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Hatteras Financial Corp (NYSE:HTS)

Q1 2011 Earnings Call

April 27, 2011 10:00 am ET

Executives

Frederick Boos - Co-Chief Investment Officer and Executive Vice President

Kenneth Steele - Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Benjamin Hough - President, Chief Operating Officer and Director

Mark Collinson - Partner

William Gibbs - Co-Chief Investment Officer and Executive Vice President

Michael Hough - Chairman and Chief Executive Officer

Analysts

Jason Weaver

Bose George - Keefe, Bruyette, & Woods, Inc.

Steven Delaney - JMP Securities LLC

Joel Houck

Daniel Furtado - Jefferies & Company, Inc.

Michael Widner - Stifel, Nicolaus & Co., Inc.

Matthew Howlett - Macquarie Research

Operator

Good morning, and welcome to the Hatteras Financial First Quarter Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. At this time, I would like to turn your conference call over to Mr. Mark Collinson. Mr. Collinson, please go ahead.

Mark Collinson

Thank you, Jamie. Good morning, everyone, and welcome to Hatteras' First Quarter 2011 Earnings Conference Call. With me today are the company's Chairman and Chief Executive Officer, Michael Hough; the company's President and Chief Operating Officer, Ben Hough; and the company's Chief Financial Officer, Ken Steele. Also available to answer your questions are the company's Co-Chief Investment Officers, Bill Gibbs and Fred Boos.

Before I hand the call over to them, I need to remind you that any forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our annual and quarterly SEC filings. Actual events and results can differ materially from these forward-looking statements. The content of this conference call also contains time-sensitive information that is accurate only as of today, April 27, 2011, and the company undertakes no obligations to make any revisions to these statements or to update these statements to reflect events or circumstances occurring after this conference call. That's all for me. Now CEO Michael Hough.

Michael Hough

Okay, good morning, and welcome to the call today. As usual, we have the entire team on to answer any and all questions you may have regarding Hatteras or the general market. But first, we'll have a few minutes of prepared remarks as usual to update you on the details of the quarter and development since quarter end.

I think most noteworthy to the start of the discussion today are the 2 capital raises we did during the quarter and how they have and how they will impact Hatteras. The fourth quarter call on February, we outlined the early January raise, its accretion, balance sheet benefits and the deployment progress. As you know, late in the quarter, we came back to the market with a similar proposition and sold more stock accretively with the same long-term fundamental benefit to the company. The opportunity to get longer-duration liabilities on the books was compelling to us, and without altering the liquidity profile, we've added more aggressive book-value protection while maintaining the flexibility to increase inappropriately.

We continue to take steps to position the company more aggressively against higher rates in a shifting yield curve. Both of these transactions represented less than 25% of the then-current market cap and both were important to the company in meaningful ways. Combined, permanent book value increased by 9.1%, current book value increased by 5.1%, our expense ratio has been lowered to below 100 basis points, we purchased high-quality high end demand assets at a good time on the 2- to 3-year part of the yield curve and we aggressively hedge the assets longer than that and for cheaper than in the past, exactly the results we were looking for.

We have continued to focus our investing in hybrid ARMs because they offer a shorter and more predictable durations than other alternatives. This predictability is important so that we can trust our modeling on how the balance sheet will perform in different rate environments. We will always tend to err toward predictability here, especially considering where we are in the rate cycle. Duration is not an absolute measure. It's definitely more art than science and can vary significantly from one model to another. Models usually can come up with fairly consistent current duration estimates but are not so accurate when considering curve shifts. To us, when we invest in these -- we invest in these ARMs because we want to make sure that we understand what the actual durations are and will be when interest rates, prepayments and curve conditions change. That's when we'll need the protection and it is what we hedge for.

So to hedge the bonds we purchased, we added swaps longer than the current durations of the securities, appropriate though if we get an upward shift in the yield curve. It's because we want to protect the value when it needs protecting i.e., during rising rates. So obviously, with a steep yield curve, it is costly to properly hedge, especially when you're locking liabilities longer than you're lending, but we'll keep doing it. Also, it is very important to us that the effective durations on the assets will shorten as time passes in order to match the shortening of the swap durations during that same time. We get that from the ARMs because of the duration measure is to the reset date. The last thing we want is for our swap protection to erode while the duration of the assets remains static or even extends.

So far, we have maintained a similar percentage swap book relative to all liabilities as we have over the last few quarters because: one, we're over-hedging current duration; and two, we want to maintain flexibility in the liquidity position to be able to spend the additional money and hedge more aggressively when we view the time right. Effective hedging is not just about percentage; it's about getting the match right with your assets when you most need it.

On the investing side during the first quarter, hybrid ARM production represented about 6% of the overall mortgage market, translating to approximately $24 billion. We were comfortably able to invest deal proceeds but we have to be patient and prudent at times, meaning we're willing to settle trades forward if needed, but the reality last quarter was that we settle the regular way for most of it. There continues to be a lot of demand for our stuff, understandably from traditional asset-liability investors who need short duration paper to match against their liabilities. In MBS land, hybrids are the vehicle of choice for many ALCO committees, with a similar rationale to why we have been focusing there.

Recently, spreads on ARMs have shifted to the tightest we've seen in a while, which has been good for the values in the portfolio. Our timing was good for putting a lot of proceeds to work because since quarter end, this tightening has pushed ARM prices a good deal higher than swap values have declined. We continue to do the work on all of our investment options, but we haven't seen the driving impetus yet to move on the curve. It always boils down to a long term risk-reward hedging decision. We may at some point, but we have no immediate plans to.

Going forward this quarter and for the rest of the year, we will spend our time evaluating the balance sheet and looking for ways to position it better to perform well in static and up-rate scenarios. We view our mandate as fiduciaries, meaning that our primary focus is on protecting the value of your investment, which is why we have a company set up as we do. And frankly, while we have grown the company recently to the degree we have, within the confines of value preservation, we will continue to strive to generate an attractive dividend for your portfolio but not at the expense of your investment. So I'll hand the call over now to Ken to review the numbers for the quarter.

Kenneth Steele

Thanks, Michael. Good morning, everyone, and thanks again for joining us on the call. We are pleased to report another good quarter for Hatteras to you today. Our net income for the first quarter of 2011 was $57.2 million or $0.96 per weighted average share as compared to $45.6 million or $0.99 per weighted average share for the fourth quarter of last year. Without the averaging effect of the shares from our late March issuance, however, earnings per share would have been $1.

Our net interest income increased to $61 million for the first quarter, up from $43 million in the fourth quarter as we bought more earning assets on the books. We sold no securities during the quarter and our average MBS was $10.8 billion. We entered the first quarter with $13 billion settled so you can see where in the quarter most of these additions occurred.

At March 31, 2011, our portfolio of MBS at a weighted average cost basis of $102.25 and an estimated weighted average coupon of 3.69%, a 25-basis-point coupon decrease from the December 31 portfolio rate of 3.94%. Yield on our portfolio for the first quarter of 2011 was 3.2%, which was 19 basis points less than the fourth quarter rate of 3.39%.

Amortization expense for the first quarter rose to $12.9 million, up from $11.6 million in the fourth quarter of 2010. This expense, however, was on a significantly larger portfolio and our repayment rate fell meaningfully during the first quarter. Repayment rate for the first quarter was approximately 22% on an annualized basis, significantly less than the 31% rate from the fourth quarter.

Our cost of funds also meaningfully dropped 30 basis points lower in the first quarter than the fourth quarter to 1.05%. We had some of the higher fixed rate borrowings and interest rate swaps expire, plus all of our new swaps have been at lower rates than our overall average. This led to an interest rate spread of 215 basis points for the first quarter of 2011, an increase of 9 basis points from the fourth quarter 2010.

Our G&A expenses were $3.9 million, falling to an annualized rate of 103 basis points on average equity, primarily a reflection the economies-of-scale benefit from our equity raises. Our leverage at March 31 was 6.1:1. Our book value was $26.11 per share at March 31, the highest quarterly close we've had so far. This is a 5.1% increase from December 31, 2010. It's important to note that our net marks on the portfolio did increase during the quarter but showed lower on a per-share basis because of the additional shares issued. The majority of the book value increase can be attributed to the accretion from the equity offerings. In summary, for the quarter, we generated an annualized return on average equity of 15.3% and paid a $1 dividend. Into the seption [ph], we have now distributed 15 straight dividends, representing $13.39 per share and over $485 million paid to our investors. And our annualized total returns since our IPO through March 31 is 23.3%. With that, I'll now turn the call over to Ben for the details regarding the portfolio on our investing.

Benjamin Hough

Thanks, Ken. Good morning. I'd like to go over the main drivers of performance for the first quarter and specifically the timing of deployment of proceeds of each of our equity offerings. We used patience in acquiring assets so that we were able to get invested exactly how we want it. We continue to stay short on the curve, and so everything we approaches this year is a mix of 5/1s and 7/1s along with some season hybrids. All in, the breakdown was about 2/3 5/1s and 1/3 7/1s. The pace at which we put money to work was about the same in both offerings. As we said on our last earnings call, it took about 2 months to get securities invested and settled from the January deals, so we were pretty much fully invested by late February. We ultimately purchased $1.7 billion that settled in January and $1.1 billion that settled in February. The timing was about the same with the equity offering in March. We settled about $2 billion in late March and about $2.9 billion this week in April. And like Michael said, we have seen spread tightening in agency ARMs over the last month or 2 but especially in the past few weeks. So we are pleased we were ahead of that, for the most part, of all of our purchases.

So for both deals, we are able to put on 200-plus basis points of net interest margin with a strong hedge position against the assets. Our debt-to-equity leverage number at the end of April, once everything is financed, should be at the neighborhood of 7:1. We may take that up closer to 7.25 or 7.5 by May or June. Now on the hedging side, while we're always evaluating alternatives, paid fixed-interest rate swaps make the most sense for us from a long term book value and income perspective, probably because we do only ARMs. Therefore, as Michael mentioned, we've been systematically flattering in longer swaps out past the stated durations of our new assets so that when rates do go higher and duration extends, estimated cash flows are better matched. So we accomplished 2 important things: we extended our average swaps maturity and we did it at lower rates, thereby improving the hedge position for the overall portfolio, which was a primary driver of each of our last 3 equity offerings.

In the first quarter, we added $2.4 billion in new swaps in the 4-year maturity range at an average rate of 1.71. At the end of March, our total notional of swaps was $6.5 billion with an average rate of 1.94% and 38 months to maturity, which compares well with the December averages of 2.15% and 34 months of maturity. So far in April, we've put on an additional $600 million in swaps out 4 years. So as it stands now at the end of April, we should have about 52% of our repo book hedged as before, but at a lower rate and longer term than in the 3 previous quarters.

Now turning to prepayments. We got the big drop we were expecting in February and, again, lower in March. We averaged a 22.4 percentage rate for the whole quarter, which translates into a CPR [constant prepayment rate] of about 20. On a monthly basis, prepayments steadily declined and came in at a percentage rate of 30% in January, 21% in February and 17% in March. For the current quarter, in April, we again had a rate of 17% or, in CPR terms, about 16.

Looking ahead to the next few months, we expect prepayment to – prepayment rates to remain about the same to perhaps a little higher depending, of course, on rates in general.

Lastly, taking a look at the repo market. As we mentioned on our last earnings call in February, given the downward pressure we were seeing on longer repo rates, we expected 30-day rates to move lower ahead and they did. The change in the FDIC fee structure jump-started the move lower on April 1, but the excess liquidity in the market has compounded the move lower. So throughout the first quarter, we stayed short on repo so we could take advantage of lower rates in Q2. And now that rates have moved lower, we have opportunities to extend at lower rates.

We think that this move lower has some staying power and may persist for another 3 months -- another 3 to 6 months. And so on average, our repo costs should be a little lower for a while. And with that, I'll turn it back over to Michael.

Michael Hough

Okay, that's all for the prepared remarks, and we're happy to answer any questions you may have. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Bose George from KBW.

Bose George - Keefe, Bruyette, & Woods, Inc.

First, just on the spread. The 215 basis point spread that you had in the first quarter, is that consistent with where you're putting on new investments now?

Michael Hough

It's closed for all of the investing we've done. That's kind of what our target was and what we actually realize. So yes, it's very close to that.

Bose George - Keefe, Bruyette, & Woods, Inc.

Okay, great. And then switching to the duration, I was just wondering with extending your swaps, what that's done to your asset duration after you've invested all of the capital, or I guess your net duration after you invested all of the capital.

Michael Hough

Well, first off, I'll just take the first part. I mean, it's always what we've done with these ARMs. We've been more aggressive with is as the cycle has matured. So, Fred, on the duration?

Frederick Boos

The duration is still within the band of about a 0.5 duration on our net basis. Asset duration moved out of touch, but we increased liability duration as well. So the net is still right in that 0.5 duration area.

Bose George - Keefe, Bruyette, & Woods, Inc.

Okay, great. And then just wondered -- the last question on your views on the 15-year hybrid space. Just curious what your thoughts are about that area?

Michael Hough

15-year fixed?

Bose George - Keefe, Bruyette, & Woods, Inc.

15-year fixed. Yes, I'm sorry.

Michael Hough

Well, first, I made a mention of that kind of in the intro there that it's something that we're looking at. We're looking at -- fairly consistently it is an option for us. I think the durations are fairly predictable at least on the current side. But we just haven't seen the need to extend in the portfolio yet. It's -- like I said, it's a risk rewarded. If we feel like -- if we can hedge it more aggressively and earn a higher return, I guess, a higher net return, then it's something we'll consider. We just haven't gotten there yet.

Benjamin Hough

At the current time, Bose, as Michael mentioned earlier, the hybrids tightened a good deal in the last probably 3 or 4 weeks. You've also seen that in the 15 years, maybe into a little greater extent. So from the perspective of looking at it if it's cheap relative to, say, 7/1s, for example. We don't necessarily think that it's cheap enough to be looking at 15 years at this time.

Bose George - Keefe, Bruyette, & Woods, Inc.

Okay, great.

Benjamin Hough

The spread basis 15-year is rich when compared to 5/1s, 7/1s. They're still the cheapest based on that measure. So we constantly look at the 15-year sector. We constantly evaluate it cheap versus rich. But we acknowledged that, that is moving out our duration profile a bit.

Operator

Our next question comes from Steve Delaney from JMP Securities.

Steven Delaney - JMP Securities LLC

So, Ben, your comments on repo being a little cheaper, could you guys be a little more specific on sort of the range you're seeing for like 30- and 90-day repo?

Benjamin Hough

Yes, I'll turn that over to Bill for...

William Gibbs

Sure. Steve, if you take a look at -- we're pretty much seeing, for 30 days, in the range of 22 to 23 basis points. As you move out the curve, it's very flat. 90-day repo, for the most part, we've done some rolls there in the 25 basis point area.

Steven Delaney - JMP Securities LLC

Okay, and has anybody -- given this additionally liquidity, has anybody -- you see any quotes going out as far as 6 months now?

William Gibbs

We have heard some people talking about looking out 6 months. It's definitely gotten to be a more liquid market but it's not across the board. It's definitely bank by bank, depending on who you're talking with.

Steven Delaney - JMP Securities LLC

Okay, all right. And then I guess just one final thing. Michael, maybe this is for you. It looks like when we get into second quarter and your average equity fully reflects the March offering, I think you guys are going to be the first public mortgage REIT ever to have an expense ratio below 1% of equity. So congrats on that. I know it's a double-edged sword, I guess, in one respect. But are you guys comfortable with the current management structure? I mean it's extremely efficient and very shareholder-friendly. I guess what I'm saying is that -- does it work for you guys? Or are you -- would you consider internalizing the structure at some point?

Michael Hough

Well, as you know, that this type of business is a very efficient business to run. And we've always said that we don't have to double our staff every time we double the size of the company. Quite the contrary. So from that standpoint -- I mean, I think it's a logical way for these businesses to be run, and we are comfortable with it. And I don't think anyone here is complaining. However, we -- on the internalization front, I don't think necessarily that, that would change our positions, personally, but it's something we do look at. But the fee structure is not going to be the driver of that decision. We're a $2 billion company now, which -- that's a lot of...

Steven Delaney - JMP Securities LLC

There's an awful lot of fee.

Michael Hough

There's an awful lot of fee. Yes, it's or -- we're very high relative when we started this business. So, I mean, I don't know if that answers your question, but it's not a driver in any of our decisions going forward.

Steven Delaney - JMP Securities LLC

All right, very good. No, that is helpful.

Operator

And our next question comes from Joel Houck from Wells Fargo.

Joel Houck

Guys, my question is related to prepayment. I mean, we've seen them come down, as you mentioned, on your current book. What were the prepayment rate assumptions in the new capital that you put to work in late March, in late April?

William Gibbs

Joel, yes, if you take a look at the bonds where we're buying, we were using assumptions in the high-single digits to around 10 CPRs. It was mainly new production paper. It's definitely interest-rate sensitive. And as I think Ben pointed out earlier, those assumptions are based upon rates in and around this range and not going significantly lower from here.

Joel Houck

Right. So should we read that into in terms of where the overall book is going? Or is this -- can you help us kind of understand the differences between what you booked and, kind of, what's on the portfolio?

Benjamin Hough

Hey, Joel, we have a lot of paper that we purchased over the last 3 years and a lot of it seasons well. The rate drop off in the first quarter went from 30 to down in the mid-teens, mid-to-upper teens and feel like that, that range is probably reasonable going forward depending on obviously what rates do here. So for the portfolio as a whole, given our spread out of vintages and coupons and when we put capital to work in the past, we feel like that's probably a reasonable range to use as an assumption going forward, at least in the short-term here.

Operator

And our next question comes from Mike Widner from Stifel, Nicolaus.

Michael Widner - Stifel, Nicolaus & Co., Inc.

I just want to follow-up on a couple of the details on the things, Ben, you were talking about as far as investment activities. You mentioned adding $600 million of swaps, generally 4-year. The swap price moved around a bit. Just wondering if you could give us sort of an indication of where -- what kind of rates you were getting on those?

Benjamin Hough

They were -- The $600 million we've done in the last few weeks are around the $180 million, $182 million range, so low 180s. They are all right around 4 years, a couple of them has been a little longer than 4 years. I think on average, probably 48 to 50 months. Somewhere in there.

Michael Widner - Stifel, Nicolaus & Co., Inc.

Got you. And is that 600 the level that you think is appropriate for kind of fully deploying the capital that you raise? Or are you still anticipating maybe adding more to that? Or what's your thoughts on that?

Benjamin Hough

Well, we've taken sort of a systematic approach as we've been adding bonds. We've been kind of maintaining our 50% to 55% ratio that we've had for a while here. And given the fact that we are hedging for longer terms, have been the state of duration of our assets, we feel like the percentage number is reasonable. And it's really not about percentages; it's about the net duration that you're adding and we're where we like, given the point of the cycle. It doesn't mean that, as things evolve and as the rate outlook changes from our aspect, that we may spend some on hedging greater than where we are now. But for now, we think it's very appropriate where we are, and we feel very defensively positioned right here.

Michael Widner - Stifel, Nicolaus & Co., Inc.

Great. And finally, just on the MBS, I think I misheard you when you talked about what you were -- what you bought in both March and April. So just wondering if you could go through those numbers again.

Benjamin Hough

Yes, in March, we settled about $2 billion. It's actually $2.0 billion. And in April, settling in from yesterday through the end of the month here, $2.9 billion.

Michael Widner - Stifel, Nicolaus & Co., Inc.

So I thought that's what you said the first time. I was just doing the math on that. And so when you say $2.9 billion, I mean that's $2 billion in March, $2.9 million in April, so for a total of $4.9 million?

Benjamin Hough

Right. That's correct.

Michael Widner - Stifel, Nicolaus & Co., Inc.

Okay, and so I'm just trying to reconcile that with -- maybe my math is kind of wrong here -- but with what you were talking about in terms of leverage at quarter. So I mean I'm just kind of...

Benjamin Hough

Well, I mean, there's a lot of moving parts. I mean, the mark-to-market was actually higher on the portfolio at the end of the March. That brought leveraged -- the debt-to-equity number down a little bit. We are doing 2 deals and allocating which settlement date goes with which purchase with which equity raise, it might confuse it a little bit. I think you have to look at it combined. You have to go back to the end of the year and combine the January deal and the March deal, and then look at the total that we have invested. And that should take you to around 7:1 leverage at the end of April.

William Gibbs

And some of it was reinvestment of cash flows as well.

Michael Widner - Stifel, Nicolaus & Co., Inc.

Yes, I mean -- okay, so I guess just one final one on that, trying to square my numbers here. The basically $13 billion that you indicate as the March 31 mortgage portfolio, does that include any forward settles that you're also including in the $2.0 billion or the $2.9 billion?

Benjamin Hough

No.

Michael Widner - Stifel, Nicolaus & Co., Inc.

No, okay. So if I'm getting -- if I'm just adding your math right, and I'm getting to -- trying to get to a sort of implied end-of-April level. I add that $4.9 million to your basically $13 billion at the end of Q1 and then subtract out any sort of prepayments. I mean is that...

Benjamin Hough

Yes, that would be the way to get to that math.

Michael Widner - Stifel, Nicolaus & Co., Inc.

Okay, I mean that -- so you should be -- I mean, that should be putting you somewhere close to $17 billion. Is that right? I mean, am I missing something?

Benjamin Hough

No. Well, if you do the $12.9 billion and add another $2.9 billion then subtract prepayments, that's going to put you a little over $15 billion.

Michael Widner - Stifel, Nicolaus & Co., Inc.

Right. Well, I was -- I guess, oh, I'm sorry. Okay, so the $2.0 billion is already in the number, okay. Got you. That's where I was missing it. All right. Well, I appreciate -- and then just one final question on that. I assume you're buying the 5 -- you said kind of the 5/1s and the 7/1s and I assume those are kind of in the 3.4% to 3.5% kind of coupon range like the existing stuff you've got.

Benjamin Hough

Yes, actually in the January, when we put pricings to work in January and February, coupon was in that -- the average coupon combine was in that 3.20%, 3.25% range. And the deal in March, the bonds that we purchased here in March and April, it's higher than that. We got the benefit of a move higher in rates, and we were in that 3.40% to 3.50% range on the average coupon and it's come down, obviously, since that time as well.

Operator

Our next question comes from Jason Weaver from Sterne Agee.

Jason Weaver

I thought I heard you mention as part of the rationale [ph] for most of really the track of opportunity [indiscernible] long configuration 5/1 and 7/1 assets. Do you have a little more details of the breakdown for the $2.9 billion [indiscernible] that settled in April?

[Technical Difficulty]

Operator

Our next question comes from Dan Furtado from Jefferies.

Daniel Furtado - Jefferies & Company, Inc.

Could you -- I'm sorry if I missed the answer to Bose question earlier, but can you kind of discuss where the net duration gap is today and kind of how that compares to a year ago?

Michael Hough

Just to start off, Daniel -- Fred can go into details. Just looking back on how we've approached this interest rate cycle, we have obviously – well, from day one, we always had some percentage of our book hedged as an insurance piece. But as we've gone through this cycle, which has been fairly transparent, we have gradually increased the notional amount relative to the company of the swaps, as well as increased the term of the swaps relative to our assets. And there has been times when -- we went through all of '09 and most of '10 without raising capital, and we saw the duration really shorten on our assets. We continue to -- we really, since September 2010, we've added more duration intentionally so we can increase the duration of the liabilities against them. So a year ago, I can't tell you exactly, but I'll hand it over to Fred to give you kind of the specifics of where that number comes from.

Frederick Boos

We're about a 0.5 duration, as we mentioned earlier. Our asset duration is in the low 2s, liabilities in the high 1s, gives you about 0.5 a duration currently. About a year ago, we actually, at some point last year, were in a negative net-duration environment whereby short rates were very low and our ARM duration, at least on a spot, basis was down at around 1. So based on liabilities of 1.3, then, we had technically a negative duration at that point. So our management goal is to keep it tight, perhaps within a neutral to 0.5 duration maybe with 1 full duration being the outside barrier.

Michael Hough

Hey, Daniel. Just to add to that, the point I was trying to make early on in the call was that we are running a gap right now that is measurable and that we look at. But most important to us is what that gap is when rates go up. And when the curve shifts, durations change on all MBS, and that's why we want to stay so short and why we want to focus on ARMs because the durations are going to change in a measurable way on the ARMs. And we expect them to change within the band of duration of the liabilities that we're putting on now. So we feel like we're getting the protection today for changes in durations tomorrow, and that's kind of where we're going to go with this. Obviously, if we're 0.5 today it's going to -- would be more than that if rates went up but it's a measurable amount and something that we can deal with, with additional hedging between now and then.

Daniel Furtado - Jefferies & Company, Inc.

And then the other thing is just kind of more from a procedural or -- I don't know, theoretic, whatever. Do investment spreads or CPRs -- I should say, are investment spreads or CPRs a bigger driver of the leverage decision?

Michael Hough

Well, CPRs, we're always trying to invest CPRs or staying ahead of the CPRs. The spreads are obviously an important driver to us in how we recognize value of the securities. But the primary driver for leverage to us is liquidity and how much flexibility that we can own to deal with changing market rates, margin calls, et cetera. So right now, in the range that we're in, we're carrying a tremendous amount of liquidity considering the short-duration assets that we have. And we had a different mix of assets. We may want to have more liquidity than this, but I think we are best -- really the driver of this leverage. We want this flexibility and we want this cushion to be able to maneuver when things change.

Frederick Boos

Spread is the result, not the target.

Daniel Furtado - Jefferies & Company, Inc.

Got you. Yes, I was just thinking that with your short-duration book and CPRs following that, that would kind of instill -- kind of give you some more confidence to take leverage a little bit higher. But I just wondered if maybe it makes more sense to keep that powder dry for an up-rate environment.

Michael Hough

Yes, I think that's what we want. I mean, we have to assume at some point that we're going to shift higher in rates, and we're positioning for that. We're not doing it all at once. Today is not the day to make that bet. But we have a lot of flexibility right now. We're positioned very well.

Operator

[Operator Instructions] And our next question comes from Bose George from KBW.

Bose George - Keefe, Bruyette, & Woods, Inc.

I just had a follow-up. You had mentioned earlier in the call that ARM prices had rallied since quarter end. I was just wondering if, like, you could give any more color on how much of a move you've seen. And also, is it just the rally in rates or spreads are tightening or a combination of both?

Benjamin Hough

It's a combination of both, Bose. Depending on where you are on the curve, I'd say probably in the 5/1 sector. You're off in the neighborhood of 0.5 points.

Michael Hough

That's mostly from spread tightening.

Benjamin Hough

Well, it's a combination of spread tightening as well as the treasury round.

Michael Hough

Yes.

Operator

And we have one final question. This comes from Michael Howlett from Macquarie.

Matthew Howlett - Macquarie Research

On the purchase yield, do you guys give what the average purchase yield was on the acquisitions in the first quarter?

Benjamin Hough

We didn't give the exact numbers, but we're in that probably, depending on the mix, anywhere from 3 to 3 1/4 on a net basis. And given the way we're hedging it, it produced net interest margins. I said 200-plus and that could be anywhere from 200 to 220. So it's still on top of where we've -- what that interest margin we have for the first quarter.

Matthew Howlett - Macquarie Research

Can you give us the speed assumptions on those? Did you give one for the entire book? I mean, the lifetime speed, whether or not that was adjusted for the overall booking in the quarter or where it stood at March 31.

Michael Hough

Yes, I think that the CPR estimate that we had on the stuff that we purchase really this year as a result of the last 2 deals is in the high-single digits to 10 with the guidance that we have in the estimates that we're applying to the portfolio. But the estimates that we have now, we had mentioned that we're probably going to come in similar to what we've seen in the last couple of months: in the 16%, 17% range up to 20%. So that's kind of -- that's what we're applying to the portfolio as a whole today, but which is -- so you have to assume the vintage stuff we're putting up a slightly higher number on considering all of the shorter -- the slower paced stuff that we just put on.

Matthew Howlett - Macquarie Research

Got you. Okay, and then how much -- I don't know if you guys pay a lot of attention to lowering the premiums and managing convexity but, I mean, how much -- I mean is there any way to hedge that if there was a pickup in speeds or if the curves had flattened or something? Or how do you, sort of, you navigate around those type of risks?

Michael Hough

Well, you we've always told you that we purchase as low a dollar price as we possibly can to manage the amortization risk that we get from prepays. But the way we have done this is really through asset selection, and I'm going to let Bill elaborate.

William Gibbs

Yes, we've tried to select assets that are going to have more predictable cash flow characteristics, such as low to [ph] third party originators prior to July, IO-type paper and some other different characteristics. So we're trying to get the cash flows predictable and the asset size so that we can match them up, as Michael said, on the liability side with the swaps, you know, so that the cash flow is aligned.

Michael Hough

Lowering on balance both [ph]. Okay, I think that's all of the questions we have. We sure do appreciate your interest in Hatteras and for being on the call today, and feel free to call us with any questions you may have. Have a good day.

Operator

That concludes today's teleconference. We thank you for attending. You may now disconnect your telephone lines.

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