Dynex Capital’s Q1 2025 Earnings Call: Unraveling Contradictions in Repo Funding, Investment Strategy, and Risk Management

Repo funding costs and market availability, investment strategy and return opportunities, hedging strategy and swap usage, leverage and risk management, repo funding costs and mortgage market stability are the key contradictions discussed in Dynex Capital's latest 2025Q1 earnings call.



Capital Raise and Deployment:
- Dynex Capital raised $270 million of new capital year-to-date, with a significant portion raised at a premium to book value.
- The funds were partly invested into the agency portfolio, and the remainder was retained for liquidity to maintain flexibility.
- This capital raise strategy was aimed at facilitating growth in an attractive market and enhancing liquidity during volatile conditions.

Portfolio Performance and Risk Management:
- Despite a 70 basis point intra-quarter move in the 10-year treasury and significant rate fluctuations, Dynex's portfolio generated a 2.6% TER, demonstrating effective risk management.
- The company maintained a 7.8x leverage ratio, which reflects a proactive approach to preserving liquidity amid market volatility.
- The portfolio strategy focused on Agency RMBS, Agency CMBS, and Fannie Mae DUS, with increased diversification across the coupon stack and duration stability.

Impact of Tariff Announcement:
- The April 2 tariff announcement led to a derisking of positions, with long and treasury yields rising, reflecting market uncertainty.
- Dynex experienced some impact on book value but managed risks through cash collateral and margin adjustments, with no significant loss crystallization.
- The company emphasized maintaining liquidity and flexibility to withstand market shocks and navigate potential risks from policy changes.

Dividend Strategy and Capital Risk Management:
- Dynex raised its monthly dividend in February, reflecting confidence in generating attractive returns.
- The decision was based on factors including long-term returns, capital availability, and liquidity risk, considering the company's risk management framework.
- The dividend strategy supports Dynex's position as a reliable income-generating stock, especially in volatile markets.

Hedge Strategy and Market Opportunities:
- Dynex's hedging strategy employed swaps and options, providing a natural hedge for the mortgage portfolio, particularly under current market conditions.
- Opportunities for significant returns on equity are present due to the wide spreads in Agency RMBS compared to swaps and treasuries.
- The company continues to evaluate opportunities in Agency CMBS, Fannie Mae DUS, and options strategies to capitalize on market conditions.