Company: TWO-PC
Filing Date: 2025-07-29
Form Type: 10-Q
Source: 0001465740-25-000140
Chunk: 7

Company: TWO HARBORS INVESTMENT CORP.
Filing Date: 2025-07-29
Form: 10-Q
Item: Item 2
Chunk 7
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 resilient in the second quarter, rebounding from poor performance early in the quarter as the uncertainty of fluctuating tariff and trade policies unsettled markets, spiking the Chicago Board Options Exchange's Volatility Index to a multi-year high. As the quarter progressed, tariff tensions eased and the macro environment recovered steadily, leading the S&P 500 to a record high, returning 10.6% over the quarter. Similarly, yields for U.S. Treasuries initially increased, with the 10-year Treasury yield rising by about 60 basis points but finished the quarter with a net increase of only 2 basis points at 4.23%. The yield curve for U.S. Treasuries steepened, with the 2-year Treasury yield falling from 3.88% to 3.72%, or 16 basis points. 

The Federal Reserve, or the Fed, left interest rates unchanged at both their May and June meetings, as benign readings on employment and inflation did not justify any immediate action and the potential inflationary impact of tariffs provided further justification to not lower rates prematurely. By quarter-end, Federal Funds futures implied over a 90% chance of an interest rate cut by the Fed in September, with the median forecast in the Fed’s own projections remaining unchanged at two cuts for 2025.

The performance of Agency RMBS tracked the pattern of the equity markets over the quarter, 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