David L. Finkelstein: Yes.
Jason Weaver: All right. Thank you for that. Yes, yes. I appreciate the time.
David L. Finkelstein: You bet.
Operator: The next question will come from Rick Shane with JPMorgan. Please go ahead.
Rick Shane: Hi, good morning, everybody. Two questions, one, on each side of the balance sheet. When we look at the growth in the fourth quarter in terms of the agency book, you guys were most of what was added appears to be up in coupon 6s and 6.5s. I’m curious at this point in the cycle, how you feel about adding premium securities, given that, as we sort of reached that inflection point, we could see pretty significant bifurcation in the book and speeds could pick up in those coupons fairly quickly.
David L. Finkelstein: Yes, let me pass it to Srini to talk about what we’re exactly doing in higher coupons.
V.S. Srinivasan: Sure. I think we’ve highlighted this over the last few quarter, our core strategy is to move up in coupon and specify both production. What we have done over the last two quarters is to execute the strategy that basically, the coupon stack given the sharp move in the coupon stack traded with a lot of volatility in the first quarter, so this gave us an opportunity to move up in coupon at relatively attractive levels. And the pace at which we move up in coupon is somewhat dictated by our ability to source high quality specified rules at reasonable valuations. So, that’s why the pace has been somewhat moderated as which we move up in coupon, but we continue to like specified growth up in coupon. I think if you look at TBA, it’s pricing in the loan size that new production is, the new production loan size has gone up almost $75,000 over the last year or so and is now running at around $450,000 so these pools are likely to have very steep S curve and very poor convexity profile.
And so the payoffs will compensate for one of our weakening we see in the TBA collateral.
David L. Finkelstein: And one more point to note, I was just going to say that if you look at the overall portfolio, the average dollar price is still $98 notwithstanding the rally we experienced in the fourth quarter and you do get the most spread in the higher coupon. So you take more convexity risk, but we try and mitigate that as Srini said through specified pool selection, but at the end of the day, we get paid to manage convexity risk. And if you’re way down the coupon stack in low dollar price securities, you’re not going to get the spread you need. So that informs the strategy.
Rick Shane: Got it. And it is as you make the point I realized that one of the things that shifted not only is where you are in coupon, but the percentage of generics, to your point also went down. So that’s consistent. Turning to the right side for a second, if we look at the repo funding from the third to the fourth quarter, the duration went down or the funding time went down slightly. I’m assuming in the third quarter you extended funding with the idea that you didn’t want to take risk into year-end balance sheet contraction and that some of that was just run off of the 120s — over 120s in the longer duration borrowings rolling down, but I’m also wondering if what we’re seeing here is a little bit more bullish positioning on rates with you shortening the funding also.
David L. Finkelstein: Yes. So to your first point about adding term in the third quarter, you are correct in that and that does reflect the roll down. And I’ll tell you another point to note about the repo market today, Rick relative to a number of years ago is that the vast majority of the liquidity is in the very front end of the curve there and to really extract the value in the repo market, it’s we do need to stay somewhat short. We did have some very good opportunities to put on some long-term trades last year that we benefit from. But generally speaking the term of the repo is going to remain relatively short because that’s where the liquidity is. And to the extent that the Fed does ease certainly then you benefit from that by being able to capture those lower rates. So to a certain extent that’s the case as well to your second point.
Rick Shane: Perfect. Okay. Thank you. And term was the phrase I was struggling to find at 6:30 in the morning, I apologize. Thank you.
David L. Finkelstein: We understand our west there.
Rick Shane: Thanks, guys. Have a great day.
David L. Finkelstein: Thanks, Rick.
Operator: Our next question will come from Trevor Cranston with JMP Securities. Please go ahead.
Trevor Cranston: Hey, thanks. Good morning. David, I think you mentioned in your prepared remarks that you might consider adding duration to the portfolio in the near future. So I was wondering if you could maybe just talk a little bit about what kind of catalyst you’d be looking for that and maybe just generally your outlook on rates particularly at the long run of the curve.
David L. Finkelstein: Yes, sure. So we have duration has been added organically a little bit since the end of the quarter just through higher rates, but what we’re looking for is more persistent signs that inflation has moderated to a point where the Fed feels good about cutting rates and we think we’ll get there. If you think inflation prints for the next three months are going to be consistent with what they were for the last three months, we do think the Fed will release beginning in May irrespective of how the economy plays out. And once we see those signs, we’ll be more comfortable with duration because real rates still do look attractive. And ultimately, we think where the long end of the yield curve should settle as we get through this is probably inside of 4% and look for those signs that volatility dissipates and that might be beneficial to the portfolio.
