Company: TWO-PC
Filing Date: 2025-04-29
Form Type: 10-Q
Source: 0001465740-25-000104
Chunk: 175

Company: TWO HARBORS INVESTMENT CORP.
Filing Date: 2025-04-29
Form: 10-Q
Item: Item 8
Chunk 175
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The Fed held rates unchanged at their January and March meetings, but revised lower real GDP growth expectations for 2025 from 2.1% to 1.7%, while the core personal consumption expenditures index was revised up from 2.5% to 2.8%, changes which Chairman Powell attributed to the changes in trade policies proposed by the U.S. Administration. As of March 31, 2025, the market’s expectations for cuts for the remainder of 2025 moved from 50 to 75 basis points.

The performance of Agency RMBS securities was net positive for the quarter. Agency RMBS outperformed interest rate hedges in January and February but underperformed in March as equities and other spread products weakened. The performance across the coupon stack was uneven, with higher coupons, both in TBA and specified pools, outperforming longer duration 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