Contradictions Unveiled: Orchid Island Capital's 2025 Q1 Earnings Call on Duration Gaps, ROE, and Market Dynamics

Duration gap and convexity, ROE expectations, MBS purchases by banks, mortgage spreads and market conditions, duration gap and interest rate strategy are the key contradictions discussed in Orchid Island Capital's latest 2025Q1 earnings call.



Financial Performance and Market Conditions:
- Orchid Island Capital reported earnings per share of $0.18 for Q1 2025, compared to $0.07 in Q4 2024. The book value per share at 3/31/2025 was $7.94, down from $8.09 at 12/31/2024.
- The decline in book value and earnings per share was attributed to market dynamics and strategic portfolio adjustments.

Portfolio and Hedging Strategies:
- The company's average portfolio size was under $6 billion, with a leverage ratio of 7.8%, having sold $690 million worth of securities to manage leverage.
- Orchid Island deployed capital into higher-coupon mortgages and hedged them predominantly with longer-duration instruments, aiming to mitigate exposure to declining swap spreads.

Market Developments and Tariff Impacts:
- Q1 was marked by a rally in the cash treasury curve and a significant move in long end prices due to expectations of increased Fed cuts and tariff-related impacts on inflation.
- Market volatility and concerns about tariffs and their potential impact on inflation and growth drove the steepening of the yield curve.

Hedge Fund and Basis Trade Activity:
- The company noted significant movements in swap spreads, which were attributed to basis trades involving highly leveraged hedge fund positions and forced selling by dealers in long end treasuries.
- These activities contributed to market turmoil but presented opportunities for Orchid Island to benefit from attractive hedging strategies.