Company: TWO-PC
Filing Date: 2025-02-18
Form Type: 10-K
Source: 0001465740-25-000083
Chunk: 73

Company: TWO HARBORS INVESTMENT CORP.
Filing Date: 2025-02-18
Form: 10-K
Item: Item 7
Chunk 73
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2024, the 10-year Treasury yield increased by 79 basis points to finish at 4.57% while the 2-year increased by 60 basis points to 4.24%, steepening the Treasury yield curve by 19 basis points. The S&P 500 was higher by about 2.1%.

Mortgage performance was volatile from month-to-month, as spreads widened significantly in October as rates and volatility increased only to recover in November following the Presidential election. Mortgages gave back some of their gains in December in light of the continued strengthening economic data and a more hawkish Fed posture toward year end. Ultimately, our preferred implied volatility gauge, 2-year options on 10-year rates, increased from 94 to 101 basis points on an annualized basis, right in the middle of its range for 2024. The nominal spread on current coupon MBS finished 11 basis points wider at 117 basis points to the Treasury curve, while the option-adjusted spread finished 6 basis points wider at 23. Nominal spreads remained attractive to longer-term averages, while option-adjusted spreads are tighter on a historical basis. Given that the Treasury rate curve bear steepened and implied volatility ticked up, on a hedged basis lower coupon mortgages generally underperformed while higher coupon mortgages outperformed. Higher coupon specified pools were the best performer, outperforming TBAs by at least a quarter point.

Primary mortgage rates increased in the fourth quarter of 2024, tracking the increase in yields on the longer end of the Treasury curve. The Freddie Mac 30-year rate increased by 78 basis points to 6.85%. Overall prepayment rates for 30-year Agency RMBS increased by 0.4% percentage points quarter-over-quarter to 6.9% CPR, as higher coupon speeds reflected the mini-refinance wave triggered by the fall in rates in the third quarter of 2024. Borrowers with a refinance incentive responded to the lowest mortgage rates in September with a propensity similar to borrower behavior back in 2019. Our MSR portfolio, with a low gross mortgage rate of 3.46%, came in at 4.9% CPR in the fourth quarter of 2024, down 0.4% percentage points compared to the third quarter of 2024, as slower seasonal factors began to take effect. 

The housing market has shown some signs of improvement with home sales running at about 10% more volume on a year-on-year basis and inventory has