Arlington Asset Investment Corp. (NYSE:AI) Q3 2019 Earnings Conference Call Transcript

Nov 08, 2019 • 09:00 am ET

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Arlington Asset Investment Corp. (NYSE:AI) Q3 2019 Earnings Conference Call Transcript

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Presentation
Operator
Operator

Good morning. I'd like to welcome everyone to the Arlington Asset Third Quarter 2019 Earnings Call. [Operator Instructions] After the Company's remarks, we will open the floor for questions. [Operator Instructions]

I would now like to turn the conference over to Richard Konzmann. Mr. Konzmann, you may begin.

Executive
Richard Konzmann

Thank you very much and good morning, Rich Konzmann, Chief Financial Officer of Arlington Asset. Before we begin this morning's call, I would like to remind everyone that statements concerning future financial or business performance, market conditions, business strategies or expectations and any other guidance on present or future periods constitute forward-looking statements that are subject to a number of factors, risks and uncertainties that might cause actual results to differ materially from stated expectations or current circumstances. These forward-looking statements are based on management's belief, assumptions and expectations, which are subject to change, risk and uncertainty as a result of possible events or factors. These and other material risks are described in the Company's annual report on Form 10-K and other documents filed by the Company with the SEC from time-to-time, which are available from the Company and from the SEC and you should read and understand these risks when evaluating any forward-looking statements.

I would now like to turn the call over to Rock Tonkel for his remarks.

Executive
J. Rock Tonkel

Thank you, Rich. Good morning and welcome to the third quarter 2019 earnings call for Arlington Asset. Also joining me on the call today is Brian Bowers, our Chief Investment Officer. During the third quarter, the continuation of a weakening global economic outlook ongoing trade tensions and declining inflation expectations led the Federal Reserve to lower its target fed funds rate twice during the quarter and once again at the end of October. Despite these actions by the Fed the yield curve continue to flatten during the quarter. The two to 10 year treasury curve declined by 22 basis points to 4 basis point as of quarter end, as the weakening economic outlook drove long-term interest rates meaningfully lower leading to heightened interest rate volatility.

Intra-quarter, the 10-year treasury rate fell 55 basis points to 146 basis points in early September before retracing some of that rally to close at 1.66% as of September 30, a decline of 35 basis points during the quarter. Prepayment speeds on mortgages, increased significantly during the quarter in response to the strong rally in interest rates through the course of the year, as well as normal seasonal patterns. In mid-September, a much-publicized market dislocation in the repo funding markets led to a substantial spike in overnight government repo rates, the Fed responded by adding substantial liquidity to stabilize repo funding markets through its open repo market operations and announcing its intentions to expand its balance sheet a very positive step for funding in our business.

High prepayment at speed expectations heightened interest rate volatility on a flat interest rate curve led to an increase in risk premium in mortgages resulting in agency MBS underperforming interest rate hedges