Arlington Asset Investment Corp. (NYSE:AI) Q2 2020 Earnings Conference Call - Final Transcript

Jul 31, 2020 • 09:00 am ET


Arlington Asset Investment Corp. (NYSE:AI) Q2 2020 Earnings Conference Call - Final Transcript


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Good morning. I'd like to welcome everyone to the Arlington Asset, Second Quarter 2020 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 now over to Richard Konzmann. Mr. Konzmann, you may begin.

Richard Konzmann

Good morning, thank you very much. This is 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 the stated expectations or current circumstances.

These forward-looking statements are based on management's beliefs, 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 in evaluating any forward-looking statements.

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

J. Rock Tonkel

Thank you, Rich. Good morning and welcome to the second quarter 2020 earnings call for Arlington Asset. Also joining me on the call today is Brian Bowers, our Chief Investment Officer.

Financial market conditions improved significantly during the second quarter, driven by unprecedented support by federal monetary and fiscal stimulus policies. Despite the uncertain path of an economic recovery, risk asset prices rallied during the quarter with equity markets recovering most of their losses from the prior quarter. Most fixed income asset classes also recouped some of their prior quarter losses as credit spreads generally tightened during the second quarter. And the Federal Reserve signaled its intention to keep short-term interest rates at their current level for the foreseeable future, leading to low interest rate volatility and a slight steepening of the yield curve during the quarter.

Agency mortgage performance was mixed for the second quarter. Elevated prepayment expectations adversely impacted higher coupon agency MBS, resulting in generic lower coupon bonds outperforming their higher coupon counterparts. Agency MBS backed by specified pools, like those Arlington owns, outperformed generic TBAs as pay-up premiums for specified pools increased significantly during the quarter.

As a result of the Federal Reserve rate cuts and ongoing support for repo operations, repo funding for agency MBS remains readily available at lower funding costs. While the current landscape for the levered agency MBS investing has improved from last quarter, certain investment risks have also increased, including the uncertain path of prepayments in a lower interest rate environment and higher pay-up premiums embedded in the current pricing of specified pools.

With the improvement in the financial markets during the second quarter, values of most mortgage credit