Company: TWO-PC
Filing Date: 2025-07-29
Form Type: 10-Q
Source: 0001465740-25-000140
Chunk: 251

Company: TWO HARBORS INVESTMENT CORP.
Filing Date: 2025-07-29
Form: 10-Q
Item: Item 8
Chunk 251
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 with spreads to interest rate swaps materially widening in April, then recovering over the next two months. An implied volatility gauge, 2-year options on 10-year swap rates, also followed suit, hitting a quarterly high of 104 basis points of annualized volatility in mid April only to close the quarter 4 basis points lower, falling from 98 to 94 basis points. Hedged performance across the coupon stack was uneven, with higher coupons generally outperforming longer duration lower coupons. During the quarter, the nominal spread for current coupon RMBS widened by 3 basis points to 171 basis points to the swap curve, while option-adjusted spreads finished 12 basis points wider at 81 basis points, reflecting the drop in implied volatility by quarter-end. Nominal spreads ended the quarter right on top of the year-to-date average, whereas option-adjusted spreads were about 5 basis points wider than average with swaption volatility about 5 basis points below average.

Primary mortgage rates were in the high 6% area for most of the quarter, dipped lower in March into early April which, together with stronger seasonal factors, drove an increase in prepayment rates in the second quarter. Increasingly fast closing times led to a notable bump up in refinance speeds and borrowers displayed a similar refinancing sensitivity to what we observed last fall. Overall prepayment rates for 30-year Agency RMBS increased by 1.8 percentage points quarter-over-quarter to 7.3% conditional prepayment rate, or CPR, in the second quarter. Nationally, existing home sales continue to run at a historically low volumes and are flat on a year-over-year basis. Inventory has begun to climb in the weakest markets and there have been some home price declines in select metropolitan areas. 

The MSR market remains very well supported, with bank and non-bank servicers aggressively bidding for a declining amount of supply. The volume of MSR available in the bulk market has continued to trend lower from the peak years of 2022 and 2023, with supply about 30% lower year-over-year. Quarter-over-quarter, our MSR portfolio experienced a 1.6 percentage point pickup in prepayments rate to 5.8%. The increase was anticipated due to stronger seasonal factors, though the speed was slower than model expectations. Overall, prepayment rates on our low mortgage rate MSR are expected to remain very slow on a historical basis, which will remain a tailwind for the portfolio.

RMBS funding markets remained stable and available during throughout the quarter, with rep