Rich Shane

Rich Shane observed a tactical net short position in the coupon 50 basis points below the highest concentration coupon for the third consecutive quarter, seeking clarification on the strategy driving this exposure.

Answer

Nick Letica (Chief Investment Officer) explained that the coupon exposure is influenced by rate movements and the current coupon's position relative to the portfolio's risk exposures and MSR. He noted that as rates rally, the negative exposure migrates down in coupon to offset current coupon risk in the MSR portfolio. He emphasized that the company views these risks on a 'bucketed basis' and does not 'fuss' over specific 50 basis point coupon swaps, managing overall risk rather than a strong strategic reason for that precise exposure.

Rich Shane sought clarification on the strategy behind Two Harbors' tactical net short position in the coupon 50 basis points below their highest concentration coupon, as observed on slide 17.

Answer

Nick Letica, Chief Investment Officer, explained that this coupon exposure is primarily driven by interest rate movements and the current coupon's position relative to their MSR and other portfolio risk exposures. He noted that as rates rally, the negative offset migrates down in coupon, and they manage this dynamically. He clarified that this specific 50 basis point exposure isn't a strong strategic commitment but rather a result of managing overall risk in the context of spreads and specified pools across nearby coupons.