Company: TWO-PC
Filing Date: 2025-10-28
Form Type: 10-Q
Source: 0001465740-25-000152
Chunk: 248

Company: TWO HARBORS INVESTMENT CORP.
Filing Date: 2025-10-28
Form: 10-Q
Item: Item 8
Chunk 248
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icing Activities to the consolidated financial statements, included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

Market Conditions and Outlook

Performance across the fixed income market was positive in the third quarter of 2025, as the Federal Reserve, or the Fed, delivered a widely anticipated 25 basis point cut to its benchmark rate at its September meeting, the first interest rate cut since November 2024. Though inflation readings continued to run above the Fed’s target, and the full impact of recent increases to tariffs on forward inflation remained unclear, the Fed cut rates in response to emerging downside risks in the labor market, as Chairman Powell outlined in his remarks after the conclusion of the Fed’s September meeting. The Fed’s own guidance of another 50 basis points of cuts before the end of 2025 aligned with market consensus. Net changes across the yield curve for U.S. Treasuries were minimal over the quarter, with 2-year Treasury yields down 11 basis points to 3.61% and 10-year Treasury yields down 8 basis points to 4.15%. Equity markets were also buoyed by Fed’s benchmark rate cut, with the S&P 500 up by 7.8% by quarter-end after setting all-time record highs earlier in the quarter.

Given the stability of interest rates and broad consensus that the Fed is on a gradual path to lowering rates further, implied volatility declined to its lowest level since mid-2022. The implied volatility of 2-year options on 10-year swap rates closed the quarter at 84 basis points, down by 10 basis points and back to just about its average level over the past 10 years. RMBS spreads responded very positively to the expectation of further Fed rate cuts and the decline in volatility. During the third quarter, the nominal spread for current coupon RMBS tightened by 26 basis points to 144 basis points to the swap curve, while option-adjusted spreads finished 14 basis points tighter at 67 basis points. Nominal and option-adjusted spreads ended the quarter 22 and 8 basis points tighter than year-to-date averages, respectively. Hedged RMBS performance was positive across the 30-year coupon stack, with the best performance concentrated in the “belly” coupons, such as 4.5% and 5.0%. The excess return of the Bloomberg U.S. Mortgage Backed Securities Index was a positive 82 basis points, the best since the fourth quarter of 2023.

During the three months