Orchid Island Capital reports Q2 EPS 25c, consensus (1c)

Robert Cauley, Chairman and CEO, said, “The regional banking crisis that emerged in March of 2023 elicited a severe market reaction, but the Federal Reserve and U.S. Treasury were very responsive to these developments and the damage was quickly contained by effective macro-prudential policy. By late April, market focus began to shift away from the prospects of contagion from a couple of high-profile bank failures to an impasse between congressional Republicans and the Biden administration over the debt ceiling. Fortunately, the impasse was resolved in late May. While the debt ceiling impasse was resolved before the government ran out of borrowing capacity and risk sentiment improved modestly, the economic data, particularly with respect to core inflation and the labor market, did not improve at all. The U.S. Treasury curve inversion peaked in early July, interest rates continued to rise as the 2-year U.S. Treasury approached 5% and the futures market priced in nearly two additional rate increases by the Fed with no rate decreases at all in 2023. In short, market expectations were now in sync with Fed rhetoric that funding rates would be higher and for far longer than previously expected. These developments were not good for the Agency RMBS market as the spread between the Agency RMBS current coupon and the 5-year U.S. Treasury reached approximately 187.5 bps on May 26, 2023. Orchid has maintained a lower coupon bias throughout the tightening cycle as we believe these securities still offer superior total return potential over new origination, higher coupon securities. We continue to hold these securities for the same reasons. We raised approximately $48 million of new capital in the second quarter and deployed the proceeds into higher coupon, low pay-up specified pools and hedged these positions predominantly with swaps. With the U.S. Treasury curve inverted as much as it is our hedge positions allow us to earn approximately 100 basis points of marginal net interest income on the new securities.”