Company: TWO-PC
Filing Date: 2025-04-29
Form Type: 10-Q
Source: 0001465740-25-000104
Chunk: 76

Company: TWO HARBORS INVESTMENT CORP.
Filing Date: 2025-04-29
Form: 10-Q
Item: Item 1
Chunk 76
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 lower coupons. During the quarter, the nominal spread for current coupon RMBS tightened by 3 basis points to +114 basis points to the Treasury curve, while option-adjusted spreads came in only 2 basis points tighter to finish at +22 basis points. An implied volatility gauge, 2-year options on 10-year swap rates, fell modestly to 98 basis points of annual expected volatility. Nominal spreads and implied volatility remained above long-term averages, whereas option-adjusted spreads are closer to fair. All three metrics finished the first quarter of 2025 close to their 6- and 12-month averages.

Primary mortgage rates hovered around 7% for most of the quarter but moved lower into mid-to-high 6% in March. With winter seasonal factors at play, prepayment activity was muted on both the refinance and housing turnover fronts. Overall, constant prepayment rates, or CPRs, for 30-year Agency RMBS decreased by 1.4 percentage points quarter-over-quarter to 5.6%. The housing market remained quiet with home sales running about flat on a year-over-year basis. Inventory has begun to climb off of very low levels though many buyers remain priced out. The implementation of tariffs will make new construction even costlier, which is expected to further depress home sales.

The MSR market remains very well supported with the number of bulk acquisition opportunities limited. Our MSR portfolio experienced an aggregate speed of 4.2% CPR for the first quarter of 2025, down 0.7 percentage points compared to the fourth quarter of 2024 and slower than model expectations. Many borrowers are content with their low rates and remain locked in to their current mortgages. Seasonal factors in the housing market turn positive as we enter the spring and summer months, which is expected to lead to a modest uptick in prepayment speeds. However, 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 strategy.

RMBS funding markets remained stable and available during throughout the quarter, with repurchase spreads normalizing into a tighter historical context at SOFR plus around 20 basis points.

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Looking ahead, we expect the markets will continue to be choppy while the U.S. government implements its trade and economic policies. Being mindful of this backdrop, we plan to keep our portfolio leverage and risk at muted levels until there is more clarity on the economic path forward. Despite the high levels of realized volatility so far in 2025