Welcome to the Invesco Mortgage Capital's Third Quarter 2024 Earnings Call. All participants will be a in a listen-only mode until the question-and-answer session. [Operator Instructions] Also as a reminder, this call is being recorded. Now I would like to turn the call over to Greg Seals, Investor Relations. Mr. Seals, you may begin.

Thanks operator, and to all of you joining us on Invesco Mortgage Capital’s quarterly earnings call. In addition to today’s press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website, invescomortgagecapital.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding these statements and measures, as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome and thank you for joining us today. I'll now turn the call over to IVR’s CEO, John Anzalone.

All right, thanks Greg. Good morning and welcome to Invesco Mortgage Capital’s third quarter earnings call. I’ll provide some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning for Q&A is our President, Kevin Collins; our COO, Dave Lyle; and our recently appointed Interim CFO, Mark Gregson, so welcome Mark. During the quarter, interest rates dropped sharply across the curve as investors reacted to cooling inflation and the potential for slower economic activity signaled by a weakening labor market. These factors also led to a repricing of the market's expectations of future monetary policy. Following the FOMC's initial 50 basis point reduction in its benchmark rate in September, the federal funds futures market reflected an expectation that the target rate would be reduced by an additional 50 to 75 basis points during the balance of 2024, with another 100 to 125 basis points worth of cuts priced into 2025. Against this backdrop, Agency Mortgages outperformed treasuries during the third quarter. Moderating industry volatility and the steepening of the yield curve spurred demand for Agency Mortgages, with lower coupons performing better than higher coupons as a sharp decline in interest rates mitigated demand for coupons trading at a premium to par. Overall prepayment speeds remained at very low levels given limited housing activity and elevated mortgage rates, but speeds increased notably on higher coupons in September as the decline in mortgage rates over the summer led to a surge in refinancings in more recent originations. Given the decline in mortgage rates and upward pressure on prepayments, premiums on higher coupon specified pool collateral increased modestly, while implied volatility via the dollar roll market or implied financing via the dollar roll market…

Thanks John and good morning to everyone listening to the call. I'll begin on Slide 4 which provides an overview of the interest rate and Agency Mortgage markets. As shown on the chart in the upper left, U.S. treasury yields declined across the yield curve during the third quarter as two-year yields were 111 basis points lower while 10-year and 30-year yields declined 61 and 44 basis points respectively. The chart on the bottom left provides fed funds futures market pricing since year end. Due to ongoing disinflation and a weakening labor market Investors priced in two more 25 basis point cuts in the fed funds rate for 2024 and 2025 by the end of the third quarter compared to the end of the second quarter. By the end of October, investor expectations moderated due to a stronger than expected September employment report, raising concerns that monetary policy may remain tighter for longer. Elevated monetary policy uncertainty and the strength of the economy has caused interest rate volatility to rise sharply leading to Agency Mortgage underperformance in October. The chart in the upper right reflects changes in short-term funding rates since year end. During the third quarter funding rates declined in line with expectations from near-term monetary policy easing, while repo rates exhibited substantial volatility at quarter end given heavy U.S. treasury supply and increased demand for repo. Positively, the repo market normalized in October, although spreads have remained modestly wider given concerns regarding future treasury supply, election and monetary policy uncertainty, and the risk of renewed funding pressures into year end. Lastly, the bottom right chart details Agency Mortgage holdings by the Federal Reserve and U.S. Banks. Runoff of the Fed's balance sheet continues with Agency Mortgages declining by approximately $15 billion to $20 billion per month, while U.S.…

[Operator Instructions] Looks like our first question comes from Jason Weaver with JonesTrading. You may ask your question.

Hi, good morning. Thanks for taking my question. I want to bridge to your comments about the addition of the Agency CMBS. I appreciate the fact that that might dampen book value volatility, but does that change your approach to how you set leverage targets there? That is, could you support higher leverage forward?

Hey, Jason, it's Brian. Yes, thanks for the question. Yes, I think, to the extent that our exposure to rate volume declines that that would allow us to increase leverage. I think clearly, the month of October has been pretty challenging, but that puts us in a pretty good position where spreads are attractive and you know, as that volatility declines, it gives us more room to be able to add in the future.

Yes, I'll point out all this, John. The Agency CMBS has basically the same borrowing costs and haircuts as Agency Mortgages. So that doesn't impact leverage from that perspective either.

Got it. Thank you, that's helpful. And then I was curious about any sort of perspective change in positioning quarter to date. Not that you've raised quite a bit on your ATM in the third quarter.

Yes, quarter to date, nothing too significant changes wise. I think, like I said, October was pretty volatile, and we came into it with a strong liquidity position and, moderate leverage. And so, our ability to kind of withstand that volatility allowed us to. Do not have to make significant changes since quarter end.

Okay, that's helpful. Thank you.

[Operator Instructions] Our next question comes from Trevor Cranston with Citizens JMP. You may ask your question.

Hey, thanks. You guys have historically mostly used swaps for hedging purposes, and those have kind of underperformed relative to using treasury hedges over the last several months. I was just curious if you guys have any kind of general thoughts about swaps versus treasuries, why swap spreads have become so negative and if there's any sort of change in your thinking in terms of using either as hedge instruments going forward. Thanks.

Yes. Hey, Trevor, it's Brian. Yes, we certainly started in the third quarter to using treasury features more prominently. You're right. I mean, swap spreads have been moving tighter for quite a while now. And I think the move from LIBOR to SOFR kind of removed the credit component of swap spreads and it's mostly more just about treasury supply at this point. And, the expectation is that treasury supply has been robust and it's likely to continue to be robust. So we're a bit concerned that swap spreads won't be mean reverting. And so this tightening that we've seen could be relatively persistent. And so our idea is to increase our exposure or a hedge book in treasury futures that will help mitigate our exposure to swap spreads.

Okay, got it. That's helpful. Thank you.

Thank you. Our next question comes from Jason Stewart with Janney. Your line is open. You may ask your question.

Hi. Thanks. Good morning. Just a quick clarification on the down 5.8 through 11.5, is that including a dividend accrual?

Correct? Yes. Yes, that includes. I'm sorry. Well, it excludes the impact of the dividend.

Excludes the dividend. Okay.

Yes.

And then, obviously some big moves this morning with 10 sort of approaching 450. I was just wondering what your macro take was on. On where you think tens as a benchmark for mortgages are headed in terms of the news we got overnight and maybe how that coincides with your view of rate fall.

Yes, certainly pretty fresh moves so far this morning. I think the move in treasury rates was largely expected based on the outcome of the election. And so that's not a surprise from that perspective. I think actually implied volume has come down. So that's been a positive for Agency Mortgages, at least here initially. I haven't looked in the last 30 minutes or so. Clearly there have been on the day after the election some pretty big swings in markets historically. But I do think that it's a question of, implied volatility versus realized volatility. I think, like I said, I think implied has come down now that we're kind of past this event. So that's a positive, as far as, where treasury yields kind of end up. That's a tough question. I think, the expectation is kind of in that, 4.5 to call it four, three quarters range here in the near-term. So we could continue to see some pressure higher. But, the steeper curve and lower implied volume should both be relatively positive, particularly for higher coupon Agency Mortgages.

Yes. Okay, that's helpful color. And then on the short end of the curve, I mean, the forward has taken out, about one rate cut so far. Is your, is the house view or your view and sort of the way you construct the portfolio, take forwards at their word or do you feel like, when you look at underlying inflation trends that the Fed might be, off-sides on some of these moves and we'll see more forwards come out. And I guess net, net to that is, how important is 350 versus a 4% Fed funds rate if the curve remains steep to the strategy and the structure of the portfolio?

Yes, like I think to your point, the overall level may be less important as opposed to the steepness of the curve and what it means for volatility going forward. Clearly, we prefer a steeper curve and lower fall. Yes, our house view has been in that five to six cut range between now and the end of 2025. So, I think based on last night, again, I think that probably moves to the lower end of that range. But, I think clearly there's been a lot of talk about tariffs and tax cuts. And so we'll have to just kind of see how that plays out here over the near-term before we kind of settle in on a specific number.

Okay, thanks for the caller.

Thank you. Our next question comes from Eric Hagen with BTIG. Your line is Open. You may ask your question.

Hey, thanks. Good morning. Maybe a couple follow-ups here. I mean, does retiring the preferred stock change the way that you think about your overall debt to equity leverage and does the range for your leverage that you might explore change because of that at different spread levels?

Yes, I think our overall debt to the common, it doesn't change our view on that, but the total debt to equity will move higher as the capital structure kind of normalizes.

Okay. Is there a target range for your leverage that you envision running with over the near-term?

Yes, that's a common. We've been pretty comfortable around that nine area. I think, we'll continue to kind of monitor how the market evolves here over the near-term. But, I think nine has generally been a pretty kind of conservative/moderate comfortable level where it gives us a lot of liquidity and, it allows us to maybe take that up a notch higher if we see that ball come down.

Yes. Okay, another follow-up on the kind of spread conversation. I mean, do you basically see more risk that spreads would widen at this point in a rate rally or a sell off? And as the yield curve steepens, I mean, how much appetite do you have to maybe extend your duration gap? I mean are there any constraints that you see to extending your duration gap?

As far as duration goes, we intend to keep that pretty close to zero. Mortgages have been trading pretty long versus rates over, well, really since the curve has been inverted. And so, what that means is, they tend to outperform as rates rally and underperform as rates sell off. You know, and I think at least in the near-term, we don't expect that to change too dramatically. But it, like I said, it is dependent upon, where implied volatility kind of moves from here. So, sorry, I'm trying to remember what the first question was.

No, I think you got it. I mean, it was just, gauging the sensitivity to spreads in a rally or a sell off. Thanks for the comments. I appreciate it.

All right. Yep, sure.

Thank you again. [Operator Instructions] Our next question comes from Doug Harter with UBS. You may ask your question. Your line is open.

Thanks. Wondering if you could just touch on how you're thinking about the dividend and especially kind of in light of the, kind of the more challenging start to 4Q.

Yes. Hey, Doug, it's John. Yes, so as always, our Board recommends the dividend or determines a dividend based on recommendations. So, that said, what we're generally looking at is, where available ROEs on our target assets are. I mean, that's the biggest driver of where, set dividend policy. So, we'll kind of see where that goes. I mean, we have a month and a half until we have to make that decision. So lot can happen between now and then, we balance that with. You want to stay competitive within the space and in line with investor expectations. So it's kind of the things we look at. So, yes, I mean, that's kind of where we're at right now. It's a little early for that, though.

Understood. I get that the markets are moving around fair bit, but appreciate that answer, John.

Thank you. And at this time, I'm showing no further questions.

Okay. Well, thanks, everybody, for joining us, and we look forward to speaking to you next time. Thanks.

Thank you. That does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.