Company: TWO-PC
Filing Date: 2025-02-18
Form Type: 10-K
Source: 0001465740-25-000083
Chunk: 72

Company: TWO HARBORS INVESTMENT CORP.
Filing Date: 2025-02-18
Form: 10-K
Item: Item 7
Chunk 72
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 value at the reporting date. We use prices obtained from third-party pricing vendors or broker quotes deemed indicative of market activity and current as of the measurement date, which in periods of market dislocation, may have reduced transparency. For more information on our fair value measurements, see Note 12 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K. Additionally, the key economic assumptions and sensitivity of the fair value of MSR to immediate adverse changes in these assumptions are presented in Note 6 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.

30

Market Conditions and Outlook

Interest rates remained volatile throughout 2024 as fixed-income market participants considered the impact on Federal Reserve’s policy (the Fed) of often conflicting economic signals on employment and inflation. By the third quarter, inflation data showed enough progress towards the Fed’s two percent target that the Fed cut rates by 50 basis points in September. The Treasury yield curve steepened as the Fed cut rates while robust supply of longer-term Treasuries kept longer end rates high. Mortgage spread volatility declined as the Fed began to cut rates, though nominal current coupon spreads remained wider than longer-term averages. MSR valuations were well supported throughout the year, with balanced supply and demand and favorable prepayment rates.

During the fourth quarter of 2024, interest rates increased across the Treasury curve as both job and inflation data firmed up, driving a shift from the third quarter of 2024 to a hawkish stance from the Fed. The Fed delivered two 25 basis point interest rate cuts during the fourth quarter of 2024, bringing the total to 100 basis points for the year, while the market’s expectations for more cuts in 2025 went from 4.5 to start the fourth quarter of 2024 to 1.5 cuts by quarter end, making it one of the most volatile episodes in recent Fed policy cycles. The bond market also had to contend with the outcome of the U.S. Presidential election, which fueled a rise in short-dated interest rate volatility in October, spiking to the 95th percentile of history in the post-COVID era. As the results of November’s U.S. Congressional and Presidential elections made it clear that the Republican Party would be in control of both the executive and legislative branches of government, expansionary fiscal policy and the potential economic impact from tariffs led to a bearish steepening of the Treasury rate curve. Over the fourth quarter of