Ellington Credit Company (EARN) Q3 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2016 Third Quarter Financial Results Conference Call. Today’s call is being recorded. At this time, all participants have been placed on a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Maria Cozine, Vice President of Investor Relations. You may begin.

Thanks, Crystal and good morning. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our Annual Report on Form 10-K filed on March 10, 2016, forward-looking statements are subject to a variety of risks and uncertainties that could cause the company’s actual results to differ from its beliefs, expectations, estimates and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call and the company undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. I have on the call with me today Larry Penn, Chief Executive Officer of Ellington Residential; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer. As described in our earnings release, our third quarter earnings conference call presentation is available on our website earnreit.com. Management’s prepared remarks will track the presentation. Please turn to Slide 4 to follow along. As a reminder, during this call we will sometimes refer to Ellington Residential by its New York Stock Exchange ticker EARN for short. With that, I will now turn the call over to Larry.

Thanks, Maria. It’s our pleasure to speak with our shareholders this morning as we release our third quarter results. As always, we appreciate you taking the time to participate on the call today. First, an overview, for the third quarter, Ellington Residential generated a strong $0.73 in earnings per share on a fully mark-to-market basis and book value per share increased over 2% to $15.70. There were many contributors to this performance, including the excellent prepayment behavior of our specified pool portfolio, reduced hedging costs, thanks to lower interest rate volatility and robust investor demand for agency RMBS assets. Throughout the quarter, investors continued to drive asset valuations higher in agency RMBS as both foreign and domestic investors maintain their pursuit for assets with greater yields, better credit quality and more liquidity. Investors around the world are starved for high yielding assets as the supportive economic and quantitative easing policies of global central banks have driven many sectors to ultra-low and sometimes even negative yield levels. As long as the outlook for global monetary policy remains accommodative, agency RMBS valuations should continue to be bolstered from increased demand. Mortgage rates remained low for the entirety of the third quarter and agency RMBS prepayments in many sectors significantly exceeded most sell-side estimates. Despite the material increase in prepayments in the overall agency RMBS market, the portfolio that we have constructed did not have elevated prepayments, thanks to its large concentration in specified pools with favorable prepayment characteristics by being very particular about the sectors and even the individual pools that we choose to buy. We successfully insulated our portfolio this quarter from what turned out to be the highest market-wide level of prepayments since 2012. We will follow the same format on the call today as we have in the past. First, Lisa will run through our financial results. Then Mark will discuss how the residential mortgage-backed securities market performed over the course of the quarter, how we positioned our portfolio and what our market outlook is. Finally, I will follow with some additional remarks before opening the floor to questions. Go ahead, Lisa.

Thank you, Larry and good morning everyone. In the third quarter, we had net income of $6.6 million or $0.73 per share. The main components of our net income were our core earnings, which totals approximately $2.9 million or $0.32 per share and our net realized and unrealized gains from our securities portfolio, which were $3.8 million or $0.41 per share. Excluding the net periodic cost associated with our interest rate swaps, which is included as a component of core earnings, we did not have significant income or loss from our derivatives during the third quarter. Our core earnings includes the impact of catch-up premium amortization, which in the third quarter decreased our core earnings by $1.4 million or $0.16 per share. Catch-up premium amortization is calculated based on interest rate levels and prepayment projections at the beginning of each quarter. Last quarter, we had a similarly sized catch-up premium amortization adjustment. If we add back the catch-up adjustment in both the third quarter and the second quarter, our core earnings in each quarter was $4.4 million or $0.48 per share. Despite the amount of this adjustment being similar in the third quarter relative to the second quarter, it generally tends to fluctuate from quarter to quarter. While our quarter-over-quarter core earnings adjusted to exclude the impact of catch-up premium amortization was the same at $0.48 per share, the components of core earnings differed, but were effectively offsetting. In the third quarter, interest income excluding the impact of catch-up premium amortization declined by approximately $450,000 or $0.05 per share as compared to the second quarter. But our cost of funds also decreased by just over $400,000, also $0.05 per share. Our expenses were flat at approximately $1.3 million in each quarter. In terms of our net interest margin components, the weighted average yield on our aggregate portfolio declined to 2.78% in the third quarter from 2.93% in the second quarter, each adjusted to exclude the impact of the catch-up premium amortization. With respect to our cost of funds, our cost of repo increased very slightly during the quarter, but this was more than offset by a decrease in the periodic costs associated with our interest rate hedges. Rising short-term interest rates positively impacted the net cost of our fixed payer interest rate swaps. In addition, as Larry will touch on later, new regulations related to prime money market funds increased the amount of available repo during the third quarter and served to hold agency repo rates lower than they may have otherwise trended, especially given the quarter’s increase in LIBOR. Overall in the third quarter, our annualized cost of funds decreased to 1.1% from 1.17%. As a result, our net interest margin adjusted for the impact of the catch-up premium amortization adjustment was up slightly to 1.77% in the third quarter versus 1.76% in the second quarter. Our core earnings was augmented by net realized and unrealized gains from both our agency and non-agency portfolios. During the quarter, we had net realized and unrealized gains from our agency portfolio of approximately $2.6 million or $0.29 per share and net realized and unrealized gains of approximately $800,000 or $0.09 per share from our non-agency portfolio. Assets in our non-agency portfolio also increased in price over the quarter. Our agency portfolio turnover was 24% for the quarter and 102% for the nine months ended September 30, 2016. We ended the third quarter with a book value per share of $15.70, which when compared to book value per share as of June 30, 2016 of $15.38 and taking into account our $0.40 dividend resulted in a net economic return for the quarter of 4.7%. For the nine months ended September 30, 2016, our total economic return was 6.9%. I would like to now turn the presentation over to Mark.

Thank you, Lisa. The third quarter proved to be quite different to what we experienced in the first half of 2016. In the first half of the year, heightened interest rate volatility lowered our returns as delta hedging costs chipped away at our net interest margin. In the third quarter despite continued central bank and political uncertainties, interest rate volatility plummeted. Not only was the actual volatility lower during the quarter, interest rates moved around less than they had in past quarters, but implied forward-looking volatility as reflected in the options market dropped as well. The drop in actual volatility lowered our delta hedging cost this past quarter and the drop in implied volatility helped support the prices of our agency RMBS assets as the market now expects delta hedging costs to be lower in the future quarters as well. There continues to be a shortage of positive yielding high quality liquid assets around G3 bond markets and the agency mortgage base has reaped the benefits of declining hedging costs and continued cross border sponsorship. EARN’s economic returns for the quarter non-annualized was a strong 4.7%. This was a quarter where our specified pool performance hit on all cylinders hedging costs were low, investor sponsorship of RMBS was strong and prepayment protected pools lived up to their name. From peak to trough in the quarter, there was a 32 basis point range in the yield of the 10-year treasury note. That may sound large, but it’s actually less than 40% of the 10-year treasury yield range in the second quarter and around half of the range for the first quarter. Not only was the total range small, but the volatility within the range was small as well. For example as you can see on Slide 7, throughout the entire month of August the 10-year swap rate closed within 5 basis points of 1.44%. EARN has traditionally used more delta hedging as opposed to options buying to manage the mismatch between negative convexity of our mortgage assets and the positive convexity of our swap hedges. The relative lack of rate movement and resulting lack of change in the durations of our already low duration assets kept the swap hedging costs very low both in terms of the rates we are paying on our swaps and our swap delta hedging costs. Meanwhile, the yields on our agency assets were reasonably preserved as the prepayments on our specified pools were very well behaved. So within our asset yields staying strong and our total swap hedging cost dropping, our portfolio captured a healthy net interest margin with low leakage. Finally, the increase in prepayments on generic pools weighed on TBA roll levels for every coupon except 30-year 3%s and 15-year 2.5%s. Since the TBA short positions are a significant portion of our hedging portfolio and since we are effectively short TBA rolls and we are short TBAs, these lower TBA roll levels helped to contain our TBA hedging costs this past quarter. The expectation of continued lower TBA roll levels also supported payouts through our specified pools since the expectation of lower future roll income from holding TBAs make TBAs look less attractive relative to specified pools. Having part of our portfolio of high quality specified pools hedged with TBA mortgages allows us to simultaneously capture the huge carry difference between slower prepaying pools and higher coupon TBA shorts while reducing our mortgage basis risk after the quarter’s strong performance. A steady scene throughout the year has been global demand for agency MBS. The reach [ph] free yield resulting from quantitative easing from various central banks has directly benefited agency MBS. The asset class continues to have great liquidity and attractive yields compared to many sovereign and corporate alternatives that are being purchased by central banks and institutional investors around the globe. Take a look at Slide 8, which has been updated from the previous two calls. It shows the continued sponsorship for agency MBS for Japanese buyers. We closely monitor this activity as any change in this activity has implication for MBS pricing. The third quarter was a very strong one for thoughtfully constructed MBS portfolios, twin pillars of low volatility and positive technicals augmented the generous NIMs. However, the fundamental picture actually weakened in the quarter. Prepayment rates jumped to levels not seen in years. The speed environment changed materially as borrowers reacted to lower mortgage rates from the preceding quarter. Speeds reached their highest level since 2012 as newer borrowers with larger loans from non-bank services having the largest reaction. The increase in speeds are so great that for the first time in a while they greatly exceeded sell side estimates. This is the major departure from trends of previous years when sell side estimates if anything usually proved to over-predict prepayments. The biggest prepayment story over the last 2 years has been the narrative that high compliance costs and a tight credit box that functioned as a wet blanket on prepayments. That finally may be starting to change. The faster speeds in the third quarter have the potential to erode the yields of many agency mortgage portfolios that don’t have prepayment protection. We have been closely observing changes in prepayment patterns for the last several quarters and we have seen some worrying trends. Take a look at Slide 9, it shows just how dramatic the change in prepayments have been since June. In the course of one month, generic Fannie 3.5%s originated in 2014 went from paying around 22% CPR to around 34% CPR. This is an asset that had an average price of almost 105.5% for the quarter, so prepayment speed had a huge effect on the realized yields for these pools. Our portfolio in contrast to generic portfolios consist mainly of borrowers who we believe are far less reactive to changes in mortgage rates. On the same slide, you can see that Fannie 3.5%s in the same vintage, but whose loan balances are less than $85,000 went from paying 7.8% CPR to just over 10.8% CPR over the same timeframe. Prepayment protection is no longer an out of the money portfolio insurance like it was when rates were higher. It’s become critically important for preserving NIM today. Slide 10 shows why we believe elevated prepayment rates may be here to stay rather than the short-term phenomenon. We have highlighted in the past that the opportunity to refinance has been increasing with many banks slowly stripping away credit overlays that were implemented in the crisis era. Data from Ellie Mae shows the up-tick in the percentage of loans approved for both purchases and refinances. In the FHA market in particular in May of 2015 only 57% of FHA loans were approved, but now that number has shot up to around 70%. So this maybe evidence that the credit box was loosening. And Slide 11 is another piece of data that challenges the continuing relevance of the wet blanket theory of prepayments. Mortgage industry employment is at a post-crisis high. While employment in this industry is still well below pre-crisis levels, it is well above 2010 levels. We have previously highlighted how technology is improving the efficiency of many servicers, business models have evolved, call centers from non-bank servicers have slowly been replacing brick-and-mortar establishments. These improvements have been met with additional staff to take advantage of them. So there are more mortgage industry employees chasing the refinancing business and technology has made each employee more efficient. Put that together and competition in the mortgage refinancing industry has gotten fiercer, we believe that this increased competition is part of the reason for the compression spreads between primary mortgage rates, which are the rates that borrowers are seeing and secondary mortgage rates, which are the yields that RMBS investors are getting. And it is this confluence of changes that lead us to believe that the mortgage universe can continue to prepay at elevated levels for some time. In such an environment, the benefits to owning specified pools with favorable prepayment characteristics should continue. We continue to like the Paratrade we have under long specified pools and short TBAs. The TBAs mitigate some of our negative convexity. We don’t even need large rate fluctuations to generate trading gains in an environment like this and our portfolio turnover was 24% for the quarter. Well, we just have done well in 2016 despite fundamental headwinds. Our interest rates are low, prepayment speeds are elevated and the mortgage industry continues to evolve in ways that should keep prepayment speeds this way as long as interest rates stay low. Despite this erosion in fundamentals, mortgages remain at relatively tight valuations. For this reason, we think it’s important to manage the portfolio with a large TBA hedge. By doing so, we better protect ourselves from spread widening, rate volatility and prepayment shocks and we decrease the volatility of our book value. Our asset selection process continues to provide us with predictable cash flows that we believe allow us to generate a strong net interest margin and a variety of rate regimes. Now, back to Larry.

Thanks Mark. Before making some general comments, I wanted to mention some technical factors that have helped our funding costs. This past quarter saw the continued flight of money market investors out of prime money market funds and into government money market funds. Government money market funds are one of the largest lenders in the agency RMBS repo market. So as a chunk of these massive inflows to government funds were lent out in agency RMBS repo, agency RMBS repo borrowing cost compressed relative to LIBOR. Now since we are receiving LIBOR based payments on our interest rate swap hedges, any compression between our agency RMBS repo borrowing costs and LIBOR translates directly into a wider net interest margin for us. Of course from our point of view as a borrower, broadening the depths of the agency RMBS repo funding market is just a good development in and of itself both in terms of the funding levels we should see going forward and the overall availability and reliability of our funding. On last quarter’s call I discussed that with prepayments poised to increase, the value of our prepayment protected pools was finally moving out of the latent stage and was poised to start furnishing us with tangible benefits. As Mark just described in great detail, this proved to be true as this past quarter our prepayment protected pools experienced a mere fraction of the prepayment increases seen in generic pools. We believe that this prepayment divergence will continue. In a high prepayment environment where most of the market trades at prices way above par, asset selection can make or break portfolio performance. In addition in high prepayment environments, the mortgage markets are notoriously inefficient as market participants often don’t see prepayment danger until it’s too late and then they sometimes panic and market participants often don’t see prepayment value until it’s obvious and then in many cases they overreact to the upside. We believe that we are in the kind of environment that’s ideally suited to our research driven analytical and active trading oriented style. The kind of environment we can exploit our competitive advantage built over Ellington’s 21 plus year history in the mortgage market and senior management’s 30 plus year history in the mortgage market. Our significant use of TBA short positions is just one of the many factors that differentiate us from our mortgage REIT peers and that can make a big difference in a high prepayment environment. Using TBA shorts is generally considered a more conservative approach since it helps protect against increased interest rate volatility, increased prepayment speeds or a widening in agency RMBS yield spreads. Although the TBA markets can be quite volatile, our hedges in TBA short positions are liquid so we can easily pare down our TBA short positions in favor of more interest rate swaps whenever the risk reward balance may shift. During the quarter, we essentially maintained the extent to which we hedge with TBAs. After the Fed’s September meeting, a large majority of investor sentiment shifted in favor of potential rate hike later this year. This sentiment was reflected in the decided price drop in interest rate sensitive stocks, especially stocks in the mortgage REIT sector and EARN’s stock price wasn’t spared. Worries about rising interest rates seem to be keeping mortgage REIT investors on the sidelines. However, we believe that EARN is well prepared for a movement in rates, because as always, we aim to hedge our portfolio to an interest rate neutral stance. We actively and dynamically manage our interest rate hedges to mitigate the effects of possible increases or decreases in interest rates. We also hedge along the entire yield curve, because changes in the shape of the yield curve can significantly impact our portfolio and our earnings. On last quarter’s call, I mentioned that our stock price had moved up to levels where share repurchases had become less attractive for us. However, with EARN stock price having recently moved down in sympathy with the rest of the sector, we are back near levels where share repurchases could start to look attractive again. In the second quarter, we lowered our dividend by $0.05 to $0.40 per share. This allowed our core earnings of $0.48 per share excluding the catch-up premium amortization adjustment to comfortably cover our dividend both last quarter and this quarter and also helped our book value per share to increase in the third quarter relative to the prior quarter. Rather than pay dividends out of book value, our goal is to generate sustainable income that covers our dividend. As evidenced this quarter, we continue to find excellent opportunities in the agency RMBS market. Our competitive advantages allow us to capitalize on market conditions as they occur. By having a highly liquid portfolio, we can adjust rapidly in response to any dislocations in RMBS prepayments or RMBS credit. By remaining disciplined and opportunistic in asset selection and by diligently and dynamically hedging our portfolio, we believe that we can continue to build and grow a sustainable earnings stream for our shareholders. And with that, our prepared remarks are concluded. I will now turn the call to the operator for questions. Operator?

[Operator Instructions] And your first question comes from the line of Doug Harter with Credit Suisse.

I was hoping you could just talk a little bit more about what that environment would look like that would cause you to shift from more TBA hedges to interest rate hedges and if that move in LIBOR kind of changes your thinking about the relative attractiveness of interest rate hedges?

Yes. So, the move in LIBOR was a really big deal for the quarter and it’s a huge positive for the entire agency mortgage REIT space and not just ourselves. We typically do mostly three month repo, so we can directly compare the repo costs we are paying to the three month LIBOR we received on the floating leg of our swaps and it’s been a tremendous benefit versus where we were earlier in the year where there was a lot of concerns about the depth of the repo market, the availability of the repo market. So I think that’s a big fundamental improvement in the market right now, which benefits the strategy and we didn’t even realize the full benefit this quarter as some of that move in LIBOR took place after the start of the quarter. So, it does tip the scale a little bit more towards swaps, but I think that the prepayment volatility was even a little bit bigger story for the quarter. There were some shockingly fast speeds on certain unprotected pools. And I think the ability to sort of implicitly short those sort of pools via the TBA market, it makes a lot of sense for us. If we thought there was a really big difference in the net interest margin we would capture from being short TBAs versus swaps, if we thought there was a big net interest margin we pickup to be more hedged with swaps; you would see us rotate back and depending on how prepayments play out, you could see that happen. But we are reaping a lot of the benefit of those LIBOR hedges, because we didn’t move a lot of our shorts into treasuries, right. So I think its close. But given the move in prepayments right now and given the fact that it’s a market where most bonds at significant premiums 5, 6, 7 point premiums, I think the best way for us to preserve net interest margin and reduce book value volatility still have at least a substantial portion of the hedges in TBA.

I just wanted to follow-up on that one more thing. The way – one way that I look at the TBA shorts is they kind of are both a defensive instrument and an offensive instrument. So, we play defense with those. We have talked about how they can help insulate against interest rate volatility, which is potentially underestimated right now, how they can help insulate against prepayment shocks which we obviously talked about and mortgage basis widening, right. But they also – we can also play offense with those. And what I mean by that is that if the market changes and as I have said let’s say that people realized that generic pools are just overvalued right now, right, if people start to worry that these prepayment spikes are not going to be degrade as quickly as they might have thought in the past, you could see a big re-pricing. You could see pay-ups increase a lot from here. You could just see obviously agency TBA spreads widening a lot. And if those things happen, right, we definitely would reevaluate. At some point, TBAs might overshoot to the downside, right. And in that case, we would definitely want to cover and be more long in the mortgage basis. So, I think that watching how that mortgage basis is going to react and whether we think it’s overreacting or under-reacting to prepayments is definitely also a factor in terms of the extent to which we are going to hedge with TBAs.

And I guess along that, how do you see pay-ups today, how attractive are they, how efficient is that market today relative to kind of where it’s been over the recent past?

So, especially if you look at the move post quarter end or yesterday, 10-year notes up to 1.85%, pay-ups have held in extremely well. They have performed extremely well. So, for some of the highest pay-up types of pools we think that pay-ups, are a little expensive right now. Maybe we are a little bit spoiled, because we added so much protection at much lower valuation. If we dig deeper though into a little bit more nuance prepayment stories that don’t trade at as big a premium, there we are still finding a lot of value. So, I would say for the most generic, for the most broadly understood prepayment protection stories, for the higher pay-up stories; we would say they are a little bit on the expensive side, but there is other parts of the market we think are much more fairly valued.

Great, thank you.

Your next question comes from the line of Steve DeLaney with JMP Securities.

Good morning, everyone. Thanks for taking the question. You make a very compelling argument for your specified pools versus either long TBAs or just generic coupons. So what I find interesting guys and I know you see value in the market both ways daily, but the 102% turnover over 9 months. Help me understand the nuance since you are focusing on spec pools, what is there that goes beyond buying the right bond at the right price and just holding it because you like the protection, what leads you to turn it over 100% in nine months? Thanks.

Hi Steve, it’s Mark. Thanks for the question.

Hey Mark.

So, one thing we have seen and there is a lot been written about the decline in liquidity in the bond market. Decline of liquidity in high yield bonds, corporate bonds, non-agency bonds, it’s everywhere right and it’s definitely a component of the agency mortgage market too. So what we have seen is even while the agency market is very liquid, there are certain types of pools that many of the primary dealers do not traffic in aggressively that they do not maybe there will be smaller volume portions of the market that’s not a core component of their agency mortgage business and we see a lot of opportunity there to insert ourselves as a buyer of pools that we like. But then can we offer those pools to other market participants that might not have access to the same ability to acquire those pools we do. Ellington has been around for a long time, we have deep relationships, we see a lot of things offered on business that not everyone sees. And I think we can sort of sit in the middle of this market and be a little bit of a traffic cop or really a toll taker. So, the same thing we have done in EFC with turnover on non-agencies, we can do that here in EARN. So even though that agency mortgage market is orders of magnitude more liquid than credit sensitive structured credit, the liquidity isn’t what it was. You have seen not only a significant decrease in trading staff from the big investment banks, but you have also seen some talent flight there, so that’s created an opportunity for us.

And just to add one more thing that’s related to what Mark said is that there is a lot of niches I guess you could call them in the market that in some cases are maybe too small for the huge mutual funds, let’s just say to be involved in or even the dealers to a large extent, but that we actively follow. And for the amount of capital that we manage and EARN is a small company, it can make a significant difference if we can be a big player in a small pond, small niche of the mortgage market. I mean we have – you can see we have got reverse mortgage positions that we dial up and down, there are all sorts of sectors of the specified pool market that are just not that closely followed because they are small and they are idiosyncratic. So, those are all sorts of things that we – if we decide that the sector has moved too far one way or another, we can make a big move there.

And the reverse mortgages Larry, are those the Ginnie Mae HECMs?

Yes.

Okay, great. I think your comments about repo and money market were very helpful as well, I think given the volatility that we have had over the course of the year and the fact that we are still in sort of the 70 basis point range on one month to three month repo, I think most of us will take that, let’s assume that we get the December hike from the Fed, do you have a sense for how much of that is priced into repo at this point by dealers and if we get that hike, would we find ourselves in January looking at one month to three month repo that’s 25 basis points higher or is some of that in the current rates in your view?

If you do repo now that carries you over year end, so let’s say in November we do a three months repo that would carry us out through February. Yes. The expectation of a Fed hike is definitely factored into that rate and there is that function on Bloomberg, what is it WIRP, gives you a good proxy for probability. So a lot of that is priced in. I guess for us when we think about our business and our earnings potential, what matters more to us than the absolute level of three months LIBOR or the absolute level of agency repo is where agency repo is relative to three months LIBOR and that was the real story in Q3. That three month LIBOR went up a lot and the agency repo didn’t really move and we sort of got back some of the headwinds we faced at the end of last year where there were a lot of questions about it. Is agency repo a viable business for the big investment banks, is it no longer an attractive ROE business given the necessary capital charges. So and I think that concern about the health of the repo market and the relative levels of agency repo versus three months LIBOR definitely weighed on prices of agency mortgage rates second half of last year, beginning of this year. But one big positive I think right now is that agency repo seems really healthy, its cost relative to three month LIBOR has declined significantly. So between now and December sure, if there is uncertainty about a Fed hike, that always weighs on the sector; but hike or no hike, I think as long as agency repo is lower than three months LIBOR, that’s a big positive earnings lift to the sector relative to the relative levels of that relationship we saw at the end of last year.

Yes, Larry. Yes. I was just going to say we attribute most of that to money market reform?

Yes. And what I was going to say is that I think a lot of it boils down to, I may be getting myself with this expression to TED spread. So, you are looking at the difference between things like Fed bonds, which are more government based let’s just call it and three month LIBOR, which is technically more bank [indiscernible], right. So, that has widened a lot and a huge amount, right and most people I think point to this money market reform is causing that right to play out of the prime funds that invested in things like bank debt and those sort of things, long-term bank debt and into the government funds, right. So the TED debt spread widened. Now as long as the debt spread stays wide, I think that you are going to see this to continue, which is that agency repo is going to trade through LIBOR because agency repo really because the collateral is government agency based and it’s especially the fact again now you are bringing in the money market reform is a great asset for government money market funds, so I think that you are going to continue to see agency repo at negative spreads to LIBOR as opposed to what they were before which is positive spreads to LIBOR. Now, if the TED spread compresses, which I think is possible if people may be and this is just a speculation, but let’s say people start to get more comfortable with prime funds and that they believe that this whole concept what is it really worth to have the possibility that their share price will fluctuate. Obviously there have been a huge exodus, to the extent that that – rates are still low, to the extent that that starts to reverse, then I think you could see a reversal in the TED spread, which I think would then cause the spread between agency repo funding and LIBOR to widen or reverse as well. So I think a lot of it is tied into these money market flows and I think - but if you wanted to look at one number, I think if you look at the TED spread, that’s a good indicator of where we are going to be able to fund versus LIBOR.

Well, I will share my edge too [ph], because I am looking at a sheet on my desk that showed as of last Friday the TED spread was 59 basis points, up 20 basis points from 39 basis points at June 30, so I am watching it too. Guys, thanks so much for your comments.

Thank you.

We have reached our allotted time for questions-and-answers. This concludes today’s conference call and you may now disconnect.