Contradictions in 2025 Q1: Spreads, Liquidity, and Returns Under Scrutiny

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Financial Performance and Economic Return:
- Two Harbors Investment Corp. reported a total economic return of 4.4% for the first quarter, with both RMBS and MSR contributing positively to the results.
- The positive return was driven by keeping risk exposures low and actively managing the portfolio to take advantage of market dislocations and attractive return opportunities.

Interest Rate and Market Dynamics:
- Interest rates across the U.S. Treasury yield curve ended the first quarter lower than at 2024 year-end, with 2-year and 10-year notes decreasing by 36 basis points.
- Uncertainty around proposals from the administration on tariffs and trade policies raised concerns about the status of the dollar as the world's reserve currency.

Portfolio Management and Risk Mitigation:
- The company decreased its mortgage exposure by 30% and reduced leverage in response to market volatility and potential economic slowdown.
- This strategic risk management included decreasing exposure in lower 3% to 4.5% specified pools and adding exposure in higher coupon pools.

MSR Market Dynamics and Strategy:
- The MSR market remains well supported due to high demand and limited bulk acquisition opportunities, with transfer volumes normalizing to pre-COVID levels.
- Two Harbors is focused on growing its presence in third-party subservicing and exploring possibilities in the non-agency sectors to diversify its portfolio.

Dividend and Leverage Strategy:
- The company is comfortable with its dividend with spreads where they are, and with the wider spreads, there is an estimated $0.03 increase on both ends of the return potential range.
- The leverage strategy involves keeping leverage at muted levels until there is more clarity on the economic path forward, while also exploring opportunities in Agency RMBS and low-weighted average mortgage rate MSR.