Q2 2024 Orchid Island Capital Inc Earnings Call

Participants

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

George Haas; Chief Financial Officer, Chief Investment Officer, Secretary, Director; Orchid Island Capital Inc

Jason Weaver; Analyst; Jones Trading

Jason Stewart; Analyst; Janney Montgomery Scott LLC

Eric Hagen; Analyst; BTIG LLC

Mikhail Goberman; Analyst; JMP Securities

Christopher Nolan; Analyst; Ladenburg Thalmann & Co. Inc.

Jim Fowler; Analyst; Kingsbarn Capital Management

Presentation

Operator

Hello. Good morning, and welcome to the second-quarter 2024 earnings conference call of Orchid Island Capital. This call is being recorded today, July 26, 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 are forward-looking statements subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements are based on information currently available on the management's good faith, belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in such forward-looking statements.
Important factors that could cause such differences are described in the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K. The company assumes no obligation to update such forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking statements.
Now, I would like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Robert Cauley. Please go ahead, sir.

Robert Cauley

Thank you, operator, and good morning. Hopefully, everybody has had a chance to download our slide deck. As usual, I'll be using that for the presentation today.
Turning over now to slide 3, just the agenda. As usual, we'll go through our financial results, and we'll talk about market developments and how those impacted our results and how we see things going forward. And then, we'll dive deeper into the portfolio hedging and funding positions and then a few comments on our outlook for the market and for the portfolio going forward.
So on slide 5. For the quarter, Orchid generated a net loss of $0.09 per share versus income of $0.38 in the last quarter. Book value declined approximately 5.9% from $9.12 to $8.58.
Book value, as of last Friday, I know that most of our peers have mentioned that, is down about 0.9%, so a little under 1% that has to do primarily with just our hedges, which I'll get into later in the presentation. Total return for the quarter was slightly under negative 2%, and we declared and paid $0.36 in dividends.
The average portfolio grew quite substantially from a little under $3.9 billion to $4.2 billion. We have been raising capital in the ATM. The portfolio, as we stand today, is about $5.1 billion, and repo is about $4.9 billion. Leverage ratio was 7.1 at the end of the quarter, unchanged primarily from the beginning of the quarter. Today, it's a little higher in the mid-7s.
Speeds in the portfolio did increase slightly. That's probably due to rates being a little lower and ceasing, especially on the discount side of the portfolio. Liquidity remains strong, up slightly and represents little under 50% of equity.
Slide 7 just presents our financials. I won't spend time going through these. These are just for your review, the income statement and balance sheet as of the end of the second quarter.
Slide 8. As we all know all of our peers publish something they refer to as earnings available for distribution. This is commonly compared to the dividend. We don't publish such a number. This is kind of our proxy.
This number is what we call our economic income. It's all derived from GAAP financials. So we are taking all of these numbers from our GAAP numbers.
The dividend is based on taxable income, not GAAP. So there are some differences. I just want to walk you through just this presentation and highlight where there could be differences between GAAP-derived numbers and tax.
So for instance, just walking down the income statement, the interest income number is slightly different for tax, but I think this is a good proxy. There are minor differences in the calculation of interest income on pass-through portfolios and derivatives, but this number should be reasonable.
The amortization of discounted premium, that number is the GAAP number here. That can deviate quite a bit from the taxable number. The main reason is simply the fact that we do this based on changes or paydowns how that impacted the market value at the beginning of the quarter; whereas for taxes, from purchase date. And then with repo funding, of course, that's pretty much identical.
And then the hedges, we show the impact of the benefit of the hedges that we have in place, which is quite substantial. There is a slight difference between GAAP and tax in that with tax, you have to take into effect hedge positions that are actually closed to the extent they cover the effective period, the current period.
So for instance, if you entered into a 10-year swap two years ago and closed it one year ago, the open equity at the time of closing would still impact your interest income for tax purposes over the remaining eight years of that swap. So that can be slightly different, and expenses are basically the same.
So we're showing this number, this economic income or adjusted income, of $0.50.It is a proxy for what our taxable income. I just want to make sure you understand that they're not necessarily exactly the same. And as you can see, it's been fairly stable for the last three quarters. So that's all I'll say for that for now.
Moving on to the market development, I'll just go through these four slides. The first on slide 10, this is basically just, in a nutshell, what's happened in the economy. If you look back to the end of the first quarter, the inflation and economic data had been quite strong.
In fact, we were talking about the rates being higher for longer, even with the potential that the Fed would have to hike again. Second quarter, that all changed. All of the main key data, inflation, jobs, ISM for April, May, and June were considerably softer. And especially, the inflation data is back consistent with what we saw late last year, which is inflation trending down towards the Fed's 2% target.
And now, the market views the Fed is likely to be on path to cutting rates later this year. And that then just kind of fast forward to where we are now in July. And the big change has been the change in the slope of the curve as the market gets closer to pricing in or pricing eases closer.
So now, for instance, [2s, 10s] as a proxy for the shape of the curve. In late June, that was at minus 50 basis points. Earlier this week, it got as low as minus 30. So a big move. It's really hard to discern from these charts if you're looking at the different -- the green and the blue line.
But the two-year point in the swap curve has moved over 35 basis points. So a big move, the curve is much deeper. And our view going forward is that that will continue.
And it's easy to have a fair amount of conviction in that because there's really two forces that could drive that. On the one end, obviously, if the Fed eases, you can get the front end of the curve moving down. It's currently anchored.
But also, on the longer end of the curve, to the extent that we're going to continue to run, for instance, large deficits, there's somewhere in the $5 trillion to $8 trillion of debt that has to be rolled over by the government in the next 1.5 years. And depending on the outcome of the election, say -- for instance, if Trump will win, he has talked at length about imposing more tariffs, which could be inflationary.
So there's a lot of reasons to think that the long end of the curve may not rally as much as the front end. In fact, it could even go higher. So for these reasons, it's easy to gain a fair amount of conviction that it'll steepen, and that's how we expect the market to unfold. That being said, to the extent that it doesn't, we are positioned to do quite well even with that outcome.
Moving on to the mortgage market. This chart on the top talks about just the spread of the 10-year treasury going back to very far. It's a good perspective. As you can see, we are still in a fairly elevated level.
On this chart, we show as the most current rating of 141 basis points spread to the 10-year. Today, that's closer to the 135, 136. All of that being said, the current coupon mortgage has a duration that's much, much shorter in tenure. So a more appropriate benchmark for today will probably be the five-year. And that spread is a little under 150, and it hasn't moved as much of late.
So it's not tightened as much. So mortgages are still attractive. And we expect going forward that there's room for tightening. The market expects that to the extent we do see Fed easing, we're likely to see the banks become more involved. They have been modestly involved to date.
But if they were to become more meaningfully so that that could be the impetus or the catalyst for some more tightening. I don't know if we're going to go back to the levels we saw pre-pandemic, but it could certainly drive us fairly tighter. And again, that's the -- market's conventional thinking is that the banks would become more involved if we do get easing.
Outside of that, money manager inflows have been substantial. I saw some data published by Nomura yesterday that showed something like $7 billion or $8 billion weekly average to date this year, which is pretty strong.
And to the extent that those money managers continue to be overweight mortgages, those are pretty substantial inflows. So they've been supportive in and of late as we know that REITs have been raising capital, and those are on the margin support of the market as well.
Looking at the bottom left of the page, you can see the performance of select coupons of mortgages. And you can see early in the second quarter, quite weak performance. April is a rough month. We are still looking at data from March.
It was very strong. The market was expecting the Fed to be break high for an extended period of time, so mortgages were looking and also appealing. And we had a nice recovery into the end of the quarter.
Gave up most of that in the last week, which really ended up hurting the returns for the entire quarter, only to turned around in July and rebound. Although of late, the last week or so, that's turned around again, we're probably close to unchanged if you look back at a [3/31] reference point.
On the next slide, we talked about volatility. Volatility is obviously a very big driver of mortgage performance. And this chart on the top shows -- if you go back to October 2023 when we are at very high levels, rates, and volatility, we've had a nice long rally since. Although rates haven't started to pick up.
And in particular, this week, especially realized volatility, has been quite high. And this is just something that we always have to keep an eye on because it is a very big driver of mortgage performance. For now, they're relatively low levels, looking back just a year or so, but starting to build the other way.
Slide 13 is our proxy for the housing market and refinancing. And as you can see, as we all know, it's been the same story for quite some time. Mortgage rates are high. That's the red line in the top left, and the blue line is the refinancing index, which is basically zero.
But just speaking more generally about the housing market. Affordability is very, very low, near record lows. So that impacts a lot of things like turnover, rates, again, near the high level. Prices are high, which these two, combined, drive affordability.
And now, what we're starting to see are inventory levels build. I know this week, for instance, new home sales were released. The inventory of new homes is over nine months' supply, which is typically associated with recession levels.
I'm not saying that we're going to get a recession, but those levels have moved a lot. In fact, I think the absolute level of new homes and inventory is similar to the levels we saw before the financial crisis. So the housing market is definitely weak. There's no question of that.
Slide 14 is something I introduced last period. It's just an interesting look at GDP and the money supply. I'm not really going to talk about it, but it paints an interesting picture.
You can see that growth has been above long-term trend now for some time since the pandemic. And whether it's causational or not, the money supply would appear to be behind that. And that's associated with the significant deficits that we've been seeing since the pandemic. That's about it all I'd say.
Now, I'll turn to the portfolio. On slide 16, as I said, our outlook for rates is for the curve to steepen. As I said, there's two potential drivers of that. You can have the Fed lower short-term rates and/or longer-term rates could stay the same and/or go higher if inflation and/or deficits continue to stay high.
So with that in mind as the backdrop of how view the world going forward, not in terms of what we did. Well, the big driver was we had a lot of money to put to work. We used the ATM quite exclusively in the second quarter.
We raised about $100 million. And actually, in July through the first third of the month or so, we raised another $55 million. So quite a bit of capital in relation to our size.
As a result, we've been deploying that into the portfolio and basically almost exclusively in higher coupons. As a result, our weighted average coupon went from 4.38 at the end of the first quarter to 4.72% the end of the second, which is a pretty substantial move. But it's even higher now.
It's at 4.88%, so a 50-basis-point increase off of where we were at the end of March. Realized yields are higher. I don't have the current number, but it would be higher than what we report here for the end of Q2.
And then also, our net interest spread for the quarter went from 2.47% to 2.64%. With the additions of the higher coupons and our slight changes to our hedging strategy, which I'll get into in a moment, there's room for that to expand slightly more.
And I would just point out. If you look back at our portfolio historically, say, going back a year or so, especially in relation to our peers, we probably had one of the lowest weighted average coupons in the portfolio. And as we employ our barbell strategy, higher coupons has been coming up quite a bit.
And so we were -- in terms of performance for the quarter, our net interest income for June, even though we were negative for the quarter, was actually slightly positive. I don't have any Q2 figures yet for you, but that's clearly the trend.
With respect to the portfolio itself, as you can see on slide 17, These charts are just the bar graphs of our portfolio. If you look at the right, that's where we were at the end of last year. And as you can see, moving to the left, the current positions at 6/30, we have, as I said, been adding to the higher coupons.
Just to give you some updates of what we've done since quarter end, 6/30/24. Our allocation to 6 is now is just under $1 billion. So that's grown quite a bit. 6.5s were now over $800 million, and sevens are almost $400 million. So that's almost $600 million of adds in all of those higher coupons.
And the reason we prefer this barbell strategy is we think it does well in either rate environment. So for instance, if we would have a rally on the long in particular, our lower coupons would do quite well to the extent the rates long and, in particular, stay higher.
These higher coupons clearly generate lots of income and, absent a substantial increase in longer-term rates, don't have much extension risk. The belly of the coupon stack is more often than not been quite rich of late. That's another reason why we find these securities to be attractive.
Turning to our slide 18 and our funding, well, the Fed hasn't done anything. So not surprisingly, our average repo rate for the quarter was unchanged.
All that being said, with the market starting to price in eases, we have extended our average maturity, And we've continued to do this as of July. So we can get some benefit of some slightly lower, not meaningfully -- small, but slightly lower rates further out.
With respect to our economic cost of funds, it did improve a fair amount from 2.56% to 2.41%. And that has a lot to do with changes in the strategy of how we're hedging. We've been using a lot more swaps versus treasuries or futures, and we've been moving those swaps up the curve. So slightly maybe lower notional balance but with more [DV01] further off the curve.
And with the curve very, very flat, in effect, our hedge borrowing rate has gone down slightly. And that's what caused the NIM to improve.
Now, turning to our hedge positions. As I mentioned, we've been moving the swaps out -- moving two swaps and using longer tenor swaps on almost all 7- and 10-year. And the reason we're doing that is this. We think the greatest potential pain or risk to the portfolio would be a long-end sell-off, which would typically be accompanied by an increase [involved].
And so therefore, by using 7- and 10-year swaps, especially when we're hedging new purchases, which are higher coupon, lower duration -- if those mortgages were to extend, they're extending their duration absolutely close to our hedges, we would dynamically hedge and potentially add to those positions.
But it really, I think, is the most sound way to protect the portfolio. Because that -- as I said, I think that would be the greatest source of pain. It would be a significant selloff in the long end.
Also, just more of the statistics on slide 19. We do cover 84% of our funding liabilities with our hedges, excluding TBAs. Swaps are now up to 72% of that. And our weighted average paid fixed rate is 2.71%.
If you look at the bottom of that page, you can see our swaps are now a little over $3.1 billion. Corresponding numbers end of Q2 was [2.53], so a significant move of the futures. Those were $842 million. Now, it's $521 million.
In addition to adding to our hedges, we've been moving some of them from futures to swaps and moving the swaps further out the curve. TBA short is essentially unchanged, and same with the swaptions, probably just one position.
Now if you look at slide 20, we provide a little more detail on our hedges. And I just want to say a few comments. In particular, on the top right are swaps.
As you can see, if you compare where we were again on the first quarter versus now, the shorter maturity swaps are the same. So we've been adding to the longer tenor swaps, as I mentioned.
With respect to the performance of the portfolio through last Friday, it really was just driven by the fact that we do have a fair number of swaps in a five-, six-, seven-year part of the curve. And that's where the markets really rallied.
And so it's -- the reason that we're down side is just because of that, the rally in the swap positions that drive the mark-to-market to a slightly negative position. Now that being said, I don't know that we're going to change that. But I think as we expect the curve to steepen, we do expect the Fed will ultimately ease.
But current pricing is for quite a few eases by the end of the cycle, 200 basis points or so. I don't think we're ready to take the over on that. I don't think we see the economy about [the rule] in the recession. And so I wouldn't be surprised if we actually realized less than that.
So the fact there's no real reason in our minds to unwind any of those hedge is because we think the market may be a little ahead of itself. Also with respect to the swaps, I want to point out that none of our swaps mature between -- before March of 2026. 85% of our swaps are in place through or mature in Feb '29 or longer, and 65% in May of 2030 or longer. So these hedge positions are going to be in place for quite a while.
The one swap that does mature in March of '26 represents less than 10% of our notional balance. So our hedges are here. We're not going to have them roll off. We don't have to refinance those, so to speak, anytime soon.
And then secondly, with respect to our balance sheet, as you know, we have no preferred. We have no floating rate preferred. So our balance sheet in that regard is very clean, and we don't have that risk to our net interest margin posed by either a floating rate preferred or swaps that have to be refinanced in the near term.
Slide 21 just gives you a look at the portfolio. I would point your attention to the column entitled effective duration. And you can see across the various coupons of those numbers. And then the far right is just our allocation.
So basically, if you look at the effective duration column, starting from the top, down to the bottom, that's basically the curve -- where we're positioned along the curve. So the shortest part of the curve, which would be 1.27 year, our current allocation at the end of June was 7%. Those are higher.
But basically, this just gives you a sense of how we've positioned the portfolio across the curve, granted these are static numbers. If rates were to move materially, these duration numbers can change.
But as you can see on the far-right column, how we're positioned. And just note, in the bottom right, the allocations to those higher coupons have gone up.
Slide 22 just kind of gives you a sensitivity of our net duration gap or the sensitivity of the portfolio. As you can see, we do a little better in the backup. And that's just because we've added longer tenor swaps primarily.
Finally, on slide 23, our speed experience. The one thing that we benefited from (inaudible) I mentioned earlier is that most of our deep discounts, say, bonds with [95] handles are below 4s, 4.5s, and so forth. So quite seasoned.
And as a result, our speeds, if you look in the very far right column, they're not bad for deep discount bonds. So that's been beneficial for us. And with respect to our newer higher coupons, they've been maintained at just basically moderate speeds. We haven't had any issues there.
That's pretty much it. Now, just turning to our outlook. As I mentioned earlier, a lot has changed since the end of the first quarter. We were looking at higher for longer, maybe the Fed hiking, the data changed pretty abruptly. And now, the market really thinks that we're on the verge of an easing cycle.
We've been here before. We certainly -- if you go back to December of last year, we thought we were on the verge of a big easing cycle, and it didn't turn out to be the case. So we are mindful of that. But that being said, to the extent we do get an easing cycle, there's obvious benefits to that as our funding cost decline and are positioned in the portfolio, which I think is well suited for that outcome.
But all that being said, if nothing happens and the data turns around again and we don't get any tightening or easing rather, we just have a status quo, the portfolio is very well positioned. The income and net of our hedges is very attractive. And we think that our hedges are such that we can maintain pretty stable book value throughout. So we're very comfortable positioning where we are.
And that's it. Operator, I will now turn the call over to questions.

Question and Answer Session

Operator

All right. Thank you. The floor is now open for questions. (Operator Instructions) Jason Weaver, Jones Trading.

Jason Weaver

Hi. Good morning. I appreciate that market commentary. It's very helpful. I was wondering, could you comment on the pace of deployment over the quarter of the ATM issuance and if that represents any sort of meaningful cash drag? Or were you able to get that invested relatively simultaneously?

Robert Cauley

I'll give you my first comment and turn it over to Hunter. We did wait a little bit in June. We raised a lot of money in ATM in June. And with the market, especially the mortgage market underperformance late in the month, we did wait.
So we didn't deploy most of that until July. So that would cause a slight drag for the first month because we just have less income on more shares, but we then did deploy it. We're, I would say, fully deployed.

George Haas

Yes, we're fully deployed at this point, although our numbers in June and July would not reflect being fully invested. So the first -- with the most recent slot of capital that we've raised, the money will be fully put to work starting in the month of August. So we'll get full month's worth of interest accruals on all those.
We raised some capital in the beginning of May, put that money to work relatively quickly, and then also did some more rate fundraising in the later part of May and early June. We really waited until towards the end of the quarter to put that money to work. I think it was a wise decision as that last week of June spreads really backed up quite a bit. So we put some money to work in late June and early July at pretty attractive levels.

Jason Weaver

Got it. Thank you. And then just on the macro front, as far as the book looks today, where do you think benchmark mortgage rates or spreads, for that matter, have to come in for you to begin to get really concerned about your convexity exposure?

Robert Cauley

What spreads have to come in?

Jason Weaver

Sorry, where rates have to move before you start worrying about the accelerated prepayment exposure.

Robert Cauley

I would say, right now, the current coupon is about 5.58% or 5.60%. We have a lot of 6%s and 6.5%s. I think guys mentioned a little under $400 million of 7%s. So the 6%s and 6.5%s are not significant premiums. And we also have -- a lot of those are New Yorks. They're all specs, a mixture of low pay-up and some higher pay-up bonds.
They would have to be quite in rally I think for those to become meaningfully in the money and become a concern. Exact number, you're probably looking at, I don't know, 25 basis points or more. And the other thing is that mortgage spread is primary secondaries, but I even mentioned that on the call earlier. But it has been kind of sticking to the high side, so I don't know that we would necessarily see them take up with (inaudible) basis point per basis point.

George Haas

Yeah, the strategy has been, especially in the 6.5% and 7%, even more so as you go up in rate, has been to stay sort of close to TBA. So we recognize that convexity risk, and we monitor our hedge ratios as they change from day to day on that front.
So we're trying to stay on top of the convection into a rally. We did mention that our barbell strategy. The other side of that is we have a lot of really high-quality specified pools that are lower coupon.
And so because they're so far out of the money, at this point, their pay-ups aren't all that high. But we would expect those pay-ups to accelerate at an increasing rate if we were to have a really big rally.
So on the opposite side, the high coupon portfolio, because it's relatively low payout, if we were to have that big sell-off -- I think as Bob alluded to in his comments -- we would expect those assets to do quite well. And we've really seen that as we've bounced around the rate range.
We have a big sell-off, we'll see 6.5% and 7% TBAs do relatively well. lackluster performance down lower in coupon. That market is a lot more technical, less predictable as rates rise and fall, but the production coupons tend to do well into a sell-off and tighten up. So we like the way we're positioned for that reason.

Jason Weaver

Got it. Well, thank you for that color. Very helpful.

Robert Cauley

Yeah. Thank you.

Operator

Jason Stewart, Janney.

Jason Stewart

Hey. Good morning. Thank you. Hey, Bob. Maybe start with the current cash ROE of the portfolio and what you're seeing in terms of incremental capital deployment on current cash ROEs?

Robert Cauley

Well, we've seen, we were at [150] for quite a while. Now, we're getting closer to [200] over, especially as we've been using more of the longer-dated swaps. I don't think we've published the numbers, but yields on the new acquisitions that Hunter just alluded to were in the very, very high [5s] on average and using a combination of 7- and 10-year swaps therein, depending on when we put them into the low [4s] or even high [3s].
So I don't know if we're 200 over, but they're quite high. And with 7x leverage, 7.5, those -- that's pretty decent ROEs. And I don't think that's being very aggressive with respect to leverage. So they're very, very attractive.
I think the one thing we do think about is, what's going to be the big driver if you're going to get the big tightening? And we haven't seen that yet, obviously. I don't know that we're going to see it in the immediate term unless you really start to see the banks come in.

George Haas

And I would just add just a comment. One thing we've seen, since you don't have the Fed doing QE, you don't have banks buy, is the mortgage market has become very relative value driven. No coupon outperforms for more than a day or so.
So if the belly outperforms today, then you know it's not going to perform tomorrow kind of thing. And so performance has been very volatile in that regard on just rich cheap basis. But that being said, we've been able to generate very decent yields in this stationary market. And taking advantage of the funding or hedging strategy, we've got very attractive ROEs.
Now depending on the point in time, as I alluded to earlier, some of the early May settles were done at slightly tighter spreads from both an OAS and yield perspective. But it's [180 to 200] over positive cash flow versus funding, today's repo funding levels, just in terms of carry.
And then one of the benefits of hedging these a little bit further out the curve is if and when we do get those Fed eases, we have immediate room for NIM expansion on some of the unhedged portion of the assets. So yeah.

Jason Stewart

Yeah, no, it does. Thanks. So like mid- to high teens and all cash carry with room for improvement is the bottom line there, right?

Robert Cauley

Yeah.

George Haas

Yeah.

Jason Stewart

Okay. And then just a technical question on the pay-ups. When you look at hedging, that spread duration of the pay-up, does that change your hedging strategy at all? I mean, we've seen some pretty aggressive refi programs out there. It seems like a lot of the mortgage market is going to be very quick to refi some of the new production. Just maybe talk a little bit about how you're looking at that spread duration and hedging risk on the pay-ups?

Robert Cauley

Well, we've seen that be very painful in the past. I mean as we all know, there's been some gut wrenching episodes early in '23, where those payoffs can move a lot and you experience that spread duration. What we've done is basically just basically stick to Moore's Law pay-up stuff.
As I did mention, we owned some New Yorks, but those are in 6%s. So their payoffs aren't that high. Generally, it's been higher loan balance or FICO or Texas or Florida or LTV. So we try to avoid that as much as we can. We have not been buying all loan balance 7%s, for instance.

George Haas

Yeah. And those pay-ups are a little bit different than the traditional pay-up stories, where you might say, like a low loan balance or something where you're really paying up for this superior convexity. A lot of times, the pay-ups that is embedded in some of those less expensive stories is really months to breakeven sort of play, right?
So are they going to outperform generic TBA, deliverable type of collateral, by a handful of ticks per month? And the market kind of works out the breakeven is for that. They do have, in all cases, better than cheapest to deliver convexity or S curves. But a lot of times what you're really paying for is just a month to breakeven type of approach.
So it's been a good strategy. They do carry a little bit better than worse to deliver. We don't expect them to defy gravity into a huge rally. That's why we're focused on the lower pay-ups, and they have relatively low negative convexity. And so we think into a volatile market, they can do well.

Robert Cauley

And that's also part of the barbell strategy. We still have a lot of 3%s. We don't expect a huge rally on the long end. But if we do, they're going to do very, very well even despite the fact that some of these higher coupons may not do as well.

George Haas

And they're fully extended at this point. So they have very low convexity for the opposite reason.

Jason Stewart

Yeah. Absolutely. Okay, that's helpful. And last question for me. On slide 8, Hunter, maybe this one's for you. If I look at the 2Q '24 number, say, $29.5 million of gains on funding hedges attributed to the current period, how much of that is coming from closed swaps? And really, what I'm trying to get at is...

George Haas

None, none of it. These are all from currently existing hedges.

Jason Stewart

Okay. So when we look at these numbers relative to the dividend and book value, there's a mark-to-market impact, obviously, that's been realized in the book. And it's going to change as rates move around. And some of this is going to come out of book value. So it will be a return of capital and the dividend.

George Haas

Right.

Jason Stewart

Okay, I got it. I'm thinking about it the right way. Okay. Thanks a lot.

Operator

Eric Hagen, BTIG.

Eric Hagen

Hey, guys. Good morning. Hope you guys are well. How are we thinking about the range for your leverage right now? Can you remind us the historic range that it's been and what you think might get you to take it up to kind of the higher end of the range versus raising more capital? Thank you, guys.

Robert Cauley

Yeah. The range -- 7% to 8% will be the range, maybe a little less than 7%. We're about 7.5% now. We were right around 7% and 7.1% at the end of the last few quarters. I would say at the moment, I don't see a reason to take it meaningfully higher. I would say, we'd be quite comfortable with 7.5.%.

George Haas

Yeah. I think that this fall could be very volatile. We're not really in a position where we're thinking about hiding and taking cover. But we're also -- I think, there's a lot of black swans flying around right now. So we're content to sit at this level for the time being.

Eric Hagen

Yeah. All right, that's helpful. So how are we also thinking about repo rates in light of higher volatility. I think you guys mentioned a lot of government debt coming to the market pretty soon. Should we expect repo rates --

Robert Cauley

You started to see that. I was just reading this morning about -- our in-house repo trade has been in the industry for 30 years. We spent a lot of time talking about this.
So if you look at software, today, I think it said it's [34]. It's above Fed funds. I don't want to get over my skis, but my understanding is that software is set on -- it's the average of weighted average of third-party repo, GC repo, and then I don't remember what the third component is.
But what we've been seeing is that the banks, the Wall Street firms, have been using sponsored repo more for balance constraint reasons. As a result, the blended rate has been driven higher, so less third-party, more sponsored repo, which is at a higher rate.
And so you're seeing that drift higher. It's actually quite a bit higher now than the RRP, which is why the RRP usage has been coming down money markets and moving funds into there. But that's been higher. I don't know that that's not a function of deficits. That's just funding levels and QT and things like that.
Our focus on the deficits and things like that is more of a long end story with so much debt to be refinanced over the balance of the next two years, obviously at much higher rates, we think that's going to pressure longer-term rates. And that's why the effect we're playing for a steepener, we think it's going to be more front end driven than long end.
And then depending on the outcome of the election -- as I mentioned, Trump talks a lot about sanctions and the like. He's not known as a deficit hawk. So I don't think you're going to see inflation come roaring back down to the low 1%s. So all those things are going to keep pressure on long end, I think.

George Haas

Yeh, in spite of all the volatility in light of the builds markets and everything that's rolling off there and the index rates bouncing around -- and there's a lot of noise there -- repo rates have been remarkably stable. And now finally, just starting to roll into that period where we're taking longer term, putting on some longer-term repos or two, three months, every day that passes start incorporating more of that September rate cut that's baked into the market. So spreads may widen out a little bit, but I think we'll see the nominal level of repo rates come down.

Eric Hagen

Good perspective. I appreciate you guys very much.

Operator

Mikhail Goberman, Citizens.

Mikhail Goberman

Hey. Good morning, guys. Hope everybody's doing well. If I could just jump in with a question. If you can flesh out perhaps a little bit further your ideas about book value and the swap portfolio. Given we're going to probably get some Fed loosening here in the next couple of months and quarters, are you guys thinking about book value stability or book value growth in a lower rate environment?

Robert Cauley

Stability versus growth. I don't know that we have that quite an outlook. I think as I said, I'm going to see the curve steeper on the front end. So obviously, the swaps are going to suffer there. But if you look on the asset side, especially with large allocations of 3s, I think a lot of that can be offset.
So I guess, without thinking out too much, it would be stability, but there is certainly room for growth. That would be more mortgage tightening. Like I said, we're trading, depending on your benchmark, between 135 and 150 off. If we do get a meaningful easing cycle, which I don't think it's going to be that meaningful -- but if we do when the banks come back in and they're more buyer the space, you can get spreads tightened 10 or 15. That's probably where the book value would come from.

George Haas

I'd add that we have, from a tax perspective, a little bit of an over distribution earlier in the year. So as the NIM expands, we have some latitude to think about preserving a little bit of below. That's in a very short term, just really kind of through the end of this year. And then 2025, we'll be more tax driven in terms of whether or not we can distribute or retain some excess profit.

Mikhail Goberman

Got it. Thank you, guys. Good luck going forward.

Operator

Christopher Nolan, Ladenburg Thalmann.

Christopher Nolan

Hey, guys. Bob, your comments on the bank staying out of the MBS market. Is this any sort of anything related to the fallout from the Silicon Valley Bank (inaudible) where suddenly the Feds are --

Robert Cauley

That was more of a last year's story, maybe earlier this year. Not they're not present, they're just not in a big way. The conventional with them is that they're waiting for the Fed to ease. And once they do that, they'll become meaningful buyers.
And that was what I was trying to get at earlier the comment and the one question I was answering is that we had QE back in the day. The Fed was just an indiscriminate buyer, and banks were buying too because the Fed was pumping reserves into the system.
So even though people didn't talk about it at the time, if you looked at bank holdings of mortgages, they are going up in lockstep with Fed holdings. So you had these two huge buyers of the space. They're pretty much both gone. I mean the banks buy some, as I just said, but -- so you don't really have this huge indiscriminate buyer.
So now, the money managers buy it. They're very much relative value driven. So they'll buy mortgages if they think they're cheap versus, say, corporates or versus treasuries, whatever. But so there's -- mortgage trading now is all relative value driven. So nothing stays rich for long or cheap for long.
And so you haven't seen mortgages gap wider or tighter much. There's no real potential for that, but that could change if we get banks back in. So we'll see.
The regional banks, I think, were the biggest culprits when it came to the underwater how the maturity accounts. The Wells Fargos and JP Morgans of the world, I don't think are in that position as much or at least, if not at all. They still have legacy portfolio of issues to work off and the accounting classifications that they use and how much they can sell at a loss and redeploy at wider spreads.
And so it's just going to be a matter of time or, in the case of -- there have been some large bank portfolio movements, and those have been sort of one-off in nature, related to selling some profitable arm of the business and then using the gains from that to offset selling lower coupon mortgages and loss and then redeploying in the higher coupons.
So Fed cuts will definitely accelerate the amount of time that they're sort of in the penalty box from having to work off those losses before they can redeploy into more profitable strategies. So I think they'll be present at an increasing rate, but I don't really expect a monumental shift any time soon.

Christopher Nolan

Okay. And then turning to capital management. What was the average share issuance price for the ATM in the quarter?

Robert Cauley

I don't have that in front of me. It did vary quite a bit. I would say in the second quarter, we were probably around 97% of book on repo we are selling, what was moving around. Obviously, that number is higher. We weren't starting for long in July, but it was at a much higher percentage of book. But I think the last sales we did were even in the [8.60]s gross, but the stock has since fallen back.
So we traded in quite a range probably [8.25 to 8.75] throughout the second quarter, and the selling price tracked bulk more -- like I said, it was kind of 97% of book of gross, maybe 97.5%. And so just depending on the day where those prices were. I don't have that in front of me, unfortunately.

Christopher Nolan

Yeah. So given that you're raising equity capital, which is dilutive to book value, how much of the swing in book value in the second quarter was due to these capital raises?

Robert Cauley

About $0.09, and here's how you get to that number. We had GAAP earnings of negative $0.09 and we paid dividends of $0.36. So if you don't issue any shares, the change in your book value is just going to be earnings less the dividend, right? So minus $0.09, minus $0.36 gets you to minus $0.45. But we did issue shares and book was down $0.54, so that delta is $0.09. It was attributable to share issuance.

Christopher Nolan

And final question. Given that, should we expect further book value dilution from the capital raises you've done quarter-to-date?

Robert Cauley

Well, we did those at a much higher percentage of the book. My rough estimate is about $0.01 quarter-to-date. And that's because -- the last sales we did were almost at book, essentially at book. And so there's very little dilution in those.

George Haas

Maybe worth noting also that something that makes us a little bit tough to get your hands around or on your mind around is that, as I alluded to earlier, some of the capital that we raised, we did so when book was higher and then put the money to work when book was lower. So not to confuse the matter too much, but we did save some capital and put it to work when spreads were sort of at their quarterly wides.

Christopher Nolan

Okay. Thanks, Hunter. Okay. Thanks, guys.

Operator

(Operator Instructions) Jim Fowler, Kingsbarn Capital.

Jim Fowler

Hello, Bob and Hunter. Good morning. Hey, guys. Thanks for taking the question. I just wanted to ask a bit -- refer to a couple of tables, one in the press release, one in the deck. If (inaudible) I'm looking at this properly and I'm going to ask the question.
So I've noted that the last two quarters, strong economic income relative to the dividend distribution. If you note on page 8 and which you also provided detail, the largest contributor of that has been the hedges in the current period, of which about 60% is related to the net swap benefit in those swaps. You have a very enviable position of not having maturities until 2026, and then they're much longer.
So when I look at the economic income for the quarter of $29 million, and I look at that as a return on the average capital allocation of the quarter of $405 million from the press release, I get an economic income return on average invested economic capital of about 28% for the quarter. And as you articulated earlier, I think the marginal cash ROE is in the 19% to 19.5% range, leveraged 7.5 times.
So if all of that seems reasonable to you and is accurate, I guess the question that I have or the observation I'm making is that this is now a convergence situation. How long will it take for the portfolio economic return of 28% on average invested capital to converge onto the marginal investment return on the cash ROE of approximately 19%?
That would seem to be a very long convergence cycle unless a significant amount of capital was being raised and invested at that margin with that marginal cash ROE that would cause that economic return to converge more rapidly. And here we are in the second quarter on into July, raising lots of capital. I think share issuance in the quarter was up quarter-over-quarter, about 22%.
So I'm wondering how you think about that vis-a-vis the relationship of economic income versus the current distribution and if that economic income on the margin gets declined closer to distribution -- the distribution rate because of capital raises. Does that obviate any opportunity to adjust the dividend upward and could potentially pressure the dividend?

Robert Cauley

Let me take a crack at that. So the convergence, if we were to get an easing cycle --

Jim Fowler

Let's not talk about easing at this point. I'm just talking about the marginal capital raised or invested at 19% when you have a balance sheet and hedge structure right now that's -- it's obviously above market, mostly driven by the swap benefit. But I don't want to introduce anything with the Fed at this point. I'm just looking at static balance sheet, the raising of capital on the market at a cash ROE that is diluted to the economic ROE.

Robert Cauley

So if I'm following you correctly, so you're saying it's diluted because the legacy ROE is higher than the marginal ROE, right?

Jim Fowler

Absolutely right. Yes.

Robert Cauley

Right. The rationality for doing so is that if you look at it purely from the perspective of a NIM in your framework, it doesn't make sense. But the way that we would look at it is not just from the perspective of NIM, but the valuation of the assets.
So we think that the NIM that you allude to, the 19.5%, that is -- if you think of total return as the sum of price appreciation and income, that's purely income, right? So that's assuming no price delta.
And the rationale for us in doing so is the expectation that there's the potential for a fairly meaningful price return because we're putting the money to work at assets that we view as historically cheap. That may not come.
So let's say that mortgages don't tighten at all for the next two years. in which case, you're right. As we raise capital, we will continuously dilute the return, the NIM. That being said, there is potential for price return, and that would cause the marginal return to be higher.
And I guess that would be our justification for continuing to do so. We view ourselves as putting money towards -- and that's really the reason, getting back to the last question, why would you so stop slightly below book. And that's why, is you think that you have the potential to generate capital -- price returns that will more than offset any potential dilution from issuing stock.

George Haas

Just to add, I think there's one oversimplification here, and that's that these gains and losses attributable to the swaps, for example, as you alluded to -- the swaps have already been mark-to-market. So those mark-to-market on the swaps that are in the money is going to go from whatever it is now to zero over the life of that swap, right? So it's going to accrete or it's going to amortize back out of book value. That's, I think, one of the missing pieces to the 28% number, is just on a total return basis.

Jim Fowler

Right, they're going to accrete to zero. The market value impact will accrete to zero as they approach maturity.

George Haas

Right.

Robert Cauley

And that's why I was going to bring up the Fed, not because I'm making a call on the Fed. But if the Fed were to ease, to Hunter's point, the value of those swaps would decrease, right? Because there's -- the Fed doesn't look at markets pricing of the Fed to do. If you look at the curve, the swap curve, where's the 10-year swap yield? Well, it's a hell of a lot lower than Fed funds.
Now the 10-year point on the swap curve is 4%. So the market expects six eases on average over the next 10 years. So just the fact that the Fed eases may not do anything. But potentially, if you do get more eases than expected, those swaps start to lose value, but your return on marginal equity goes up because, as Hunter alluded to earlier, the NIM on the unhedged position grows.

Jim Fowler

So I look at that as being a geographic change on your economic income schedule. I mean, NIM will increase and the swap benefit will decrease, and the net benefit to the bottom line should approximate no change.
Yeah, I was just looking at this and saying, I was looking at the first quarter number where it was such a strong performance. The economic income was such a strong performance relative to the distribution. And then in the second quarter, it was even slightly better, thinking that that was indicative of the opportunity to address the distribution.
But then with the capital being raised, it's going to cause on the margin that delta to decline in the third quarter and in the fourth quarter. So I just wanted to see what your view on that thinking was. But I appreciate the insight. Thank you very much.

Robert Cauley

I think you might hang up. But just one more point on that. And that's the legacy portfolio is largely a lower yielding portfolio. And so what we've actually seen is -- if we think about marking our portfolio and our hedges to market every day, really, as far as that goes, but every quarter, our mix of assets once mark-to-market doesn't fall out of line with that 180 to 200 basis point economic return that gets us to that sort of high-teens type of number.
And so as we have added higher coupon -- production coupons, those have come at a slightly wider NIM than the legacy portfolio. And so if we just think about moving from one quarter where we were marked both on an asset and hedge basis to the next quarter, the recent capital raises have actually increased our blended income earning capacity of the portfolio.
Operator, next question. We appreciate your time, thanking for joining us today. To the extent that any other questions come up and, because of these apparent technical difficulties, you're unable to ask, please reach out to us at the office. The number is 772-231-1400.
Or for instance, you don't get a chance to listen to the call live and listen to the rebroadcast, if you have any questions, you can use that same number to call us. Otherwise, we look forward to speaking to you at the end of the third quarter. Thank you.

Operator

And that does conclude today's call. Thank you for attending.