Q1 2024 Orchid Island Capital Inc Earnings Call

Participants

Robert Cauley; Chairman of the Board, President, Chief Executive Officer; Orchid Island Capital Inc

Matthew Erdner; Analyst; JonesTrading

Mikhail Goberman; Analyst; JMP Securities LLC

Christopher Nolan; Analyst; Ladenburg Thalmann & Co. Inc

Presentation

Operator

Good morning, and welcome to the First Quarter 2024 Earnings Conference Call for Orchid Island Capital. This call is being recorded today, April 26, 2024. At the company would like to remind the listeners statements made during today's conference call relating to matters that are not historical. I look forward looking statements Safe Harbor provisions the Private Securities Litigation Reform Act of 199%.
I caution that such forward-looking statements based on information currently available on the management beliefs with respect to future events and are subject to risks and uncertainties it cause actual performance or results 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 including the Company's most recent annual report on Form-10K. The company assumes no obligation to update such forward-looking statements results changes in assumptions, but to changes in other factors affecting forward-looking statement.
Now I would like to turn the conference over to the company, Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Robert Cauley

Thank you, operator, and good morning. I hope everybody's had a chance to download the deck as usual, that will be the centerpiece of today's discussion. So I'll be walking you through the deck. And then at the end of that we'll have a Q&A session.
As usual, I'll just give you a quick rundown of the agenda. So first thing we'll do is go over our results for the quarter, then we'll talk about the market developments that shaped our results and provide our outlook for the future. And then we'll dig into the details of the portfolio and our hedge position.
So turning to Slide 5. For the first quarter of 2024, our net income was $0.38 versus $0.52 Q4 of last year. Our book value increased slightly by $0.02 over the last quarter. Total return was 4.18% versus 6.05% in Q4, and the dividend was unchanged for the quarter.
The average MBS portfolio appears to have declined on slide 6, but that's somewhat misleading because in the fourth quarter of last year, early in the quarter, we had to de-lever when rates were peaking and so that calculation is just a simple average of the beginning and ending. So it makes it look like it was higher.
But if you looked at where we were at the end of Q4 versus where we were at the end of Q1 was not a meaningful change. Our leverage of increased slightly from 6.7 to 7, speeds increased slightly, all that's probably more seasonal and just aging of the portfolio slightly. And then liquidity, slightly improved over where it was at the end of the quarter. But again, right in the middle of our kind of target range.
Slide 7 provides our just our preliminary balance sheet income statement. We would expect to release our 10-Q sometime today. So you'll get the final numbers. We do not expect these to change.
With respect to slide 8, this is what we call our adjusted economic income. I just kind of like to do two things you, want to just walk you through these numbers on the top of the page and just show you where they come from. And then in the bottom just show you on a per share basis and make a couple of comments about the dividend.
So with respect to the top, the interest income number that comes right off the balance sheet such as the interest in or in the income statement other that's a GAAP number, it is representative of the number we would report for tax.
So if you're thinking in terms of our taxable income and what drives the dividend that numbers representative, although not exactly the same, we can calculate interest income slightly different for tax, but that again, that's representative.
On the next numbers just the accretion or the premium amortization, it's down slightly this quarter, just reflecting the fact that it's calculated based on beginning of period prices and they've been marked up at the end of Q4. So the discount was a little less than it had been. Again, this number is not exact what we report for tax, but it is representative.
The next item is interest expense. That's not is that a GAAP number, but that's in actual dollars paid in interest expense. So that would be the same for tax.
And then finally, the last two, the gain of the hedge number. That is a very close proxy to what we report for tax. That's basically taking the change in the open interest of our hedge positions and allocating it between a portion that pertains to the current period versus all future periods.
And that's similar to the process you would use for tax. So that number is also representative. And then finally, just expenses, that's just right off the income statement. And that, again is very close to tax. So that's kind of a long and short of it so this number is a very good approximation of what we would call taxable income. It's not exact, but it is at least a representative.
And then just on a per share basis, you can see below $0.47 and $0.50 the last quarter and above the dividend. So it appears that we're now comfortably earning the dividend and then we will reassess as we always do as we move through the year to see if there's a need for an adjustment to the dividend, kind of thinking about doing that after the second quarter as of now. So we'll see.
But for now, you never know, markets can change very dramatically. So when we think of dividend policy, you also -- you've got a load factor, but you also have to look forward. So we'll be doing that, as I said in the near future.
For Turning now to market developments on the top left is an interesting slide I want to kind of walk you through this, and this is a Q. one discussion. So the booking dates would be [1231 and 331]. And those are the two bottom numbers, but we've added these extra two.
Just to give you some context, the orange line kind of represents the peak in rates last October. And if you see what happened between then and the end of the year, we had this strong rally and we all know why that was. It appeared the Fed was about the pivot in the market rallied. And since then, we've kind of retraced.
So the green line is how we were at the end of the quarter. And then the blue line is where we were last Friday. So we've been retracing all the rally since so that we saw last November and December. And we at Orchid, did the thoughts of that rally was overdone in our hedging strategy and positioning reflected that. And then again, if you look on the bottom, it's just the inversion of the curve, as you can see in the most recent data point last Friday, we are off the lows intending in a steepening direction, but still inverted. It's still fairly well inverted.
Onto the next slide, this is just the current coupon spread. Couple of comments I want to make. If you look at where we were at the end of the quarter, it was kind of a range that had been in place since the end of a really '21 early, mid '22, at least of which is when we were in the tightening cycle, we were kind of at the local loans. Mortgages did quite well in the first quarter since then, we've kind of backed off some, but we're still quite a ways from where we were last fall, so not quite as tight as we were, but still a long way from the wides. But then on a historical basis, if you look back since this data goes all the way back to 2010, we are still wide by historical standards.
On the bottom left, you just see the absolute price change in these various coupons. These prices, of course, have been normalized to [100] going back to the beginning of the year. And if you look at where we were at the end of the quarter, they were all down in absolute terms, but most mortgages have done fairly well on a relative basis relative to hedges.
Since quarter end, they've widened. So they've done an absolute price, but also versus hedges with respect to roles, most roles are negative except for the production coupons. And that's, as you can see, has been the case for quite a long time.
Far turn to Slide 12. Now this is ball. Obviously, volatility is a very important driver of mortgage performance. And I just want to point out if you look at where we were at the end of the year versus the end of the quarter. Volatility came off meaningfully. That's very supportive of mortgage performance, but it's not the only thing that helped.
During the first quarter, we also are aware that it was quite a bit of inflows into money manager funds, presumably out of equities. And so you had inflows of cash, thanks getting reengaged in ball off. So it made for a good quarter to date, it's going to reverse, but we're still not in a bad place. And then if you look at where vol is on a very long-term historical basis, again, going back 10 years, still elevated. We're well off the local highs, but on a historical basis, it's still elevated.
Slide 13 is just prepayment activity. It's really hasn't changed. The red line on the top left is the average rate. It's probably up a little bit since then, but it's still very, very elevated. And the refi index is at extremely low levels going all the way back to the 90s with respect to primary secondary spreads still somewhat elevated and still volatile.
We still see volatility in there. That's really driven more just by the originator community and their business decisions and where they want to have tried to price mortgages up. We've had a lot of volatility in rates and so on, that's somewhat probably is capturing the spreads.
And then this final slide before we move on to the portfolio, just kind of I'll call this food for thought, just threw this in there. And I think it's worthy of some discussion. I don't want to draw too strong conclusions here, but what you see here, the top line goes back really to the end of the financial crisis.
This is GDP, US GDP, just in dollar terms, so nominal dollar terms, not adjusted for inflation. And as you can see, it's been increasing at an amazingly steady rate up until the pandemic. And it's kind of interesting when you think about all the time and energy spent by economists and market participants, hashing overall, the economic data and policy decisions.
But yet you look at growth over this very long period of time up until the pandemic was amazingly steady. So that's an interesting point and end point to as you can clearly see that it's accelerated since the pandemic, and it's also become a little choppier.
The red line just represents money supply that's into most money aggregates are kind of been no taboo for quite some time. There have been no longer really viewed as appropriate measures of looking at economic behavior or performance or forecasting. But when you look at this it's still there's no question that this that M. two very closely tracks the growth of the economy, in fact, assume correlations essentially [one to $1] for dollar increase. So that's one interesting observation.
And another one is we put these lines in here. These are just kind of our trend lines. And as you can see, the red line M two is clearly above its long-term growth trend. And I guess I don't know if this is bit of a stretch, but kind of the relationship between growth in the money supply and the economy, which was sold steady for so many years has changed. Now, it's kind of out of kilter.
So now the money supply, it has grown much more rapidly. The economy although the growth rate of the economy has picked up now, I don't know if it's appropriate, but if you were to say that this growth in the money supply is kind of a function of fiscal spending.
We've had outsized fiscal deficits of late. There's been deficits, no question and by the government for years, but they're very much outsized as we speak. To have started with the CARES Act in response to COVID and the various of follow-on programs. And even today when the government between $1.5 trillion to $2 trillion deficits.
I don't know if this growth in the money supply is purely a function of that. But to the extent it is, it's interesting to note how this has had an impact on the growth rate. Wondering I think you can draw conclusion here is that if you go back to the immediate aftermath of the financial crisis, when Chairman Bernanke was the president chairman of the Fed, he would talk when you spoke to Congress about monetary policy being basically is competitive as they could.
They had the funds rate at zero. They were doing QA, they pretty much do anything. More fiscal policy was somewhat accommodative, but not that much, but they were at least in line. They were doing the same thing, maybe not as much as the Fed had hoped.
There was the sequester back then, but monetary and fiscal policy were more or less in alignment. If you look at today, your monetary policy is very restrictive. The Fed has raised rates over 500 basis points. They're doing QT, but fiscal policy coming out of Washington is not in alignment whatsoever. It's very much it's stimulative the huge deficit.
So monetary policy and fiscal policy are working at odds and that kind of leads you to think, well, maybe that's why you have the Fed's not having the success that they had, healthy growth is still fairly robust. Inflation still strong labor market is still strong.
So anyway, food for thought, but I just thought just an interesting picture I wanted to throw in here just for that, at least for now moving on to the portfolio and so forth. And I kind of wanted to set the stage before we get into the details of the portfolio.
If you want to understand what happened in this quarter and what we've done, I think you have to understand where we were coming into the year. And so in the fourth quarter of '23, the Fed, it clearly appears that pivot after we'd not long after we'd hit the cycle highs at rates that Chairman and various members of the Fed had spoken pretty openly about the interest rate cuts on the horizon. And so the market size, the Fed pivoted the market quickly moved to price in six cuts in 2024 and the market rally. And we just discussed and saw that and pictures above.
We've actually been by that. We thought that a lot of that was overdone. And that turns out as we enter 2024, what we've seen in the first quarter as the data has remained quite strong. Inflation has been strong every month. So far, payroll growth is strong. GDP, even though was reported somewhat low yesterday, a lot of that was because of inventory and trade.
And so I think it's safe to say that not pivot is on hold and is it not on hold on hold, but we're not necessarily know when it's going to happen or maybe even if it's going to happen. So that's kind of the background. So in our minds of what that means is we're kind of looking at a status quo outcome where things don't necessarily change where monetary policy stays, high rates stay high. And we basically have to continue to exist in this environment for the foreseeable future. And the takeaway from us is that there's not a bad outcome on our hedge positions. As you know, when as I mentioned in 23, when the market rallied, we didn't buy into that rally, we thought it was overdone.
So we kept our hedges at a very high level. As a result, we were very adequately hedged coming into this year. In our NIM, it's been not only is it not really decrease. It's actually increased. And so we're basically taking positions now to basically position for this kind of condition existing for some time.
What we did during the quarter going to the slide here on slide 16, we continue to increase. The average coupon of the portfolio was up another 5 basis points. The realized yield on the portfolio increased from 4.71% to 5.03% for the quarter and inclusive of our hedge instruments, our economic net interest spread was 2.47% for the quarter versus 2.04% for the last quarter.
Now next slide is really a, I think, illustrative of what we've done. So on the bottom right here, you see our portfolio as existed at the end of 2022. Now, keep in mind at that point in time, a lot of the higher coupons that exist today really didn't exist than they had been produced. And there were a lot of coupons outstanding and even to the left of threes here.
But that was the portfolio at the time. And as you can see, as you move through time, moving to the left through the end of last year and then the end of this quarter, we've continued to migrate the portfolio higher in coupon and the current basically target structure is more of a barbell construction where we have an overweight to lower coupons and higher coupons. We may add Billy coupons opportunistically over time, but they're not our ideal target holding long time.
So we're trying to increase the exposure we're trying to build is kind of a barbell. We are able to use our paydowns and or proceeds from our ATM offering over time, they've been relatively modest, but still a source of funds we can use to do so.
And basically, that's kind of the direction we're heading. The Valley has been very directional value. I mean, coupons, those coupons have been moving with interest rates. So when we sell off, they tend to perform poorly when we rally, they tend to perform well. And we think that the construction using the wings, if you will, of that strategy makes more sense.
So now turning to slide 18, kind of focus more on our funding and hedging side. As I said, we were very aggressive in maintaining our hedges going into the end of the year. And even with the expansion of funding that we saw over that two-year period. We've been able to protect, as you see in this graph on the right-hand side, the red line is our cost of funds, gray line is sulfur, and you saw that rapid expansion, meaning you can see.
Our economic cost of funds has been very flat for some period of time as a result of our hedging strategy. In fact, if you look at the on the economic cost of funds actually decreased this quarter from 2.67% to 2.56%. And the reason that happens is as the market has sold off and is priced cuts out of the future.
So if you think about purchasing a swap where you have a pay fixed receive floating, the fixed rate is very much fixed to pay us prescribed fixed rate on a notional balanced. And so the present value of those cash flows is absolutely known.
The floating leg is where you're receiving a floating rate on the same notional balance. And as the market prices out cuts in the future, the present value of those cash flows on that side become higher. Just because your projected funding rates in the future are higher.
And so as a result, Omnium has actually expanded in this quarter. And that means that, for instance, if we move into the future and the market prices are even more, it will go up in the eventually if they start to price in hikes would go up even more.
Of course, if they did actually heightening of the repo side on would actually be higher as well. But in any event we can stay in this position for some time in our name appears very very solid.
Just moving on to Slide 19 as more of a bigger picture hedged, a focus here. But basically, we have 91% of our repo funding is hedged excluding our TBA shorts and interest rate swaps, but at the same time, the migration up into higher coupons, lower duration assets in conjunction with our lower coupon positions, which are well hedged really helps protect our book value as well.
And I just want to reemphasize this point in Q4, we did have the rally. We did not extend our duration. We kept our power hedges very high, and that's worked very well for us in Q1 and into Q2.
Slide 20, just gives you our hedge positions in greater detail. Our interest rate futures positions are unchanged for the quarter. Our TBA positions were increased slightly. We actually added some TBA shorts at the very beginning of this quarter as the market tried to sell off or started to sell off.
And then just yesterday after the number, when the market sold off very much, we actually took that kind of back off. So our position now is at about $400 million short versus $370 million at the end of the quarter. So we've done a round trip there and worked very well for the first, whatever 20 odd days of the quarter, but we think we've moved quite a bit and short time, so we've taken some of that off.
With respect to the swaps, we added slightly to our swap positions. Otherwise the changes there, just the passage of time, some of the swaps that were greater than five years are no longer longer than five or less. And so it appears that it moved and we did add what is Kali to digital option.
On the bottom right, that is a hedge strategy that basically is kind of binary. We pay a premium. And if certain conditions are met, there has to be to you get a very nice payout. And those payouts are tied to both the level of rates and the S&P 500.
The idea being that if rates are much higher for longer, that that would probably cause the stock market to sell off if both of those conditions are met. We have a very nice pace.
Our knowledge has changed Slide 21, and this is really what's driving a lot of what we're doing here. So these numbers we look at on a regular basis. So these are the various coupons in the coupon stack using yield, but we can project the effective duration convexity and then returns under these different scenarios. And I want to point out a couple of things.
First off, while we looked at this very regularly, we also look at empirical or observed results and we factor in both in decision making. But when if you looked at the Connexity column, if you looked at the what we call the belly coupons [5%, 5.5% and 6%], very clearly the worst convexity in our world, very negative convexity means very hard to hedge.
And so while for instance, if you look at the lower coupons that very low negative convexity makes it easy to hedge. And so even if you look at these securities in a rally, you can see they have very great returns and a sell off. It's, of course, equally bad but they're easy to hedge. And so we can use swaps or futures and fairly effectively hedge those and then the lack of negative to Mexico really helps with that process.
And then when you look at the higher coupons, again, very low negative convexity, and they do very well in a off. And so that's kind of what's driving the what we're doing here, we're looking at a situation where we think we could be here for a long time.
But if we do move in either direction, this kind of barbell strategy will still be very effective and we don't have to deal with trying to hedge the belly, which can be very expensive and very challenging. So for instance, if you look at some of those belly coupons and a meaningful sell off, they could extend and underperformed hedges meaningfully.
And again, in a big rally, the same thing can happen. So this construction allows us to position ourselves to do well if nothing changes, but at the same time do pretty well if we move meaningfully in either direction. And so that's kind of what we're focused on the strategy.
On Slide 22. This is just our interest rate shocks or our duration gap. Just want to point out the bottom right, two numbers there. Those are basically the changes in equity given these plus or minus 50 basis points rate shock since ideally, you want those numbers as low as possible. And again, it's only models. So you don't necessarily know that you'll realize that. But no, we're comfortable with our positioning.
And then Slide 23 is just our speeds for the portfolio. We show January, February and March as well as Q1 and Q4. Speeds have picked up somewhat over the course of March. That's really just coming out of the seasonal trough. So that's why we were kind of faster in March I suspect with the backup in April, even though we're still moving towards the seasonal peak, which is around June, the net effect would be probably a uptick in speeds, but not as much as you might have seen otherwise.
And then finally, just to kind of sum up and provide our outlook on. I think if you look back at where we've come from the market very much thought ahead of itself with the pivot, basically didn't work out of developments I just described, it's driven rates higher in Q1 and early Q2 vol is much higher.
And really there's even uncertainty in the market about what the Fed's going to do with the current market. Pricing is [one] cut this year and there's something I think the next move actually could be a increased. I think that's a very, very low probability, but it just points to the uncertainty in the market and in sharp contrast to the outlook at the end of last year, where everybody was assuming significant cutting. As a result of all this mortgage valuations are cheap and then are attractive. So that's very good for us.
So looking forward, all of these developments are not bad for us. They're actually quite quite nice. We've the investment opportunities are very attractive. Our funding costs have been very well contained through our hedging strategy.
We're in a position where we can protect book value. Absent some extreme moves higher. We have been maintaining very good protection of book value and we have potential upside through our exposure to lower coupons to the extent we rally back. So that's kind of what we've done and where we are and what we look at going forward.
So on operator, that is it. I guess I will say just before we conclude our book value. I'm sure everybody wants to know what is as of last Friday we were down about 5%. Our as of yesterday, about 5.5% on market rallied hard on Tuesday when we had a very soft PMI number in risk assets rally but Wednesday and Thursday, we gave some of that back. So down about 5.5% is our best estimate as of last night and about 5% last Friday. So with that, I will turn the call over to questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Matthew Erdner, JonesTrading.

Matthew Erdner

Hey, good morning. Thanks for taking the question. And maybe talk about the repo markets on the overall health and just kind of how they're functioning right now.

Robert Cauley

We see no signs of stress. We've actually added some counterparties and we have a few more in the works on and we're looking at some both sponsored repo and on so on through State Street. They are again, they're going to term, but anyway, no, I don't see any stress in the repo markets. We have more than adequate funding, haven't seen changes in haircuts.
No I mean, no, I will say this that like I said, that maybe much something we're thinking the Fed's going to raise rates. I mean the repo market will be very quick to jump on that. They love to price that into term repo. And so even if you go out six months, there's no almost no cuts priced into it. But other than that I don't see any signs of distress.
Occasionally we'll get some weird money movements around month and quarter ends, but which might drive rates up a few bps. But in general we've been able to we really diversify our funding book across those 25-ish lenders and are actively having conversations about adding new counterparties. So and haircuts have on average come down a little, but there are few counterparties have been willing to decrease haircuts from like [five to fours]. So it seems pretty healthy. But as you know, that can change in a moment's notice.

Matthew Erdner

Yes, that's helpful color there. And then I see the move up slightly in coupon and kind of hitting that lows and the highs there in the stack. Maybe you continued to add, I guess, higher coupons in the second quarter. It's consistent with the strategy that that's been laid out

Robert Cauley

not yet, but that's on that's still on the immediate horizon on. I'm going to be able to use the ATM in the quarter just because we did in wireless blackout and we get it paid off all the labor very modest but the plan is to continue to do that in an immediate future. So when we talk at the end of the second quarter, hopefully that will be much more progress to discuss in that regard. It's been I think there was a slide at the beginning of a deck that showed how pronounced the rate movements have been from October to December and then back to where we are today, [five point five's and six's] were consistent with that barbell strategy we discussed.
So as we so it may stick out that we have some we are exposed to some belly coupons, but we'll continue to do to maintain the strategy of trying to own a little negative convexity, fully extended a deep discount securities that are easy to hedge along with higher coupons that are have lower duration and less convexity because they're just not right in the middle of the stack where the extension of stores.

Matthew Erdner

Got it. Thank you, guys.

Operator

Mikhail Goberman, Citizen's JMP.

Mikhail Goberman

Hey, good morning, guys. Here, Macao, I hope you guys are doing well and thanks again for the yes, for the slide deck and in those possible to make a I always tell people this is the best agency mortgage re slide deck. We're like a crash course in agency MBS, investing in some how you guys made it even better. \
So congrats on a good day, really good stuff, especially Slide 16 and 17 disclosures there's really nice strength there. I'm just if you could perhaps flesh out your comments on the dividend early in the call, Bob, I believe you mentioned something about the second quarter I know if I heard that correctly, but maybe just flesh out your comments about the dividend going forward.

Robert Cauley

Sure. If so, obviously, $0.12, if you look at that slide or forever. It is where we show them. Slide 8, we're running about that. Our proxy for taxable income is running above the dividend. So we will reevaluate it if there's a need for an adjustment. I mean, the obvious adjustments would be higher. But as I said, you have to look backward and forward.
So we don't like to change that given all the time. And so conditions are changing in the market over the at the time. And it looks like there might be downward pressure on that. That's going to very much affect our decision making, but we do intend to revisit midyear after the end of the second quarter. What we'll do is we'll update more precisely our taxable income estimate year to date and see if there's a need and then weigh that against what we see on the ground at the time and the outlook going forward for the balance of the year and into next.

Mikhail Goberman

Okay. So I guess that adjusted economic income per share line is the one for Q2 that you're reporting in July August. Is that sort of what's going to drive any sort of decision?

Robert Cauley

Yes, I think so. And again, it will be a discussion we'll weigh that will also weigh kind of the outlook from that point forward, whether we think it's going to be stay at that level, go up or go down on. So as I said, you don't like to change the dividend frequently. And so you're trying to pick a level that is going to be the most appropriate for the medium term.
And you know, if that means you over under earn at any given month, that's okay. We don't earn exactly what we pay every month, but that's kind of the thinking that goes into that decision.

Mikhail Goberman

Got it. Thank you for that, and best of luck going forward, guys. Thank you.

Operator

Christopher Nolan, Ladenburg Thalmann.

Christopher Nolan

You guys are that the deck is great. And Rob, always like your comments on I thought your stuff on the M2 money supply was really interesting food for thought.
Yes, that's right off of Bloomberg. By the way, if you pull that out, I mean I know I mean, you're dealing with a lot of cross currents here in the macro level. That sounds you know that you're basically pursuing the same strategy of going to more high coupon stuff. They have a barbell portfolio.
Going forward as you assuming that the economy continues to muddle along and the Fed doesn't really do anything, what do you see benefiting more earnings or book value or neither? I mean, look, clarification on that might be helpful.

Robert Cauley

Yes, that's a good outcome. I mean, as long as we don't get a violent sell-off on the long end. If we start heading north of 5% or [10%] or something we stay around here, the curve stays inverted. Book should be stable and we can earn the dividend on?
I think the question is right this week, the curve has been inverted longer now than it's ever been inverted. And I just always say I'm no road trips way back when what happens when the curve inverts, how you're going to pay dividend, nice to say, well, if the curve inverts, that means that the market thinks that the Fed is going to be easing in the future, if any to the Fed's wrong and they do leisure, the market's wrong and they don't long term rates go up and you get a normal curve shape always been like this for a long time.
And so today, the yield on the two years still well below Fed funds. So the market's still saying we think the Fed's going to ease off, we'll see what happens. But eventually you would think the curve should be going back to a more normal shape.
The other question is when and how does that mean short rates rally? Does that mean long rates go up? When you look, you have referenced my son into slide kind of tells me that with fiscal policy the way it is that's stimulative, they're pumping money into the economy.
And if you look at that surge and two as a proxy for deficit spending, excessive deficit spending, I would tell you that inflation's probably not coming down anytime soon. Well, it's going to stay fairly high, which might lead you to believe that longer-term rate should be higher. But the market still thinks the opposite. The market still thinks they're going to be easing.
And just a question on how much So I know we don't know. We'll have to watch like everybody else. But the point is to have for now, if nothing really changes meaningfully, book should be pretty stable and the dividend is pretty well covered. So that's not a bad outcome for us at all.

I think that's the environment where volatility comes off both into a rally as well as just sort of staying here and being range-bound. Certainly that last six months have been extremely volatile. And so I think as to market processes and what exactly is going to happen when the Fed is going to be involved with a lot of hedges on the front end of the curve.
And in December, we took strides to lock in as many of these anticipated rate cuts as we could. We sort of traded Eurodollar. So for futures for a very long time or we started locking in some of those cuts. And so so I think we're in a good position.
Again, it's going to be it's not going to be fun to be a levered mortgage investor, more hikes, start getting priced in the market has been trading on variable mortgages have been trading very long over the course of the last few weeks. And so we'll see big green days whenever we rally and days that are rather than expected.
Just based on purely on on the rate moves on days when we have big sell-off and the thought of easing or the prospect of even tightening starts getting batted around on mortgage basis really slipped some environment. So that will continue to be the case.
But if we're just modeling around here and the tightening cycle almost over, we don't have to pause or pivot right into an immediate easing cycle to benefit from this environment. Just one of a little bit of stability is also an attractive environment for us.

Christopher Nolan

Great. Thank you for the word together.

Robert Cauley

Thanks, Chris.

Operator

There are no further questions at this time. I'll turn the call to Mr. Cauley for closing remarks.

Robert Cauley

I do, operator, thank you, everybody. As always, to the extent other questions come up or you don't listen to the call live only the replay and you have a question, feel free to call us at the office. The number is seven seven two two three one one four zero zero. Otherwise, we look forward to speaking to you at the end of the second quarter.
Thank you.

Operator

Concludes today's conference call. Thank you for joining you.