Dynex Capital, Inc. Q3 FY2025 earnings call

Smriti Popenoe discussed executing the strategy to build a resilient company at the intersection of capital markets and housing finance, noting year-to-date shareholder returns of 20% as of last Friday's close, 23% over the last year, and 72% over three years with dividends reinvested. Rob Colligan highlighted net interest income trending upward, $254 million in new common equity capital raised in the quarter, portfolio growth (10% since Q2 and over 50% since the start of the year), and liquidity over $1 billion at quarter end, plus opening a New York City office. T.J. Connelly talked about agency mortgage spreads, prepayment speeds, security selection opportunities, longer-term outlook for Agency RMBS, credit spreads, and exposure to Agency CMBS. Byron Boston emphasized durable shareholder-first decisions and competitive dividend. Smriti Popenoe and Rob Colligan increased personal investments in the company.

Net interest income expected to benefit from FOMC rate cut in Q4. Long-term outlook favors tighter agency mortgage spreads and potential opportunities outside agency RMBS. Expect spreads to compress as investors realize potential returns in Agency RMBS. Intention to increase exposure to Agency CMBS relative to RMBS as RMBS spreads tighten.

Global economy vulnerable to persistent inflation, geopolitics, tariff-related price shocks, labor market slowdown, government shutdown. Private credit market risks with hidden leverage and potential cracks. Consumer credit risks like auto loan delinquencies and labor market weakness. Uncertainty in Federal Reserve rate path.

Q: Hey, everyone. Good morning. It's your first question. Just wanted to ask about where you see incremental spreads and current ROEs and how that compares to the ROE that's implied in your current dividend.

A: Yeah. Good morning, Bose. It's T.J. The ROEs in agency RMBS remain in the high teens net of hedging costs, and really, you can get to gross in the mid-twenties on a large percentage of the coupon stack.

Q: Thanks, T.J., in your prepared remarks, you talked about, you know, still seeing mortgage spreads as wide relative to their history. Guess when we look at it, you know, spreads are kind of closer to or slightly tighter than their long-run average. So hoping you could kind of flush out that comment and, you know, kind of what measure you're looking at it appears to come to that conclusion?

A: Yeah. The spread, Ron, if you look at them just versus certain components of the treasury curve, I could certainly see what you're talking about. They're both However, excuse me. Sorry, Doug. I'd say versus interest rate swaps, though, if you look at them versus interest rate swaps, mortgage spreads are still in that top quartile of the widest levels we've seen over the long term.

Q: Hey. Thanks. Good morning. You guys talked a little bit about the, you know, the supply side of the equation and for agencies over the next year or so. Can you talk a little bit about what you're seeing on the demand side of things and in particular, I'm curious, you know, it looks like the GSEs grew their balance sheets and retained portfolios a bit in the third quarter. I'm curious what you think about the potential for the GSEs as a player on the demand side of things going forward? Thanks.

A: Yeah. Absolutely. That is a source of potential marginal demand that we have not seen in a long time. Their monthly reports show that things have been kind of status quo for the last, let's say, you know, well, several years. I think, you know, GSE Holdings of Agency MBS could certainly increase. So far, their activity looks much like it has for the last several years, but they have the capacity to add as much as $450 billion under the current stock purchase agreements treasury, and they only hold about $194 billion. So it's a massive amount of potential. I see it as I don't think it's a very high probability. We see them use all of that capacity, but it's certainly one of the levers this administration can pull to impact housing markets.

Q: Hey. Thanks. Good morning. You guys talked a little bit about the, you know, the supply side of the equation and for agencies over the next year or so. Can you talk a little bit about what you're seeing on the demand side of things and in particular, I'm curious, you know, it looks like the GSEs grew their balance sheets and retained portfolios a bit in the third quarter. I'm curious what you think about the potential for the GSEs as a player on the demand side of things going forward? Thanks.

A: Yeah. Absolutely. That is a source of potential marginal demand that we have not seen in a long time. Their monthly reports show that things have been kind of status quo for the last, let's say, you know, well, several years. I think, you know, GSE Holdings of Agency MBS could certainly increase. So far, their activity looks much like it has for the last several years, but they have the capacity to add as much as $450 billion under the current stock purchase agreements treasury, and they only hold about $194 billion. So it's a massive amount of potential. I see it as I don't think it's a very high probability. We see them use all of that capacity, but it's certainly one of the levers this administration can pull to impact housing markets.

Q: Hey. Thanks. Good morning. On the hedging side of things, you know, with the implied volatility coming down, it looks like your option position increased a little bit this quarter. But is there any real sort of impact on how you guys are thinking about hedging strategy overall with a lower volatility priced in right now?

A: Yeah. When vol is lower, that is what we spend a lot of time thinking about. Where should we look to re some of the options that were inherently short in a levered mortgage position, and there are pockets of cheap volatility. We continue to look at those, and you can see the positions that we've added modestly in the third quarter. So I think you'd say that remains a deep and liquid market. It's a great way for us to continue to stabilize the duration of our portfolio.

Q: Hey. Thanks. Good morning. Just following up on this volatility, market kind of theme. I mean, why do you think the market has shrugged off all these themes which would maybe ordinarily kind of drive more volatility, especially over these last few weeks? I mean, does that change the way that you think about the range for MBS spreads more holistically right now?

A: So at a big picture, you know, I think there have been events that have narrowed sort of the market's opinion of what the outcomes could be. Right? So there's more certainty. And even the passage of time gives us more certainty. So policy-wise, you know, we're sitting here with the Fed looking like they're firmly committed to some level of eases over the next, you know, two to three meetings. You've also seen a lot of policy outcomes from the administration becoming more clear. So I think the market has reacted to that. But one of the things that does happen is, you know, there's a short-term focus for the markets. And, you know, in our long-term way of thinking and just recognizing everything that we talk about in the global environment, demographics, migration, geopolitics, all of that, that doesn't take away the probability for tail events. Right? There's also, like, massive amounts of liquidity still available in the markets that are driving asset flows that are affecting options prices. Right? So as we look at the fundamentals, the technicals, the psychology, we're evaluating, you know, the whole picture. You know, we like the idea of buying out-of-the-money protection here. Because, you know, the environment isn't as calm as it looks. That's kind of our opinion. So that's the thought process. I mean, the market has shrugged off a lot. You know, I think there's one particular sector in the market that's driving a lot of the thought process, and that's, you know, the advent of AI. But, you know, the rest of the economy still exists. They're still vulnerable to shocks. And that part is really what we how we think about. And as you know, you know, the big money in this sector gets lost or made during periods of extreme volatility. And so we have to think about those scenarios. And even if they're a low probability, we have to be ready. And we think about when protection is cheap, we're doing that thought process. T.J., did you have anything else to add on that?

A: No. I think that's you know, the critical part there is that you're constantly preparing for the unexpected when you run this kind of portfolio. That is what we do. I you know, in some ways, I don't know the answer to your question why have markets shrugged things off. We're preparing for the day when the markets start to react in a big way.

Q: Hey. Thanks. Good morning. You guys noted the expectation for faster speeds. And so as you guys do reinvest that, do you feel like there's opportunities to pick up alpha like within the coupon stack? Are you pretty much driven into the current coupon in order to support your return on capital? Is there really, like, more flexibility to pick spots?

A: Great question. I think that has been something we've identified as a potential source of alpha for several quarters now, not just taking what the current coupon gives you, not acting like the, you know, largest index kind of player. And, you know, we had that deliberate lower coupon bias, and that was very, very strategic and intentional for the last several quarters. I think it's really starting to pay off. So, yes, you're right. As we reinvest some of the paydowns on the book, the opportunities across the coupon stack are tremendous. And that's the great part about our size. We are at a great scale and can continue to grow while not being so large that we can't move out the current coupon and remain very nimble.