Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities (Tables)

v3.23.2
Derivative Instruments and Hedging Activities (Tables)
 6 Months Ended
Jun. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Schedule of Derivative Instruments in Statement of Financial Position, Fair Value
The following tables present the gross fair value and notional amounts of the Company’s derivative financial instruments treated as trading derivatives as of June 30, 2023 and December 31, 2022:
June 30, 2023
Derivative Assets Derivative Liabilities
(in thousands) Fair Value Notional Fair Value Notional
Inverse interest-only securities
 $ 12,509  $ 179,542  $ —  $ — 
Interest rate swap agreements
 —  —  —  8,977,714 
Swaptions, net 276  (200,000) —  — 
TBAs 3,684  (422,000) (14,976) 3,473,000 
Futures, net —  (6,624,550) —  — 
Total $ 16,469  $ (7,067,008) $ (14,976) $ 12,450,714 
December 31, 2022
Derivative Assets Derivative Liabilities
(in thousands) Fair Value Notional Fair Value Notional
Inverse interest-only securities
 $ 15,293  $ 196,456  $ —  $ — 
Interest rate swap agreements
 —  —  —  — 
Swaptions, net —  —  —  — 
TBAs 11,145  (650,000) (34,048) 4,476,000 
Futures, net —  (18,285,452) —  — 
Total $ 26,438  $ (18,738,996) $ (34,048) $ 4,476,000 
Schedule of Derivative Instruments, Gain (Loss) in Statement of Financial Performance
The following table summarizes the location and amount of gains and losses on derivative instruments reported in the condensed consolidated statements of comprehensive income (loss):
Derivative Instruments Location of Gain (Loss) Recognized in Income Amount of Gain (Loss) Recognized in Income
Three Months Ended Six Months Ended
(in thousands) June 30, June 30,
2023 2022 2023 2022
Interest rate risk management:
TBAs
Gain (loss) on other derivative instruments
 $ (77,083) $ (109,442) $ (94,247) $ (308,278)
Futures
Gain (loss) on other derivative instruments
 126,923  11,312  (13,164) 117,407 
Options on futures
Gain (loss) on other derivative instruments
 —  (158) —  (2,224)
Interest rate swaps - Payers
Gain (loss) on interest rate swap and swaption agreements
 123,602  235,234  51,842  672,394 
Interest rate swaps - Receivers
Gain (loss) on interest rate swap and swaption agreements
 (67,291) (204,550) (77,659) (681,689)
Swaptions
Gain (loss) on interest rate swap and swaption agreements
 222  2,050  196  3,988 
Non-risk management:
Inverse interest-only securities
Gain (loss) on other derivative instruments
 (2,679) (2,985) (1,199) (9,940)
Total $ 103,694  $ (68,539) $ (134,231) $ (208,342)
Schedule of Notional Amounts of Outstanding Derivative Positions
The following tables present information with respect to the volume of activity in the Company’s derivative instruments during the three and six months ended June 30, 2023 and 2022:
Three Months Ended June 30, 2023
(in thousands) Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount
Realized Gain (Loss),
net (1)
Inverse interest-only securities $ 188,085  $ —  $ (8,543) $ 179,542  $ 184,122  $ — 
Interest rate swap agreements 8,404,872  572,842  —  8,977,714  8,493,858  — 
Swaptions, net (200,000) —  —  (200,000) (200,000) — 
TBAs, net 3,718,000  11,120,000  (11,787,000) 3,051,000  3,411,198  (17,375)
Futures, net
 (6,945,550) (8,967,800) 9,288,800  (6,624,550) (6,465,800) (20,101)
Total $ 5,165,407  $ 2,725,042  $ (2,506,743) $ 5,383,706  $ 5,423,378  $ (37,476)
Three Months Ended June 30, 2022
(in thousands) Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount
Realized Gain (Loss),
net (1)
Inverse interest-only securities $ 232,218  $ —  $ (14,367) $ 217,851  $ 225,537  $ (1,875)
Interest rate swap agreements 24,299,647  6,653,204  (16,102,515) 14,850,336  20,461,467  219,025 
Swaptions, net (2,761,000) —  1,081,000  (1,680,000) (1,901,286) 27,186 
TBAs, net 4,622,000  21,697,000  (20,002,000) 6,317,000  5,568,560  (103,893)
Futures, net
 (7,516,650) (17,500,060) 8,289,550  (16,727,160) (15,287,970) 2,493 
Options on futures, net
 2,000  —  (2,000) —  1,055  (2,224)
Total $ 18,878,215  $ 10,850,144  $ (26,750,332) $ 2,978,027  $ 9,067,363  $ 140,712 
Six Months Ended June 30, 2023
(in thousands) Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount
Realized Gain (Loss),
net (1)
Inverse interest-only securities $ 196,456  $ —  $ (16,914) $ 179,542  $ 188,401  $ — 
Interest rate swap agreements —  10,565,783  (1,588,069) 8,977,714  5,860,046  (18,580)
Swaptions, net —  (200,000) —  (200,000) (129,282) — 
TBAs, net 3,826,000  25,786,000  (26,561,000) 3,051,000  3,740,503  (105,858)
Futures, net
 (18,285,452) (22,001,850) 33,662,752  (6,624,550) (10,975,000) (19,970)
Total $ (14,262,996) $ 14,149,933  $ 5,496,769  $ 5,383,706  $ (1,315,332) $ (144,408)
Six Months Ended June 30, 2022
(in thousands) Beginning of Period Notional Amount Additions Settlement, Termination, Expiration or Exercise End of Period Notional Amount Average Notional Amount
Realized Gain (Loss),
net (1)
Inverse interest-only securities $ 247,101  $ —  $ (29,250) $ 217,851  $ 232,750  $ (3,640)
Interest rate swap agreements 20,387,300  17,445,009  (22,981,973) 14,850,336  22,478,619  162,761 
Swaptions, net (1,761,000) (1,000,000) 1,081,000  (1,680,000) (2,071,862) 27,186 
TBAs, net 4,116,000  42,215,000  (40,014,000) 6,317,000  4,595,387  (294,658)
Futures, net
 (5,829,600) (22,366,160) 11,468,600  (16,727,160) (11,826,254) 380 
Options on futures, net
 —  2,000  (2,000) —  840  (2,224)
Total $ 17,159,801  $ 36,295,849  $ (50,477,623) $ 2,978,027  $ 13,409,480  $ (110,195)
____________________
(1)Excludes net interest paid or received in full settlement of the net interest spread liability.
Schedule of TBA Positions The following tables present the notional amount, cost basis, market value and carrying value (which approximates fair value) of the Company’s TBA positions as of June 30, 2023 and December 31, 2022:
June 30, 2023
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative Assets Derivative Liabilities
Purchase contracts $ 4,010,000  $ 3,859,767  $ 3,845,290  $ 499  $ (14,976)
Sale contracts (959,000) (953,915) (950,730) 3,185  — 
TBAs, net $ 3,051,000  $ 2,905,852  $ 2,894,560  $ 3,684  $ (14,976)
December 31, 2022
Net Carrying Value (4)
(in thousands)
Notional Amount (1)
Cost Basis (2)
Market Value (3)
Derivative Assets Derivative Liabilities
Purchase contracts $ 4,826,000  $ 4,802,009  $ 4,767,989  $ 28  $ (34,048)
Sale contracts (1,000,000) (878,711) (867,594) 11,117  — 
TBAs, net $ 3,826,000  $ 3,923,298  $ 3,900,395  $ 11,145  $ (34,048)
___________________
(1)Notional amount represents the face amount of the underlying Agency RMBS.
(2)Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.
(3)Market value represents the current market value of the TBA (or of the underlying Agency RMBS) as of period end.
(4)Net carrying value represents the difference between the market value of the TBA as of period end and its cost basis, and is reported in derivative assets / (liabilities), at fair value, in the condensed consolidated balance sheets.
Schedule of Futures The following table summarizes certain characteristics of the Company’s futures as of June 30, 2023 and December 31, 2022:
(dollars in thousands) June 30, 2023 December 31, 2022
Type & Maturity Notional Amount Carrying Value Weighted Average Days to Expiration Notional Amount Carrying Value Weighted Average Days to Expiration
U.S. Treasury futures - 2 year $ —  $ —  0 $ (562,200) $ —  95
U.S. Treasury futures - 5 year (2,385,900) —  96 (3,855,500) —  95
U.S. Treasury futures - 10 year (1,675,900) —  91 (2,397,200) —  90
U.S. Treasury futures - 20 year 30,000  —  91 101,000  —  90
Federal Funds futures —  —  0 (7,948,552) —  92
SOFR/Eurodollar futures (1)
≤ 1 year (1,322,250) —  286 (2,957,000) —  184
> 1 and ≤ 2 years (1,083,000) —  540 (666,000) —  489
> 2 and ≤ 3 years (187,500) —  809 —  —  0
Total futures $ (6,624,550) $ —  255 $ (18,285,452) $ —  122
___________________
(1)During the three months ended June 30, 2023, all of the Company’s outstanding Eurodollar futures contracts with maturities after June 30, 2023 were converted into three-month SOFR futures contracts with similar characteristics.
Schedule of Interest Rate Swap Payers As of June 30, 2023, the Company held the following interest rate swaps that were utilized as economic hedges of interest rate exposure (or duration) whereby the Company receives interest at a floating interest rate (OIS or SOFR):
(notional in thousands)
June 30, 2023
Swaps Maturities
Notional Amount (1)
Weighted Average Fixed Pay Rate (2)
Weighted Average Receive Rate Weighted Average Maturity (Years)
2024 $ —  —  % —  % 0.00
2025 —  —  % —  % 0.00
2026 2,647,671  4.730  % 5.090  % 1.71
2027 —  —  % —  % 0.00
2028 and Thereafter 3,129,121  3.508  % 5.090  % 6.49
Total $ 5,776,792  4.099  % 5.090  % 4.18
____________________
(1)Notional amount includes $301.6 million in forward starting interest rate swaps as of June 30, 2023.
(2)Weighted averages exclude forward starting interest rate swaps. As of June 30, 2023, the weighted average fixed receive rate on forward starting interest rate swaps was 3.6%.
Schedule of Interest Rate Swap Receivers
Additionally, as of June 30, 2023, the Company held the following interest rate swaps in order to mitigate mortgage interest rate exposure (or duration) risk whereby the Company pays interest at a floating interest rate (OIS or SOFR):
(notional in thousands)
June 30, 2023
Swaps Maturities
Notional Amount (1)
Weighted Average Pay Rate (2)
Weighted Average Fixed Receive Rate (2)
Weighted Average Maturity (Years) (2)
2024 $ —  —  % —  % 0.00
2025 —  —  % —  % 0.00
2026 1,831,339  5.090  % 3.899  % 1.72
2027 —  —  % —  % 0.00
2028 and Thereafter 1,369,583  5.090  % 3.328  % 6.28
Total $ 3,200,922  5.090  % 3.684  % 8.00
____________________
(1)Notional amount includes $260.0 million in forward starting interest rate swaps as of June 30, 2023.
(2)Weighted averages exclude forward starting interest rate swaps. As of June 30, 2023, the weighted average fixed receive rate on forward starting interest rate swaps was 5.1%.
Schedule of Interest Rate Swaptions As of June 30, 2023, the Company had the following outstanding interest rate swaptions:
June 30, 2023
(notional and dollars in thousands) Option Underlying Swap
Swaption Expiration Cost Basis Fair Value Average Months to Expiration Notional Amount
Average Fixed Rate (1)
Average Term (Years)
Purchase contracts:
Payer < 6 Months $ 660  $ 515  2.20  $ 200,000  5.19  % 1.0
Sale contracts:
Payer < 6 Months $ (580) $ (239) 2.20  $ (400,000) 5.72  % 1.0
____________________
(1)As of June 30, 2023, 100.0% of the underlying swap floating rates were tied to SOFR.