Dynex Capital, Inc. (DX) Q4 2022 Earnings Call Transcript

Dynex Capital, Inc. (NYSE:DX) Q4 2022 Earnings Conference Call January 30, 2023 10:00 AM ET

Company Participants

Alison Griffin – Vice President, Investor Relations

Byron Boston – Chief Executive Officer and Co-Chief Investment Officer

Smriti Popenoe – President and Co-Chief Investment Officer

Rob Colligan – Executive Vice President and Chief Financial Officer

Conference Call Participants

Eric Hagen – BTIG

Doug Harter – Credit Suisse

Trevor Cranston – JMP Securities

Bose George – KBW

Christopher Nolan – Ladenburg Thalmann

Operator

Good day and welcome to the Dynex Capital Fourth Quarter and Full Year 2022 Earnings Call. Today’s call is being recorded. [Operator Instructions] And I would now like to turn the conference over to Alison Griffin, Vice President of Investor Relations. Please go ahead.

Alison Griffin

Good morning and thank you for joining us today for the Dynex Capital fourth quarter and full year 2022 earnings conference call. The press release associated with today’s call was issued and filed with the SEC this morning, January 30. You may view the press release on the homepage of the Dynex website at dynexcapital.com as well as on the SEC’s website at sec.gov.

Before we begin, we wish to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. The company’s actual results and timing of certain events could differ considerably from those projected and/or contemplated by those forward-looking statements as a result of unforeseen external factors or risks. For additional information on these factors or risks, please refer to our disclosures filed with the SEC, which maybe found on the Dynex website under Investor Center as well as on the SEC’s website. This conference call is being broadcast live over the Internet with a streaming slide presentation, which can be found through a webcast link on the homepage of our website. The slide presentation may also be referenced under Quarterly Reports on the Investor Center page.

Joining me on the call is Byron Boston, Chief Executive Officer and Co-Chief Investment Officer; Smriti Popenoe, President and Co-Chief Investment Officer; and Rob Colligan, Executive Vice President, Chief Financial Officer.

And with that, it is my pleasure now to turn the call over to Byron.

Byron Boston

Thank you, Alison. Good morning and thank you for joining us today. We started this decade at Dynex, believing that surprises would be highly probable and 3 years into it, the surprises continue to come. I have been active in the financial markets since 1981, with a four-decade long career that began with a deep curiosity for economics. As a trader and banker on Wall Street, I learned disciplined processes for risk management. And my experience since then has laid a tremendous foundation for navigating this current period. I can say with all my years of having been on this planet that we are at a big moment in history.

Last year, we saw more volatility than I had witnessed since my early years on Wall Street. Bond markets had the worst year of returns since 1926. Our performance for the year reflected some of this turmoil. Our total economic return for the year was negative 9.45%. We are a big proponent of preserving book value and we never like being in a position of losing capital. So on a standalone basis, this is a disappointing result.

Nonetheless, Dynex outperformed major fixed income indices and our peer group and we continue to deliver industry leading returns. In the context of a worst performance in almost 100 years for the bond market, we made disciplined and deliberate choices in managing our risk. And as you can see on Pages 4 and 5, we remain the top performer over for 3-year and 5-year period. Against a historically difficult backdrop and markets, I take enormous comfort in this relative result. As a fellow shareholder, I focus on how we are building long-term value.

Please turn to Page 9. You can see we started the decade at $18.01 in book value and we have delivered $19.51 as of December 31, including cumulative dividends. Although book value is lower, we did not subject our shareholders to large unrecoverable, realized losses in either 2020 or 2022. As I stand here today, looking at the investment landscape, I see a favorable investment environment that supports a recovery in book value over time without the need to take excessive risks to recover capital while we continue to generate a solid return for you.

As I said earlier, we are at a significant moment in history. We are anticipating that this decade will bring new opportunities and unique challenges. Global markets are fragile because of the rapid buildup of debt. We believe central bank balance sheets matter. The removal of liquidity has the potential to impact a broad section of the investing landscape. Global complexity continues to be amplified by human conflict. As such, we are making decisions with these factors in investing your savings with a long-term in mind. As your asset manager, we have demonstrated the ability to shift risk over the past 15 years. I want to emphasize we do not consider ourselves an agency-only REIT nor we invested in an agency RMBS, because it is the hot thing to do.

We believe that this environment calls for liquidity and flexibility. Agency RMBS are highly liquid, government guaranteed assets and offer excellent returns. Therefore, they are our current investment of choice. We remain prepared for an evolving macroeconomic environment, which we believe will eventually lead to a wider set of investment opportunities. As the captain of the Dynex ship, I want you to know that we have the tools to manage through this environment. Inverted yield curves are unique to periods of significant Fed tightening. Smriti and I have shared the experience of managing through an inverted yield curve in 2003 through 2006 in a public company mortgage REIT, where significant amount of value came through our hedging strategy. As Smriti will describe, hedging is an important part of how we navigated this inverted yield curve environment.

As demographics shifts globally towards an aging population, the need for income is getting increasingly apparent. Dynex Capital is an expert in delivering income. As such, we are making decisions to invest in people, processes and technology as we build our company for the long-term. Our business model and strategy are designed to thrive and find opportunities across multiple markets scenarios. We believe that this sets us apart and you are seeing evidence of that differentiation in our results. I am proud of the loyalty, dedication and efforts of our team. And I am very proud of the results that produced both in 2020 and 2022 and so far this decade as a whole. Our commitment to providing attractive long-term returns for our shareholders is unwavering and we are excited about the opportunities ahead of us.

And with that, I will turn the call over to Rob Colligan to provide more specifics regarding our fourth quarter performance.

Rob Colligan

Thank you, Byron and good morning to everyone joining the call today. For the quarter, the company reported book value of $14.73 per share and comprehensive income of $1.17 per share. The book value performance plus the dividend delivered an economic return of 6.2% for the quarter. The portfolio benefited from spread tightening which occurred in the fourth quarter and drove increases in the value of our mortgage-backed securities and TBA positions. Our thesis of book value recovery based on spread tightening still holds true. We believe that our portfolio should recover a significant amount of value when investor demand for mortgage-backed securities improve or simply as pay-downs occur over time. Smriti will cover more granular details as well as our views on recent market activity and our outlook for the future in her comments.

Earnings available for distribution was $0.03 for the quarter. As discussed last quarter, this does not include the benefit of our hedging activities. If the company utilize swap instruments instead of futures, EAD would be dramatically different. Our decision to use futures is based on the depth and liquidity of the futures market as well as lower capital requirements compared to a comparable flop instrument. That provides equivalent rate protection.

While it’s rare for extended periods of interest rate inversion to exist, it’s not a completely new market environment. With rate inversions, income needs to be generated from the management of interest rate risk, primarily from appropriate hedging strategies. In the fourth quarter, Dynex realized $205 million of hedge gains bring our year end hedge gain to $691 million. This is a material number that has insulated the company from rising rates and has protected book value from a dramatic rise in short-term rates as the Fed continues to use rate policy in an attempt to tame inflation. As mentioned last quarter, these hedge gains are amortized into REIT taxable income over the hedge period of approximately 10 years. The benefit of interest rate hedge gain amortization was approximately $12 million for the fourth quarter and $22.5 million for the year.

The earnings release provides our estimate of hedge gains by quarter for 2023, for the full year 2024, and then years thereafter. The total amount of the hedge gain to amortize into REIT taxable income can go up and down depending on the company’s hedge position and movement in rates in subsequent quarters. We have experienced some value degradation in our hedge book so far in 2023 as long-term rates have receded, although the hedge loss has been outpaced by asset gains, which results in our book value increasing to $15.10 to $15.20 as of now. If the current shape of the yield curve persists, we do expect to have additional hedge gains in 2023. Since hedge gains that are a component of REIT taxable income, they will be part of our distribution requirements along with other ordinary gains and losses. As we discussed last quarter, we expect the hedge gains will be supportive of the dividend in 2023 and beyond even if net interest income and earnings available for distribution decline due to financing costs.

Please see Page 8 in our earnings presentation that highlights these earnings components and recent trends in net interest income and hedge gains. In the release, you will see the effective yield on our assets has increased this quarter. This is due to two primary factors. At the end of the third quarter, we reduced the balance of our lower coupon 2% and 2.5% securities and added 4.5% and 5% coupons to our portfolio. Also given the rise in rates, prepayment speeds continue to slowdown, which added a modest increase in yields this quarter. Lastly, we added $92 million of new capital this quarter via our ATM program. We added liquidity to our balance sheet at a time where returns are mid to high-teens and exceeded our cost of capital.

With that, I will now turn the call over to Smriti for her comments on the quarter.

Smriti Popenoe

Thank you, Rob and good morning everyone. Rob has covered a great deal of detail on our financial performance in 2022. My comments today will be focused on our current macroeconomic thinking, our risk, portfolio posture, opportunities and outlook for 2023. There are three key elements underlying our macroeconomic thesis. First and this one has been a consistent theme since 2015. The global environment is increasingly complex, with rising global debt, increasing human conflict, rapid technology changes and shifting demographics. This leads us to favor more liquid strategies. Second, global central banks have embarked on a monetary tightening cycle against this complex backdrop. How long the tightening cycle lasts, how effective it is? The intended and unintended consequences are yet unclear. This leads us to prepare for multiple scenarios and unforeseen events.

Third, quantitative tightening, which is seen currently as running in the background, can have a significant impact on the price of risk going forward. We believe the draining of liquidity has the potential to be a major driver of the repricing of risk in this decade. We think this can occur even if the Fed is cutting rates as the balance sheet continues shrinking. This leads us to hold assets that can be easily valued and traded at those valuations, saving dry powder for when valuations on all assets, especially less liquid assets reflect fundamental value with less distortion from central bank balance sheets. In our view, these factors have shifted the yardstick by which to measure what is a fair return for the risk environment. It is easy to be beguiled by a return that seems higher than we have seen in the last 8, 10, even 15 years. We are taking the approach that the last 15 years of market history must be viewed by considering the distortion of quantitative easing on prices. The team and I have focused on evaluating returns in the context of the future. This is a key foundational element of our thinking.

Finally, a characteristic of the investment landscape that we are calling a flat distribution, fat tails, making predicting outcomes very, very difficult, because there are more probable outcomes, more equal probability of each outcome, a wider range of outcomes and the possibility of skewed distributions and exogenous events. Many investors use models with implicit normal or log normal distributions to measure risk and return. We believe the results from such models must be viewed with the lens of a very different reality. Our risk and investment strategy are set in this context.

Next, I will discuss the specifics of the investing environment. I will tackle financing costs and the inverted yield curve first and then address asset valuations, our spread outlook and expected returns. A key feature of the investing landscape today is the inverted yield curve. Short-term interest rates are higher than long-term interest rates. This has been driven by the Fed tightening to almost 5% and long-term interest rates falling driven by investor expectations for future Fed easing either due to recession and/or inflation declining to 2%. Whether you believe what the market has priced in or not, an inverted yield curve has consequences for levered investors like us, because it means that in the short-term, financing costs will be higher, but they are expected to fall in the intermediate and long-term.

If we funded all our assets in the repo market and had no hedges, our income would suffer in the short-term, but improve in the long-term assuming the market’s prediction came true. But the reality is different. Dynex shareholders have benefited from our hedging strategy, which locks in financing rates for longer periods of time, so that fluctuations in short-term interest rates are mitigated. Our current strategy of hedging with treasury futures in September 2020 effectively locked in 10-year financing at very low rates on hedges, largely mitigating the impact of the 400 plus basis points rise in financing costs. As Rob mentioned, those hedges have generated a gain position of $691 million as of December 31 and they are reflected in book value.

Another important point to remember in an inverted yield curve environment is that asset returns must still be viewed on a hedged basis so that you can incorporate the value of locking in lower long-term financing costs by hedging. When we view returns today in this context, we see the investment environment as continuing to be favorable offering low to mid-teens returns in agency RMBS. So, the key takeaway on inverted curves, they can be managed with hedges and the Dynex team has significant experience managing through these types of environments. A last point on financing, the availability of financing remains very strong. Repo markets are functioning smoothly and financing remains widely available, especially for the liquid assets that we own.

Let’s now turn to assets. Credit spreads are broadly tighter year-to-date. We see this as the evidence of the power of the liquidity that still remains in the system and the need for cash to be put to work. Our book value is higher as a result, as Rob mentioned, between $15.10 and $15.20, up from $14.73 at year end. As shown on Page 14, agency RMBS spreads to 7-year swaps are settling in about 80 basis points higher from the tight level seen in 2021, a more than doubling of spreads. We see this as a favorable investment environment, because it’s possible to earn hedge returns using leverage of 7x in the low to mid-teens. We have currently invested at these levels with the option and flexibility because of our liquidity position to add assets when spreads are wider.

You can also see on the chart that most times that spreads have gotten this wide or wider, there has been a reversion to the mean, if you will. This is a longer term tailwind to book value. We say longer term because there is a major difference between the past spread cycles and the one that we are in. The past spread cycles had the GSEs, Fannie and Freddie with large portfolios supporting spreads in the 1990s and early 2000s. I know because I was there and probably executed some of those trades bringing spreads back in line. Post-2008 you have the Fed. In today’s environment, we have neither. In fact, the Fed is shedding mortgage assets from its balance sheet. We are now seeing the ability for MBS to tighten 10 to 20 basis points as volatility declines, but the catalyst for much tighter spreads the 30 to 50 basis points tightener is not as apparent.

Where could this bid eventually come from? Over time, we think banks maybe a powerful bid. If fixed income funds experienced major inflows money managers could be a strong bid, but new cash will be needed to increase exposure to RMBS. So we are not investing today with the hope of an immediate reward of tighter spreads. We have invested capital with the idea that today’s returns meet or exceed our all-in cost of capital. And if spreads go a lot wider, we can add incremental value by adding assets at wider spreads. So for this reason, we feel like we can be more patient in our investing process. For now, we expect spreads to be range bound, reflecting technical factors of demand and supply. Agency RMBS spreads have been highly correlated with risk assets in general and we believe that trend continues in 2023. We anticipate that volatility in the macro economic environment will translate into chances to deploy capital. We believe it is essential to maintain lower leverage, higher liquidity, a more neutral duration position and a patient disciplined approach to fully capture the value offered when volatility hits. You can see this is reflected in our risk positioning on Pages 15 and 16.

I want to make another point as we look at the risk position. Our leverage as of December 31 was 6.9x to common with $6.4 billion in assets. As you can see on Page 16, for a 20 basis point tightening and spreads on agency RMBS and a 50 basis points on CMBS IOs, our book value rises by 9% or $1.35. Conversely, if spreads widened 20 basis points the opposite happens. And therefore, we respect and maintain lower leverage and liquidity so that when we do get to those wider levels, we can potentially invest. But as you can see at plus or minus 9%, this profile does not suggest that we are under-invested, under-levered taking a defensive or cautious approach. In our view, we have plenty of risk on for this environment. It produces an economic return to support the current level of the dividend. You can expect us to continue to reallocate assets opportunistically and manage the portfolio dynamically, because this is what we expect the environment to dictate.

I’d like to leave you with the following thoughts. We have focused on preserving capital and generating returns for the long-term. Our performance in 2022 positions us to recover book value without the need to take excessive risks to recover capital. We are highly respectful of the evolving macroeconomic environment. We are focused on measuring risk-adjusted returns with an eye to the future and not the past. As such, we will be patient and deliberate in our decision-making. Our portfolio and liquidity is currently structured, support the economic return necessary to pay the current level of the dividend about 10.5%. We continue to have upside potential from dry powder and the ability to deploy capital at accretive levels. I am deeply grateful for the trust you placed in us as we manage your capital.

I will now turn it back to Byron.

Byron Boston

Thank you, Smriti. Let me conclude with some final thoughts. We are in an evolving environment and at a unique transitional period in history. It is important now more than ever to be able to rely on a team with a clear strategy and deep experience and navigating complex environments. We are patient, disciplined, focused on execution, and on driving long-term shareholder returns. We are investing our money alongside you. So our goals are aligned and we take the responsibility as managers and stewards of your savings very seriously. We believe that Dynex Capital represents a compelling investment opportunity. Our stock trades at a discount to book. We pay an attractive and consistent monthly dividend that we believe is sustainable. And we have ample dry powder to take advantage of attractive investment opportunities as they develop. For our existing shareholders and stakeholders, I thank you for your trust and joining us on this journey. For those of you who are not yet our shareholders, I hope we have made a compelling case for you to join us.

With that, let’s open the call up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question from Eric Hagen with BTIG.

Eric Hagen

Hey, thanks. Good morning. I got a few questions. In the higher coupon pools, can you say what the loan age is and the prepayment profile more generally, maybe just how you plan on toggling between the TBAs and the pools and the higher coupons? And then the second question is do you see any risk or potential that mortgage rates could come down into the 5s, call it the mid-5s and what kind of read-through do you see with respect to supply and demand for MBS and other kind of scenario? Thanks.

Smriti Popenoe

Hi, Eric. Good morning and thank you for your questions. So in the higher coupon pools there are new wall of pools, mostly I would say, not excessively high pay-up. So again, we are trying to limit the exposure to high pay-up pools to be able to cut down on that the pay-up exposure, right. So the idea there is again, you are playing the hedged return game, right, between TBAs and pools. And so over time we are kind of thoughtful about where we purchase our convexity. Sometimes that convexity is better often in pool form. Sometimes when the securities are trading at a big discount, we like the flexibility of TBA and then eventually being able to swap out. So that’s kind of been our mindset with the higher coupons. And our pool position at this point is mostly in the 4.5% very, very small position in the bonds.

With regard to your second question, do we think that mortgage rates could drop? And I think the answer to that is yes, I think we actually included a slide in our investor presentation this time, it might be in the appendix that has some of our views on the mortgage market dynamics. It’s on Page 12 actually, but yes, I mean, we believe that just even if interest rates in the broad markets don’t change, there is the possibility of primary, secondary spreads coming in because of competition, the need for mortgage originators to continue producing, profitable returns for their shareholders, that is a strong impetus for mortgage rates to decline regardless of whether treasury yields decline. So could you get that to below 5%, I would say is a stretch, definitely below 6% is a possibility. And then how that affects demand and supply? I think that was your last question. Am I right?

Eric Hagen

Yes, exactly.

Smriti Popenoe

Yes. So, look, right now, I think there is levels of cash-out refinancing that are starting to get limited a little bit by the GSE policy. But the bottom line on any kind of decline in mortgage rate from here on out is an increase in supply without necessarily a corresponding increase in demand. So that is a technical factor that we are very focused on.

Rob Colligan

Hey, you want to – let’s make one other comment here about these higher coupon 6s and others that have been originated. What I found fascinating was an article in the Wall Street Journal about Rocket Mortgage and their sales pitch at this point. A lot of loans have been made on around debt consolidation. And it is – as they make these higher coupon mortgages, many originators are assuring to the borrowers that they will be able to refinance these mortgages within 2 years or so. So there is – it’s very interesting to see you want to understand what’s happening between the borrower and the lender to get a real understanding of value. These higher coupon mortgages are being originated and especially the really highlight the 6s where they are being assured – the borrowers are being assured, they will get the opportunity to refinance within a couple of years. So it’s an interesting dynamic that you want to really understand that is happening at the front end of the mortgage market.

Eric Hagen

Yes, absolutely. Thank you guys very much.

Smriti Popenoe

Thanks, Eric.

Operator

We will take our next question from Doug Harter with Credit Suisse.

Doug Harter

Thanks. Can you just talk a little bit more about the decision to raise capital through the ATM and kind of how you view the tradeoff of near-term dilution versus future returns from that capital?

Byron Boston

Sure. So really, I appreciate the question, Doug. I think one of the things that we think about the main thing we think about is the spread between the return on investment versus our all-in cost of capital. That is the main driver of capital issuance at all times here at Dynex, we think about what can we invest the capital in and when we adjust the all-in cost of capital for dilution in the near-term? Are we able to earn that back over time? How quickly can we earn that back? And one of the key points about this particular environment and when we talk about it as being a sustained return environment that is favorable is that we feel like the investment opportunity a) is sustainable and b) it’s the return on investment is higher than our all-in cost of capital. So it is a very accretive investment environment. And when we see periods like this, it makes a ton of sense for us to go get the dry powder, so that we have in our pocket to be able to put the money to work at the right time.

Doug Harter

I guess when you are doing…

Rob Colligan

Go ahead.

Doug Harter

Sorry, if I could just get one clarification…

Rob Colligan

Yes, go ahead.

Doug Harter

Before you add. Yes, just I guess when you are thinking about that – is that kind of assuming kind of static spreads? And in that cost of capital and I guess, if you were to think about the $0.28 of dilution, I guess at what points in the quarter were those shares issued? And would there have been some appreciation on the assets that you bought that would offset that dilution?

Smriti Popenoe

Right. I mean, look, book value is up since quarter end, right. So we have already gotten appreciation on anything that was issued last quarter. And I’ll remind you guys, when we talk to you for our third quarter results, we were reporting book value in the 12.95 to 13ish area, right. But we have had a massive increase in book value since the lows of the fourth quarter. And the existing shares at the time have benefited in all of that. So, yes, we do feel like there is, we are investing capital at levels that are accretive to our shareholders relative to the all-in cost, including what we paid to issue the capital in the fourth quarter.

Rob Colligan

Hey, Doug. Just one other thing too, when you think about what happened in the fourth quarter, there were times in the fourth quarter when new investment opportunities had a return of north of 20%. So I understand that there is a temporary dilution factor, but the opportunities were there that we could put investments on the pile of investments that will deliver returns for years to come and that’s why it made sense for us to add capital during the fourth quarter.

Rob Colligan

You should also note we are long-term investors. We are building our company for the long-term. So, there are some definitive statements. We have no desire to be as large as the largest companies in this industry, zero. We are going to continue to go, build up our technology and processes, our capital base over time. With – it will add resilience. It will add liquidity for our shareholders. And then when we think about costs, costs are costs, where is my technology costs, where is the issuance costs, can we generate a return above our costs. And so, I will direct you to some of the charts that we have shown you. I love the one, especially on Slide 9, because that’s the way we think about it. And if you look at the far bar, fourth quarter ‘22, you will see it says $19.51. Look at where we are today. That number is probably closer to $20. And over time, we will think about that, it’s like a buoy in the water with a rising tide. So, costs are costs. We are building our company for the long-term. We have no desire to be as large as some of the largest balance sheets have been. Our nimbleness is extremely important to us and it’s been extremely valuable especially this decade so far.

Doug Harter

And I guess just one follow-up on that. I mean to the extent that, like Rob said, you saw returns in the 20% range at points during the quarter. How do you weigh kind of temporarily letting leverage increase to take advantage of that versus raising new capital and then kind of if spreads tighten, just kind of letting leverage naturally come down. Just kind of that thought process versus….

Smriti Popenoe

Yes. I mean I think a big one there is thinking through the risks and the risks of allowing leverage to continue to ride up, okay. And in this particular macroeconomic environment where you do have the possibility of surprises, such as what happened in September and October, you want to be very, very thoughtful about allowing your leverage to rise into those kinds of events versus taking some action to address increases in leverage. So, there is a big difference, actually. When you have surprises like the ones you had in September and October, it wasn’t readily apparent, which direction things were going to go. And in those types of environments, we have chosen to not expose our shareholders to going out of business risk. We have chosen not to do that. So, there will be times when we take up leverage or allow leverage to write up in that situation. That was not one of those times. So, we think very long and hard about the risk reward of making those types of trade-offs. When there is existential risk involved, we are not going there. In other times when there is a reasonable chance that we are going to recover capital from allowing leverage to write up, it’s a different trade-off. But last quarter was not that type of an environment in our opinion.

Doug Harter

Okay.

Byron Boston

And I think decision was made from a long-term perspective.

Operator

And we will take our next question from Trevor Cranston with JMP Securities.

Trevor Cranston

Hey. Thanks. You guys mentioned this sort of near-term outlook for spreads, you expect them to be kind of range bound and to remain correlated with other risk assets? Can you maybe talk a little bit about your outlook for interest rates this year, including kind of how you guys are thinking about volatility trending over the course of the year? Thanks.

Smriti Popenoe

Wow, Trevor, you asked me if I have a crystal ball. It is, I would say like, I have been in these markets for a long time. And I think the environment that we are in is, it is among the most difficult environments that I have sat in, in the last 30 years to be able to look forward and say, with any degree of confidence, that x, y or z is going to happen with respect to interest rates, okay. We do have a name for it here. We are calling this flat distribution with fat tail for a reason, which is that it is really, really hard to come to a conclusion about inflation, the level of inflation, the level of growth, the exogenous events that could happen. It’s really difficult to say things are going to go in one direction or another. So, we have actually got a very neutral predisposition to interest rates. You can see that in our risk position, up or down, curve shocks were pretty flat, because this is in an environment where you can – we think you can actually put your shareholders’ capital at risk for those types of moves, because you are not as certain about that. So, that we – leads us to that kind of a risk position. So, we are in that – our view on interest rates right now is, you cannot predict, you cannot predict. I would say the other thing that that informs us and I mentioned this in my comment is, the last 15 years we have had a massive distortion from quantitative easing, whether people necessarily recognize it or not, it’s been a massive factor in the price of risk. And you are now entering an environment where that is actually being taken away globally by all central banks. And so the price of risk has to change. It’s going to happen slowly over time, potentially, shocks like September or October, those are going to be more normal as the liquidity gets taken out of the system. So, you don’t want to lean too far in one direction or another in terms of interest rates. And so all of these things lead us to say, better have a more neutral kind of position with respect to that. Now, the markets have done an incredible thing here by being very confident that interest rates are going to come down. And we will see what the Fed has to say about it later this week. But we are not ready to go in that same – in the same direction per se.

Trevor Cranston

Thanks Smriti. Just can you talk about how wrong the market has been? That’s an important point that is overlook and most people don’t see the forward curve and see where the market was predicting rates just a year ago, 1.5 years, the market has been wrong throughout time, it had been extremely wrong recently. Can you just discuss that a little bit?

Smriti Popenoe

Yes, sure. I mean like the – if you look at the forwards on December, in December of 2021, I mean the market would have told you that interest rates will be up at like 50 basis points or 75 basis points at the most, right. So and look, even the Fed didn’t really believe that inflation was something, really they had, if you guys remember they had FAIT, remember that thing, flexible average inflation targeting. That was basically saying we are going to average inflation out over time and so we can stay more dovish. All of that has gotten thrown out the door. So, the ability to predict here is very, very hard. And look, in general, predictions are hard. We try not to predict here much. And so that’s kind of what informs our opinion.

Byron Boston

Yes, but [indiscernible]. And throughout time, there are better probability distributions than we have today for investing money. This is and it’s very important, we will stand firm on this at Dynex Capital. This is an evolving environment. And you have one of your best ways to understand and look back at the forward curve, and look at how wrong the market has been this decade. And then consider the surprises that have happened. We came into this decade, we believe surprises were highly probable. Not only have we had surprises, but almost all have come from overseas. You have first, you had the pandemic, then we had the government response to the pandemic, then you had inflation, we had another government response, and we had a war and then we had the craziness that came out of Britain in September. So, when you start to talk about a prediction, and anyone wants to forecast, any economists, I want to ask you what precedence you are going to do, what is Russia going to do. And then that can go down a huge list of other questions for you that will challenge your forecast. And then finally, one of the best statements that Jay Powell made this year is when he said you can’t trust any forecast today. That’s our opinion at Dynex.

Trevor Cranston

Okay.

Byron Boston

Some of you – some people would believe us, and some will disagree.

Trevor Cranston

Okay. I appreciate that. That’s a good perspective. Thank you.

Smriti Popenoe

Thanks Trevor.

Operator

[Operator Instructions] We will take our next question from Bose George with KBW.

Bose George

Yes. Good morning. Actually wanted to ask just about this current levered ROE, I mean you guys noted this is above the dividend, but just any more color on kind of a range of where current ROEs are would be great?

Smriti Popenoe

Right. Yes, I think the – what I would say, so I quoted just 7x leverage, because that’s the leverage to common that we have on right now. I would say that – so we are assuming the spreads of about 125 to 130, 135, there about. Those are in the 13 to 15 ROE, depending on the coupon that you pick out. And this is for like 4.5 to 5. That would be where they are at the moment.

Bose George

Okay. Great. Thanks. And then actually, you have noted that you didn’t sell assets during the quarter or nothing meaningful in terms of recovering book value. But just on the TBAs side, with the TBA positions that were closed, I mean were there sort of losses there to think about?

Smriti Popenoe

I mean, yes, you get one thing we did disclose right at the end of last – I mean during our conference call in our earnings presentation for the third quarter was a change in our risk position. So, if you go back to the third quarter earnings deck, we provided information, not only in terms of our interest rate risk, but also our spread risk exposure, which declined during the early weeks of October. So, that was in our numbers for the full quarter.

Bose George

Okay. Thank you. And just from a P&L standpoint, is that – are those changes, is that floating through that derivatives line, along with the TBA drop income?

Smriti Popenoe

It should be in there, yes.

Bose George

Okay. Great. Thanks very much.

Smriti Popenoe

Thanks Bose.

Operator

Our next question comes from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan

Hey, guys, quick question. Follow-up on Bose’s question on leverage, does that 7x include TBA or was that simply just that…?

Smriti Popenoe

Yes. It includes TBAs, Chris.

Christopher Nolan

Okay. And I guess my follow-up question would be, given the increased reliance on hedging for income, should we look at EPS, distributable EPS to be somewhat more divorced from the overall performance of the company?

Smriti Popenoe

We have talked a lot about EAD being a limited metric in general. And I would say, focus on total economic return. Rob can take you guys through once again, just like the A plus B plus C plus D on the hedge gains. And maybe you should do that. Now, Rob, in terms of just how to how to think through EAD plus, what is more directionally correct.

Byron Boston

Hey Chris. Go ahead Rob.

Rob Colligan

Sure. So, yes, thanks for the question. One of the things that we added this quarter, just to highlight rate moves and how we look at the portfolio. We added a chart on Page 8 of the earnings deck. So, you would see, as you would expect, repo expenses are up. Both our interest income and our hedge gains have also ramped up this year. So, that’s how we are feeling that we are insulated from a lot of the rate moves and how we are using our hedge book to supply either a buffer against rising rates or even just simply income. I think it’s an interesting market factor that right now, if you have a future on because the rate curve is inverted. We actually get paid to put a hedge on whether that is a future or a swap. There haven’t been that many times in my career that that has happened. But it’s an interesting market dynamic that will actually add to that hedge benefit in 2023. We will see how long it lasts. But the market dynamics are a little bit different now. So, we are adjusting to that and doing a good thing for earnings and book value.

Byron Boston

And Chris, I am going to just finally just chime in on one other piece as a long-term investor in Dynex Capital. And a very, very – we are very responsible for our shareholders. I am looking at this graph that we have shown you on Slide 9. So, when we talk about performance, what’s the worst in that? I am simplifying it for you. On Slide 9, I am going to be looking at that $19.51. And I am going to be looking at it as I continue to add a monthly dividend to that number. And we are looking to regain our book value over time. And I am going to be looking at that number to go up. That’s what I am looking to do. And that’s the way I am going to be thinking about our performance here at Dynex Capital. And the other piece in this would be to really understand, and Smriti made this comment in her statement. We didn’t take permanent hits to capital in 2020 or 2022. So, when you look at that bar, and please make – you do the same graph for every company that you might consider to analyze or invest in, and then look and compare to us again. Over time, this says, we are concerned with our shareholders savings. We want to deliver a solid cash income. And then we want to make that final bar continue to move up over time. So, when we say performance and how do we think about our performance, we simplify it in that graph. You can come up with all kinds of funky GAAP terms. But at the end of the day, our shareholders are expecting an above average dividend cash, cash income, which we are looking to continue to pay on a monthly basis. And we are looking to maintain the book value over time.

Christopher Nolan

Okay. Thanks guys.

Operator

And that does conclude the question-and-answer session. I would like to turn the call back over to Byron Boston for any additional or closing remarks.

Byron Boston

Thank you so much for joining us. I want to emphasize to you that we are long-term investors, skilled risk managers, disciplined capital allocators. Today, we have allocated our capital to the agency mortgage backed security sector. I will emphasize, we are not an agency only REIT. We are not doing the new hot thing. We are investing for the long-term. When we think about our costs, Doug, I appreciate you are asking that question. We are thinking about our costs over time and can we generate a higher return. And then I will emphasize to you. Get familiar with that slide, Slide 9, we like that. It shows our accumulated dividends along with where we are and our track record in terms of our book value. And when you are a little confused about who is managing your money in this decade, very important to ask yourself that, create that graph for every company that you consider and then compare it. We appreciate you joining us this quarter. And we look forward to chatting with you again at the end of the first quarter sometime in April. Thank you very much.

Operator

Thank you. And that does conclude today’s presentation. Thank you for your participation and you may now disconnect.