American Capital Agency Corp (NASDAQ:AGNC)
Bank of America Merrill Lynch 2013 Banking and Financial Services Conference
November 12, 2013 3:10 p.m. ET
Gary Kain - President and Chief Investment Officer
Ken Bruce – Bank of America Merrill Lynch
Ken Bruce – Bank of America Merrill Lynch
Quick polling questions, to gauge Everybody’s participation level. So this is kind of industry level. What will the role of Fannie Mae and Freddie Mac be in 2017? One, status quo, GSEs largely exist in their current form, private market risk sharing is immaterial. Back towards status quo, Fannie and Freddie no longer exists in name but a new GSE will replace them. Three, there will be risk sharing GSEs exist through private capital underwriting – private capital underwrite more meaningful share of the mortgage credit market and then fourth, selection private market, GSE will no longer exist and private capital will support majority of the market.
I guess I would put mine probably closer to 2 personally but I think 3 is probably the status quo, more broadly.
And the second question – what earnings metric the investors care most about for agency? Spread earnings, number one. Two, spreading earnings plus growth. Three, comprehensive income. Four, taxable earnings. Five, gap.
Okay. 40% breakeven at spread earnings plus low income, or comprehensive income. So the other metrics we can just disregard completely from now on.
Okay. Well, thank you for joining us for the American Capital Agency, or AGNC presentation. AGNC is a leading agency mortgage REIT with roughly $10 billion in equity capital and $87 billion in assets, with heightened interest rate volatility, government intervention in mortgage markets, and continued quantitative easing by the Fed. Managing a levered, mortgage-backed securities position has proven very challenging of late, not that it ever is that easy. AGNC, for its part, has managed through the market difficulties better than most, managing risk down and protecting its equity position for more prosperous times ahead. Here to discuss his views on the market and what AGNC is doing to deliver shareholder value is its President and Chief Investment Officer, Gary Kain. Please join me in welcoming Gary.
Well, thank you, Ken. And just after seeing the answers it’s really easy to figure out where you'd be on those, but I will say that I definitely would have been on three with everyone else on the GSE question. And I would have been more towards comprehensive earnings, no shocker with respect to AGNC since I think we’ve always stressed in good times and bad, it’s the combination of dividends plus book value, which is pretty close to comprehensive earnings, that’s probably the best measure.
But with that, why don’t we move on to the presentation? The first thing, for those of you that aren’t that used to, or aware about AGNC, first off, we are an agency mortgage REIT. As such, we invest in mortgage securities backed by Freddie, Fannie and Ginnie. We do so on a levered basis. We invest with a relative value kind of mindset. We are not a buy and hold investor, more like a held to maturity investor. We think it’s important to move our portfolio around as the market changes, and clearly as the last year has indicated, the market does change in what was a good securities for a period, two or three years may not be the right security for the environment going forward. And so we view it as our – the responsibility of management to keep track of those trends and to move quickly to adjust the portfolio.
One other thing that’s important is the management team, the senior members of the management team have been in the mortgage business for almost 20 years. Many of us have worked at other very large mortgage institutions such as AGFE [ph], a particular one. And then another thing to keep in mind is our fee structure as they are an externally managed REITs, we have no incentive fee, and the fee is 1.25% on equity. One thing that’s interesting is if you think about it – if you think of it as on average 8 to 1 leverage, then kind of on a per asset basis that fee is 15 to 20 basis point area, which is lower than what you would get with kind of your lowest kind of index bond fund. And so I think that’s another advantage.
One other thing to keep in mind on the left side, and I do want to be cognizant that we are going to go through some of these numbers. But I want to be cognizant of the backdrop of 2013, not being a great year. But first off, AGNC went public in May of 2008 at a stock price of $20 a share. Since then, in the five years or so that we have been public, a little over five years, so we have paid almost $27 worth of dividends, cash dividends. Our book value despite again the last year still up to $25.27 as of last reported from the original IPO. And the company has grown, it’s much more liquid, that’s almost $10 billion in terms of the market cap.
So – but I want to be cognizant and important to point out that 2013 has been a difficult year for this space and a difficult year for AGNC. And we understand that what – some of the strategies that worked in the past, we may need to pursue different strategies going forward. And we also do understand that one component – we talk a lot about comprehensive earnings or the equivalent economic return, but we do understand that, that price to book ratio is also important and that clearly impacts investors’ total returns, even if they don’t show up in portfolio returns. So we are going to touch on that at the end of the presentation.
But with that, if you turn to Slide 4, I want to go over something that we went over – it’s the same slide from our earnings presentation which was two to three weeks ago, it was held by press [ph].
So what we do here is we kind of – we try to point out what we give investors a feel for how we are thinking about the current environment. And some of the challenges that we face, a lot of people have the view that the mortgage market went through kind of a bad dream, a nightmare, taper fears, the market as a whole we sold off 125 basis points mortgages widened significantly. But then up until the last week or two have been coming back pretty hard, and this is all headache [ph]. The Fed’s purchase program goes on. If you just stop today and you said, back when they announced this last September, if we thought they were going to go for a year and a quarter, a year and half at full speed and then taper, most people would have said, “O, my God, that’s a huge program”.
But given the open ended nature of the program, now people are having and suggesting that they may taper big picture, they have bought a lot. Production is down. Mortgages could do very well. That’s one end of the spectrum. That’s sort of even under the kind of short tapering kind of mindset. Alternatively given the – I will use that term, which I don’t know who came off with it but it’s a good one, the taper tantrum, but given what we went through on the other hand, look if they announce that they are going to taper if it does become clear, the market is probably – rates are probably going higher, mortgage spreads are likely to go wider, as the expectations are for the less purchases from the Fed. Prices will decline, it will be challenging for book value.
And all of these things, if you take that more negative perspective, all the things you would do, take down leverage, increase your hedges, reduce your exposure to lower or middle coupon 30 years, all of those are negative for earnings in the current period and a quite negative for earnings. And they also will put you in a very poor position if it turns out that even that QE3 goes on longer or if the market reacts better to QE, to a tapering, that we might have thought. On the other end of the spectrum is the scenario which, even though we did get a strong employment report, which moves the odds clearly a little more toward the left side of the page, but that’s just one number, and that could be gone a few weeks from now.
But on the right side, it’s also a very realistic, very possible scenario especially for tapering mortgages, because I think most people believe, most economists believe the Fed could easily taper treasuries before mortgages. If they did that in March, they might not taper mortgages until something like June. In that case, rates are going to probably be fine. They will probably be lower than where they are today. I mean it touched 275 today. And mortgages should do very well. Again production is down to the area of somewhere around 90 billion to 100 billion a month with the Fed buying 55 billion or 60 billion of that.
Mortgages prices should do well. Spreads will tighten. All the things that you didn’t want in the first scenario, you would want here higher leverage, more 30-year mortgages and less in the way of hedges, that’s a position that’s income friendly and obviously we will do well in that scenario.
So we just outlined two very plausible kind of scenarios and then overlay that, the fact that maybe we all in the market overreacted. We de-risked. We prepared for an eventuality of an early tapering, which actually at this point an early tapering has not occurred. And this 100 basis point move in rates is corrected for an eventual tapering, and so maybe we overreacted. And I think there is – I think that’s a very real possibility. My gut is toward that side.
But on the other hand, this is very digital and it's very idiosyncratic. In other words, it’s the Fed, how they react, how they choose to react to data. It’s also how does the market choose to react, or overreact to the Fed in an over a period of – relatively short period where all these things will play out. And the short answer is that, this is not – when we see the landscape, there’s not enough information to lean too far in either direction. And so that’s a key driver of our – that’s a key factor to being more conservative which we certainly have been over the last couple of quarters.
But I want to turn to the next page, because this is important as well and it goes to the same – it goes to how we are positioned today. But it’s something that we feel a little more strongly about. And while there is a big debate on the short term, while it’s really Fed dependent and therefore really data dependent and really investor-dependent as to how we as a group of investors react to what the Fed does. So the one thing that I think the big uncertainty around the more intermediate outlook is more around timing than it is around these being kind of in my mind a reasonable set of circumstances. In other words, when the Fed is gone from mortgage purchases, let’s say, within – which isn’t what, very likely within two years, absent another recession, and so if the Fed’s gone, that means the private sector is going to have to absorb a lot of the mortgage market. And at the same time, bank capital has gone up. Banks now have to worry about AOCI moves, larger banks that is.
Also important is that, we would expect and this goes to Ken’s earlier question, under most scenarios, GSE market share to drop from 90% to 95% or something lower than that over a two or three year period. And let’s say, that’s GSE market share is 75% or 80%, there is a lot more non-agencies. And non-agencies can’t be levered as much as the agencies, which means that – that 20% will use a lot more capital than the equivalent GSE originations would have. I am also pretty convinced that GSEs continue to sell mortgage credit as they have over the last six months. When you put that together, there is going to be a lot of demand on private capital, at the same time where GSEs aren’t taking the risk and the Fed’s not increasing your holdings.
So it’s logical in that environment to assume opportunities are going to be very attractive two to three years from now, or as we kind of evolve to a new landscape. So one thing – so what does this mean? It means that in the back of our minds as managers, we’ve already told investors you need us to manage transition. I don’t know that this is a transition period, where we are transitioning to higher rate into a different environment. But it very easily could be. And we are taking this much more seriously than we have taken other backups in rates, again not because it very easily could be an opportunity, but when you weigh the short term dynamics against kind of this longer run picture, we’ve got – this is another influence that leads us to be a little more conservative.
But the good news here and maybe what investors may not have fully understood from our original kind of discussion on our earnings call about this, is that it’s not black and white and you are not in or out. Okay, and there are instruments and there are ways to stay involved in the current environment, to be in a benefit somewhat, if this turns out to be one of the better scenarios that we discussed over the short term. But while you are also meeting your objective of making sure you have a substantial amount of capital to deploy down the road, if mortgage spreads are wider and opportunities are better. And I think really that’s kind of the sweet spot that we have adapted to and what that entails is being really careful about asset selection, and we’ve talked to you guys for years about asset selection. But in the old environment, again hopefully we are back to that. But realistically the old environment where it was prepayment risk and it was about making sure that you bought lower loan balance or HARP securities where you could avoid years of pre-payments, and you could significantly improve your returns doing that.
Now we’re talking about a potentially different problem and this is a problem about having long instruments that are prepaying very slowly and not being able to reinvest cash flows in the future when there are some really attractive opportunities. And so in today’s world, your 15-year and in particularly the seasoned 15-year mortgages provide substantial benefits to kind of – for us to find that intersection between being able to stay involved, make reasonable returns but also be prepared for the future.
So if you look at this page, this is sort of prepayment in a rising rate environment, we are looking sort of that minimum prepayment fees for 30 years and 15 years. But because the 15-year mortgage amortizes and has to be paid off, in this case, I think two year old 15-year mortgage, so it has to be paid off in 30 years, it returns principal much, much more quickly. And so in three years, you’ve gotten almost 40% of your principal back on your investment in the 15-year, which means you are able to make substantial other investment. At 22% for a 30-year which is also a couple of years old.
When you get the five years, it’s 57% versus 34%. And so this is important in that if we can be in that business, now will 15-years do as well as interest rates fall and the Fed keeps buying? No, they won’t, but this is a reasonable trade-off where you get some of that outside of the current environment, you can’t get positive carry – good carry returns. But you are better protected in the other world that we described.
Now if we go to the next page, and this is probably even a more important than when you get the cash back. And this is a little more complicated, because what we are doing on this page is we are looking at the portfolio and the particular securities, 15 year security and a 30 year security, five years into the future in the case at the bottom. And I am going to start off at the bottom of the page. And in this example, we look at a 30-year 4% and a 15-year 3.5% and we look at a range of prepayment fees, kind of from the slow end of five to the high end of 30, again you can obviously have higher than 30 CPR, but it gives you a comparison of what the asset – the different assets might look like five years from now.
And again I know five years is a long time and it’s not my number one priority but this is really critical to kind of understanding the evolution of your portfolio. So five years from now that 30-year 4% at a slow prepayment speed, if rates are rising, could be a nine years, that’s five years from today, even though it’s shortened and it’s more seasoned, it still can be a nine year, or prepayments are fast, it could be 2.5 years. That’s a lot of variability, and it’s still a relatively long instrument.
Let’s compare that to the 15 year bond, five years from now. It can go to a little over three year, three and a half year, or it can be basically a two year, 1.9 years. It’s kind of a two year – if you think about it in the agency debt space, it’s like a three no call, two. That’s the range of what it can look like.
Well, a term that we use to describe bonds that become or securities that become less risky over time is that they de-lever. They are considerably – obviously in this case shorter, less risky, more stable. And so if the security de-levers, alternatively you could choose to lever it more. You could – if it’s shorter, you can choose to sell it and the price to buy a cheaper asset won’t be that significant. But what’s important – what’s really important is not only have you gotten a lot more cash back, but you also have a de-risked securities that you can choose to take risk somewhere else. And so you could either run higher leverage, you could buy other securities that you would typically want to have less leverages on but together they are a reasonable portfolio, and you can actually see this sort of on the top part of this page, which shows kind of, as you go forward in time, if you took a 30-year portfolio of four [ph] today and you assume what would happen – spreads widen 25 basis points, you’d have a 15.6% hit to book value.
Five years forward on that 15 year is minus 6.5% or less than half of what the 30-year would be over time. So that really almost doubles your ability to assume risk in the future from a cash flow perspective. And so in addition to getting cash back, you are also having a portfolio that de-risks over time. And so what this allow us to do, what’s important here is that this allows us to get more comfortable running a little more of a duration gap. In other words, having some less hedges, now that the market is a little more stable, rates are a fair amount higher. And we talked about it on our earnings call that we have increased our duration gaps. It’s still relatively conservative but we are willing to do that partially or in large part because we have repositioned our asset portfolio to be more defensive, or more set up for kind of stable rising rate environment. Whereas if we still had really long spread duration assets such as lower coupon 30-years then we wouldn’t be willing to increase the duration gap to the same extent.
So again, while these assets yield less, and they are defensive, they allow you to do other things that are income friendly such as run more of a duration gap that we wouldn’t be long ago. So that’s another thing to keep in mind.
On the next slide, I want to point out some things that again I touched on earlier which is this is – and it goes back to Ken’s question about earnings that are most important again, we always stress what we call economic returns and economic return is a combination of dividends plus change in book value and it’s the way most financial companies – mark-to-market mutual funds or hedge fund would be evaluated, then you would be evaluated versus an index of your peers or of light investments. So I don’t think anyone – we’ve gone over this in the past and I think people understand the beginning of this pre-QE3 in terms of agency’s performance both outright and versus other agency REIT who are peers.
But I think what I really wanted to focus on is the post-QE3 period, now that we’ve reported Q3 and as of our peers, I mean this has been a difficult period. So if we count from September 2012, the quarter ending third quarter of 2012, through the end of the third quarter in 2013, the positive numbers shouldn’t – doesn’t change anything. This is in a difficult period. Book value has dropped, and returns have been materially lower. On the other hand, over the entire period that we have gone through so far with respect to QE3, returns are positive. And despite agency generally having assets that we are prepared for a low rate environment with prepayment protection, agency and this kind of complete flip-flop of the world so to speak of what we have gone through has continued to outperform its peer set. And so while we are not – I don’t want to use the term happy with our performance over the course of this year, we also have to put it against the backdrop of the environment that we are in. So I think this is a healthy comparison.
But I want to like finish it and then open up for questions. On this last slide, and this is what I referenced earlier, which is agency’s price to book ratio. And I know this has gotten a lot of the discussions of late and not to say that’s gotten a lot of discussion two to three years ago, but it’s getting discussions for a different reason and that’s because agency as well as the rest of the mortgage REIT space are now all trading at material discounts to book value. And we and the REIT industry are not used to being at a discount to book, but it’s not that uncommon in for other financial institutions or other institutions out there who trade at a discount to book. And I think investors are more comfortable, so to speak, with this – investors that have spent a lot of time looking at either banks or other financial institutions, for that matter some closed end funds.
But I think there is a real difference here between the mortgage REIT and in particular agency REITs and some of those institutions. A major driver of why a company can trade at a discount to book over a long period of time is one of those issues can be that book value is not really that clear. Let’s say at the bank with lots of legal exposure that no one knows how big they are going to be, or they have a loan book that’s hard to value, and it’s not clear if they try to dispose of that book where it would really trade. And so most companies that consistently trade at discount to book, generally have less liquid assets that if you were – if you had to quickly try to trade them, they might be 20% lower than where they were actually marked, or where somebody expected to transact them.
And so what’s unique about the mortgage REIT space is the fact that our assets are relatively straightforward to mark is not much room for differences of opinion there and they are extremely liquid and easy to transact. And so you can buy back your stock if you are an agency mortgage REIT, you can sell agency mortgages, and you can do so without really taking up your risks, because you’re just basically buying your stock, selling mortgages as opposed to buying your stock and just taking up leverage, which you would clearly get stopped out of, so to speak, reasonably quickly in an environment like this.
So I think that’s really an important thing for investors to realize is that price to book – a significant discount – in price to book for a portfolio that is backed by liquid agency mortgages is very different than some of the other assets, or some of the other types of companies that we have seen traded at discount to book in the history.
So with that, I am going to stop, then open up the field to questions.
Ken Bruce – Bank of America Merrill Lynch
Maybe kicking things off, when you think about -- I guess the bookend that you set up in terms of the possible outcomes, what if the market goes from literally bouncing back between taper – or QE3 forever, the QE3 infinity we dealt with just last November, and say the whole taper talk, which obviously broke in May. So, in less than six months you've traversed this huge range of expectation. And if you've got to kind of bounce between these for some period of time, how do you react to that
No, look, that’s a very good question and it’s a realistic issue that we have to deal with. So given the ability the market to kind of go from one extreme in a sense to the other, and the implications around pricing and so forth, it’s one of the reasons why we felt that it was important to bring leverage down. And to position the portfolio in a way that sort of we call it, to some degree split the difference, but where we know that the portfolio can cash flow out over a period of time. And so that we are in a position where we don’t have to chase those gyrations in the market, because look, I mean mortgages are more difficult – mortgage portfolio is more difficult to manage because the duration changes as interest rates change, and changes as prices change. And so for that reason, to your point, it’s expensive to go back and forth. And so what we have tried to do knowing that, that’s a risk going forward is position our portfolio at a place where we are not going to be really offsides in either direction.
But we are guaranteeing that we are in a position that if we get one of those two extremes, we are going to wish we had a different portfolio on either end. But on the other hand, I think that’s the logical thing to do in this case, which is to have a portfolio that you feel like you can stick with under most scenarios that have a core part of that position, that’s a shorter term position so to speak and that’s really where the season fits to your comment.
Thanks, Gary. It seemed like during the spring and the summer a lot of agency-only REITs, when their book values came out, a lot of the hit was actually from the basis risk. Looking back now, when we probably have another basis risk event on the horizon whenever we do get a taper, is there -- have you or your peers learned how to try to hedge that risk any better than the first go-around?
So the short answer is basis risk is by definition difficult to hedge. So basis risk is the difference between more of the risks that are mortgage assets will not track our swap, swaption and treasury hedges. So the basis between the mortgages and our hedges. And yes, look, we buy mortgage securities, we hedge with these other instruments. There were very few ways to kind of hedge out spread risks. So what has agency done? That’s – what we have done is we have mitigated or reduced our spread risks and the main way you do that is – and if you go back to the slide on 15-year, we’ve greatly increased from like 30-ish percent to just over 50% of our portfolio is now 15-year mortgages. So said another way, we have close to 70% of our portfolio with 30-year mortgages which if you look, if we had a 25 basis point widening in spread, a 30-year mortgage, we are a portfolio of just 30-year mortgages with that 25 basis points of spread widening would lose almost 16% whereas a portfolio of 15-years would lose 9%, again with the same spread widening according to a relatively generic model.
So by reducing leverage somewhat, by increasing our percentage of 15-year, we have materially reduced our spread exposure. The other thing to keep in mind is that some of that spread risk, a good chunk of that relates to the fact that market positions across the board were all offsides. I mean everyone felt that it was safe to have lots of mortgages and lots of spread risks because the bigger risk to Ken’s point was you are on invested and the Fed was going to do QE forever. Clearly the market then had reasons to doubt that and everyone went in the same direction. When you think about that unfolding the second time around, it’s pretty logical to assume that there will be a lot less pain this time around, because positions – I mean you can see it in the REIT space, are more defensive than they were in the first time in particular around hedges, but also just around leverage and assets. And so given that I think it’s logical to believe that even if we do end up on the earlier taper scenario that we probably don’t see the same kind of volatility in the spread that we saw in the last time around.
Thanks, Ken. There has been some discussion about the large mortgage backed securities being – I don’t want to use the term 50, but sort of systemically important. Can you shed any light on that?
Sure. So there has been a couple of, say, headlines sort of stories out there. One is that Fed governor Stein mentioned that one area of risk was potentially mortgage REITs and duration mismatches or – and risks along those lines. The EPTOC [ph] mentioned the agency mortgage REITs as something they needed to think about in terms of risks with respect to kind of potentially creating fire sales in a stressful environment. And then IMF ran something more recently that seemed to be kind of a version of some of those other comments. What I would say is that people in the government and difference places are asking the right question and what I would say the reaction was probably – again know this specifically was that much related to the growth of the mortgage REITs rather than the size.
Mortgage REITs hold about 5%, maybe slightly more than 5% of the agency mortgages, were small. We are not – other older servicer, banks, money managers, all sold a lot of mortgages during 2013 as well. And of those groups, we are probably the small holders of mortgages, or one of the smaller holders of mortgages. So I think the reality is one of the problems, and one of the challenges with a mortgage position is the fact that they evolve with interest rates. And so they require rebalancing across the board and whether you are a mortgage REIT or you’re somebody else, but bigger picture, when you couple – when you look at the growth of the mortgage REITs and if you use the same numbers that you had seen prior to 2013 and you just extrapolate those out, very quickly the risks could own a pretty big chunk of the mortgage market. But I think at this point, REITs have actually been shrinking, frozen assets but in the case of some of us are buying back some shares as well. And we’ve gone through kind of a test of the emergency broadcast system so to speak and the REITs – while it hasn’t been pretty, it hasn’t been a systematic problem or even close to it. And so what I would say is that my personal view is that if you are looking at the REITs disclosures and current awareness on the part of investors, and for that matter, even lenders about some of the risk – growth is clearly slower at this point. I think what you have is a picture that should be much less than earnings that anyone that looks at it carefully today than maybe what you could have envisioned nine months ago.
Ken Bruce – Bank of America Merrill Lynch
Two questions but somewhat related. One, I think the reason REITs might be trading at a discount book is – probably there is a loss of book value, I think there is expectation that with the positive duration and rising rate certainly continues, but having said that, you do have a pretty significant arbitrage here, and as you shift to 15-year taper, the principal return is very high but you can use some of that to buy back stocks versus buy mortgages, how do you think about that? That’s just one part. And then the second part, you have still a very large option portfolio, on swap. So that has a high cost, the current environment, it was the right thing to do when rates may be 100 basis points lower, the chances of rates spiking very significantly is probably little bit less. So it’s actually very significantly more expensive portfolio of current environment, that goes away quickly, because the type decays [ph] is significant. So how do you think about those two things? And by the way you probably have shifted to 15-years --
So both really good questions and I see we are close out of time. So I will be relatively quick with my answers. But so first of all on the stock buybacks, look, we have executed stock buyback for agency, we bought back close to 3% of our shares last quarter. We stressed on our call that we – and I have talked about it today, we clearly believe that we should be buying back stock in an environment such as this and taking advantage of the liquidity of our assets. So look, in this environment we think that’s the right thing to do, it’s the right thing to do on a steady basis. And we are going to – we have been focused on it and we will continue to pay a lot of attention to the ability to monetize price to book discount. So we agree, I agree with you and we have been pretty clear on our earnings call in that, the other company obviously that we manage MTGE has bought back over 10% of shares.
So now going to your second question on swaption, I agree with your point, which is look, your leverage is lower, I am going to paint in a little bit but your leverage is lower, you have more 15-year, we are in different interest rate environment, you have very little extension left in your assets, why don’t you – you don’t need as many options, you don’t need as much protection. I think that, that’s an accurate statement and I want to reiterate what we have –the changes we’ve made to the composition of the portfolio and the fact that our portfolio de-leveraged so quickly with time is why we are willing to run a larger duration gap. And you can execute that either by reducing your options, or by reducing other hedges than taking more interest rate risks and then you can offset the costs. And so we have brought down the size of the swaption portfolio about as high as around 25 billion, came down to around 20 billion. So we’ve moved in that direction, we clearly talked about increasing our duration gap in half, and we are comfortable doing those things because we have reduced our exposure to lower and mid coupon 30-year mortgages.
It’s interesting the one other thing I would highlight is I got the question earlier today in a one on one meeting about why we don’t – why we haven’t just and willing to go up in coupon, buy higher coupon 30 year versus lower coupon yield [ph]. And the answer is they do reduce your duration but they may only reduce your duration temporarily. As you go higher in coupon, from a 3.5 to 4, if interest rates go up 50 basis points, the 4 looks a lot like a 3.5, so you are back to the same kind of position. Now you can go higher up, and there are ways and I don’t want to – that’s an effective way to manage risks but it’s over a much more limited period. When you go 30-year to 15-year it’s more of a permanent move and it’s not as rate dependent. But given the type of positions we have, I think it’s very likely that you will see us be willing either to reduce the option portfolio or to increase our duration gap further as we try to balance both current period returns and risk management.
Ken Bruce – Bank of America Merrill Lynch
Again we do it on time. Please join me in thanking Gary for his time and thoughts this afternoon.
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