pinch of the liquidity moments where people were getting stopped out and what we find is that.
But to your point about commercial real estate market, a lot of times people are selling the most liquid things because the most liquid and sometimes that creates a lot of pressure for agency mortgages that was as pronounced as we've ever seen it in the last year or so. So people were selling what they could not what they should to a certain extent and none.
And so, you know, if you're all long some commercial real estate and you're losing money because of that, your leverage is obviously increasing, whether it's deposit, leverage, repo, leverage, whatever kind of leverage you employ. So you know, in the last year or so, agency mortgages have been sort of the relief valve for people to go ahead and bolster their liquidity positions. And so that's been tough for us, but it could certainly happen again. But I think at we're at levels that are relatively wide enough that money starts coming in pretty quickly to the extent that we retrace the wides. And I think those levels in particular kind of in and around 200 basis points over funding have we've taken a couple of runs of that at those levels and things have, at least so far, firmed up pretty quickly when we get to those extremes So for me, thank you for the detail.

Hunter Haas

Thanks, Chris.

Operator

Your next question comes from the line of Jim Fowler from Kingsbarn Capital Management. Your line is open.

Jim Fowler

Good morning. And thank you for taking the question. Also as always, really appreciate the work you do on the market development section. A great recap of them.Question.I have pertains to Page 31. I think that tells the story behind my question and what's the economics it's now for the quarter approaching where you were in early 2022.
I'm wondering since we went through the period where you were you are more exposed to lower coupons and had a lower economic basis that sensibly resulted in the dividend reduction, understandably. So I'm wondering how many quarters of 230, 240 plus basis points of economic basis. You'll let Techfi until you address the dividend again, good question.

Robert Cauley

Good to talk to Jim, definitely good question. We're very much aware of that of the management and the Board. It is January. So we do need to see how things evolve. And I would say that there was definitely room for expansion to the dividend. I still mean that way, but today was bit of a shock.
I didn't really expect to see nonfarm payrolls, print(inaudible) [300, $ 53,000] and who knows what this might mean for the Fed on. So I do want to be somewhat guarded in getting ahead of myself. If we were to see a wage base price spiral emerge and the Fed starts talking about hiking again, that obviously could change things. But absent that, there's and I like to say on a recorded phone that we're going to do something to the dividend. I get myself in trouble, but I think we kind of paint a picture that would lead you to believe that there is room for expansion.

Jim Fowler

Yes, great.Second question, if I might more weighing on your experience and hundreds as well, a lot of commentary from peers over the past, our earnings periods that this this trading basis of 140 basis points to 190 has been resilient.
I guess my question is, and you alluded to being at a conference recently and you're certainly in the market on an active basis, what do you think would give rise to maybe that band of spreads reducing to maybe say 120 to 150 or a level where the lower end and the upper end ratchet down a bit.
Do you see that happening your comments on banks being in the market are interesting. Wondering how do you do you think it just seems like people talk about a programmatically buy at 190, sell at 140 rinse and repeat, but I'm wondering if you and saying there's there's a reason for belief that it either go to where that band ratchets down a bit. And thank you for taking the questions.

Robert Cauley

Sure. Yeah, I would say all the (inaudible) and so I would say of the reemergence of the banks, it's possible if the rig sector went on a significant capital raising a period and became large buyers that they could drive them down and they probably would on how far but the bigger Gorilla and would be EUR 800 gorilla will be the banks coming back on there because they've been downsizing their holdings as the Feds drain reserves, not dollar for dollar necessarily that they've been reducing exposure.
That has changed slightly if they were to come back into the market more meaningfully that would get us back down in order for that to happen. I really think you need to see the curve the spread and the curve and you need to see it moving towards a normalization of the curve and this inversion. And then if that were to happen, I mean, then you would expect that to happen fairly quickly
Yes, yes, I agree. I think we've all seen it first. We were all very thankful for the money managers community sort of stepping in at the as you alluded to in the prior calls, referring to kind of that 200 bps over sort of market 192 hundred, whatever the top and that ranges. And now we've all, I think, are starting to get a little sick from the overlay underway as we bounce around that range you alluded to.
So I think the banks are certainly key today, you know, we took a little bit of the wind out of the sails. I think of that happening sooner than later. I don't know if we're going to get our Fed eases quite as quickly as the market was anticipating.
So maybe 2024 is a market where we're waiting to see when and if the Fed goes in, but I think the very fact that the curve is still inverted and people are starting to pull some of that forward. I mean, we look at funding levels that have been know well, prior to the day, you could lock up three 50 pretty quickly and you don't have to go out 10 years to get 350 basis points of hedged funding, right, but by paying fixed on swaps on the front end of the curve is very inverted.
So I suspect that while that's not a standard bank play that to the extent that they can help alleviate their names by pulling some of that forward, they got to be looking at it. I know we are so together. I think a little bit of that baked in easing is going to be helpful to the extent that people can pull it forward. And that's going to be supportive of increased yields and increased demand for redeployment of income.

Jim Fowler

Thanks, guys, and enjoy your weekend and good luck in the first quarter. Talk to them.

Robert Cauley

Thanks, Jim.

Operator

And once again, if you would like to ask a question, please press star then the number one on your telephone keypad. Again, one.
Thank you. And with no further questions, I'll turn the call back over to Mr. Kelly Thank you, operator, and thank you, everybody, for tuning in.

Robert Cauley

To the extent anybody has any questions come up after the call, please feel free to call us or if you have a question that comes up after you listen to the replay because you couldn't make it this morning again, feel free to call the office number is .7722311400 Otherwise, we look forward to speaking to you again at the end of the first quarter. Thank you.
Thank you. And this does conclude today's conference call. You may now disconnect.