Good morning, and welcome to the Annaly Capital Management third quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your telephone keypad. To withdraw your question, please press Star then two. Please note this event is being recorded. I would now like to turn the conference over to Sean Kensil, Director of Investor Relations. Please go ahead.
Good morning, and welcome to the third quarter 2022 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, including with respect to COVID-19 impacts, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release.
As a reminder, Annaly routinely posts important information for investors on the company's website, www.annaly.com. Content referenced in today's call can be found in our third quarter 2022 investor presentation and third quarter 2022 financial supplement, both found under the Presentation section of our website. Annaly intends to use our web page as a means of disclosing material non-public information for complying with the company's disclosure obligations under Regulation FD and to post and update investor presentations and similar materials on a regular basis. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, President and Chief Executive Officer, Serena Wolfe, Chief Financial Officer, Ilker Ertas, Chief Investment Officer, Ken Adler, Head of Mortgage Servicing Rights, and Mike Fania, Head of Residential Credit. With that, I'll turn the call over to David.
Thank you, Sean. Good morning, and thank you all for joining us on our third quarter earnings call. Today, I'll provide an update on the macroeconomic landscape, our financial results this quarter, and our positioning heading into year-end. Ilker and Serena will then discuss our portfolio activity and financial performance. Now, beginning with the macro backdrop in what continues to be a historically challenging year, the third quarter brought about a further sell-off in the bond market and mortgage spreads widened to crisis era levels. Persistently high inflation readings, rapid and sustained Federal Reserve rate hikes, tightening financial conditions, elevated volatility, geopolitical turmoil, and rising financial stability risks have weighed heavily on markets. Now to put this in historical perspective, the total return for the Bloomberg U.S.
Aggregate Bond Index was negative 14.6% in the first three quarters of 2022, far worse than the negative 2.9% in 1994, the previous worst year in the history of the index. In light of the continuation of this difficult environment, Annaly experienced a negative economic return of 11.7% for the quarter. Now the Federal Reserve has signaled it is determined to continue tightening monetary policy until inflation approaches its target, a commitment that has been echoed by virtually all Fed speakers since Chair Powell's Jackson Hole speech at the end of August. This has caused a meaningful repricing of the rate path, with markets currently expecting the hiking cycle to end at a Fed funds rate of nearly 5% compared to expectations of just 3.5% at the end of June.
It's led to a sharp sell-off in interest rates and exceptionally high levels of volatility. A consequence of volatility has been extremely weak investor demand for fixed income products, particularly for Agency MBS. In fact, the third quarter represents only the third time in the past 10 years in which banks and mutual funds, two critical private sector holders of mortgage securities and loans, have reduced their Agency MBS holdings simultaneously. In light of the sharp sell-off in rates and widening in MBS spreads, the Freddie Mac primary mortgage rate rose to 6.94% as of last Thursday, more than doubling in 2022 and contributing to the abrupt slowdown in housing market activity. Home price appreciation very likely peaked for the cycle and has begun to reverse course in many parts of the country.
Given the mortgage affordability shock from high home prices and rapidly rising rates, we now expect the housing market to correct, potentially erasing the entire appreciation seen this year by early to mid-2023. Now although prices could fall meaningfully from their recent highs, homeowners have built up substantial equity cushions. Lending standards have been conservative. Given low rates on existing mortgages, homeowners are unlikely to default unless labor markets weaken considerably from here. Despite volatility in interest rate and mortgage markets, funding conditions continue to be healthy as agency MBS repo, residential credit, and MSR facilities remain readily available. Our financing rates have risen certainly, but are commensurate with other benchmark short-term interest rates.
While high volatility could drive an increase in repo haircuts, we have seen limited evidence of this thus far. The favorable financing conditions are driven by the high balances of investor cash and short-term interest rate products, best seen by the elevated bank reserve balances and reverse repo participation at the Federal Reserve. Notwithstanding Fed portfolio runoff reaching its steady state run rate of up to $95 billion per month, financing conditions should maintain support as cash remains ample. Now shifting to our portfolio, our focus is on prudently managing our liquidity, leverage, and risk profile in the current environment. We continue to position ourselves defensively given sustained volatility and have strong liquidity with more than $6 billion in unencumbered assets, including $4.3 billion in cash and Agency MBS, which represents over 50% of our common equity as of quarter end.
During the quarter, we maintained our economic leverage at 6.5 turns until mid-September, when the sharp market sell off over the last two weeks of the quarter brought our leverage up roughly half a turn to end the quarter at 7.1 turns. While we're comfortable with our current portfolio positioning, we expect our leverage to trend modestly lower over the longer term, reflective of our target capital allocation. With respect to portfolio mix, we modestly grew each of the three strategies with our total assets increasing to $86.2 billion as we selectively deployed capital from common equity issuance on the quarter. While the majority of new capital was committed to agency, our capital allocation to the sector decreased four percentage points to 67% as the agency portfolio absorbed the vast majority of the increase in leverage to end the quarter.
Turning to Residential Credit, in light of deteriorating housing market fundamentals, portfolio growth was focused on opportunistic additions of securities that are less susceptible to home price declines. Though we believe our home loan portfolio is well positioned to withstand further weakness in the housing sector, we have tightened our already stringent credit standards, and we expect this pace of securitizations to moderate in the near term. Nevertheless, we remain the largest non-bank issuer of Prime, Jumbo, and expanded credit MBS this quarter. This has largely been a result of our whole loan correspondent channel, which recently achieved over $2 billion in aggregated loans since inception in April 2021. Now with respect to our Mortgage Servicing Rights business, we have now fully scaled our platform, having more than tripled our portfolio size year-over-year.
The MSR portfolio benefits from stable cash flows in the low prepayment environment and helps to hedge the risks of a further slowdown in housing activity. Although we were the second largest purchaser of MSR in 2022 as of the end of the quarter, we expect to be measured with respect to future growth, considerate of the sector's relative attractiveness and our risk parameters. Now overall, we anticipate market challenges will persist over the near term and will maintain our defensive posture until volatility subsides. While spreads across our investment strategies are historically attractive, again, we're focused on preserving liquidity and optionality against additional market turbulence. When the outlook improves, we're well positioned to take advantage of opportunities across our three businesses. Now lastly, before handing it off to Ilker, I wanted to take a moment to provide some perspective on where we sit today.
We understand that 2022 has been an immensely challenging period in financial markets. We recently marked 25 years as a public company, and I was reminded of Annaly's resilience throughout numerous volatile market events such as Long-Term Capital in 1998, the 2008 financial crisis, the taper tantrum, and most recently, the financial market dislocation at the onset of COVID. Annaly has proven our ability to successfully navigate through these episodes of market turbulence, and we're confident that our business model will emerge from this current period stronger than ever. Now with that, Ilker will provide a more detailed overview of our portfolio activity for the quarter and outlook for each business.
Thank you, David. As you discussed, after a brief respite in the first half of the quarter, interest rate volatility resumed at much higher. Risk sentiment turned negative, and agency MBS sharply underperformed interest rate hedges, with spreads widening 25-30 basis points. Meanwhile, non-agency spreads also saw considerable volatility throughout the quarter but ended Q3 roughly unchanged, and MSR valuations remained relatively stable. Starting with agency portfolio activity, our holdings grew by roughly $3 billion in market value as we patiently deployed the equity raise during the quarter, purchasing meaningfully fewer assets than implied by constant leverage on new capital. We continued to rotate the portfolio up in coupon, significantly reducing our holdings of threes and below, while adding to our positions in four-and-a-halfs and fives, which benefit from lower sensitivity to spread movements and better carry.
Our purchases were predominantly in pools, and we reduced our TBA holdings by $3.5 billion. During the quarter, specified pools outperformed TBA as investors gravitated toward the better convex of specified collateral given the elevated volatility. Additionally, with TBA roll softening, pools provide incremental carry across nearly all coupons. Lastly, with the mortgage universe firmly out of the money from a refi perspective, seasoned cash flows are in strong demand. The embedded HPA should provide extension protection benefiting our portfolio, which is on average over three years seasoned. In terms of prepays, our portfolio paid 9.8 CPR in Q3, a slowdown from 14.9 CPR in the prior quarter, primarily driven by higher rates. We expect the slow prepay environment to persist over the near term as seasonal turnover declines and cash-out refinances diminish due to elevated rates and declining HPA.
In our hedge portfolio, we maintained a defensive posture consistent with prior quarters. We added over $5.5 billion notional of primarily longer-dated swaps to match the expansion of our assets as rates continue to rise. Additionally, we added over $7 billion in treasury future stages at the front end of the curve to maintain protection as our shorter maturity swaps rolled down. Turning to our residential credit business. The economic market value of the resi portfolio ended Q3 at $5.1 billion, a modest increase over Q2. As David briefly touched on, portfolio growth was largely driven by the increase in our MPL/RPL structured securities positions, an area of the market that has very high credit enhancement and is collateralized by loans from seasoned borrowers with significant equity who are less exposed to negative HPA.
In residential whole loans, we set up $900 million of expanded credit loans in Q3 and sponsored three securitizations, generating $120 million market value of retained OBX bonds. We expect future whole loan purchases to moderate given increasing borrowing rates and seasonal factors which will likely reduce housing market transactions. With respect to our MSR business, we continue to grow our MSR holdings with the purchase of one bulk package representing roughly $150 million in market value. In light of the fragility of the housing market, it's important to note that our portfolio consists of very high credit quality, 760 FICO, 68% LTV, sub-3% coupon collateral, which has benefited from steady rise in interest rates this year.
Our MSR portfolio paid 4.3 CPR in the third quarter, providing very attractive and stable cash flows while serving as a hedge to slow turnover speeds in the deep discount MBS universe. Year to date, through the third quarter, we have grown our MSR portfolio by over $1.2 billion in market value to nearly $1.9 billion. As the market stands today, spreads across our investable asset classes look very attractive from a historical perspective. However, to reiterate David's point, our focus in this period of elevated uncertainty will be to preserve liquidity. In MSR market, we anticipate that originators will continue to monetize MSR given pressure on margins and cash requirements. We will be patient to further grow our portfolio given expectations for ongoing supply, while cognizant that MSR have been more resilient to the cheapening experience in other sectors.
In Residential Credit, we will be patient about adding further exposure given the decelerating housing market. In Agency MBS, the widening experience year to date has been particularly acute. Nominal spreads on production coupon mortgages are in excess of 150 basis points and auction-adjusted spreads are over 50 basis points. As mentioned, these are levels not seen since prior crisis episodes such as COVID and the 2008 financial crisis. However, the differences to those periods versus today are, first, repo financing remains widely available. Second, comparable assets such as corporate credit are meaningfully tighter. And third, the backdrop for Agency MBS is more attractive. With mortgage universe way below par, asset convexity is much better, and with higher rates slowing housing activity, supply should contract materially.
Lastly, the possibility of a broader economic slowdown has increased, and Agency MBS has historically outperformed comparable fixed income products during recessionary periods. Our outlook is optimistic for each of our three businesses over the medium term, but we will remain patient to grow the portfolio until we see evidence of volatility subsiding. With that, I will hand it over to Serena to discuss the financials.
Thank you, Ilker. Today, I will provide brief financial highlights for the quarter ended September 30, 2022, and discuss select quarter-to-date metrics. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. Additionally, our per share metrics are adjusted for our 1-for-4 reverse stock split effective in September 2022. Our book value per share was $19.94 for Q3, which decreased by $3.65 per share for the quarter, primarily due to higher rates, spread widening, and the continued declining valuations on our agency portfolio, along with lower credit valuations, albeit more modest declines in comparison to the agency book.
Our swap and futures positions supported book value, providing a partial offset to the agency declines mentioned above, contributing $6.93 per share to the book value during the quarter, and our MSR position added $0.09. As noted in our Q2 earnings call, while our futures book does not offset higher repo rates in the EAD, the derivatives are fully reflected in economic return. In Q3 they served their function, with futures alone having contributed 60% of the hedge benefit to our book value. After combining our book value performance with our third quarter dividend of $0.88, our quarterly economic return was -11.7%. We generated earnings available for distribution of $1.06 per share.
EAD continued to outpace our dividend, though we experienced the beginning of the moderation in EAD that we have discussed on our recent earnings calls, with EAD per share reduced by $0.16 compared to last quarter. The lower EAD for the quarter is primarily related to the continued rise in repo rates, causing repo expense to more than triple during the quarter, as well as lower expected TBA dollar roll income, which declined by approximately $0.17. EAD did benefit from our improved swaps net interest benefit on higher receive rates of $0.33 per share, reduced premium amortization ex-PAA on lower CPRs of $0.13, and continued growth in MSR-related income, increasing by $0.06 per share compared to Q2.
Given the challenges David and Ilker referenced in the current environment and the impact on EAD of the composition of our hedging portfolio noted above, all things equal, we currently expect Q4 earnings to be roughly in line with the third quarter dividend. Average yields ex-PAA were 37 basis points higher than the prior quarter at 3.24% due to lower CPRs and a meaningful decline in amortization. Additionally, the portfolio generated 198 basis points of NIM ex-PAA, down 22 basis points from Q2, driven by the reduced TBA dollar roll income and higher repo rates. Net interest spread does not include dollar roll income. Therefore, the decrease was more muted, down 6 basis points at 1.70% compared to Q2. Now turning to our financing. David provided color on our views of the robustness of the funding markets.
However, we continue to see uncertainty about the pace of future rate hikes, with most of the liquidity within the repo market continuing to trade to Fed dates or shorter. Because of this uncertainty, bilateral repo markets continue to price term markets more cautiously, resulting in wider term premiums. Access to term markets remain intact. However, we do not expect a meaningful shift in our positioning until we feel the Fed has reached the end of its hiking cycle. As a result, as we messaged in prior quarters, we continue to maintain a shorter dated book over the near term versus prior years. Though quarter-over-quarter, weighted average repo maturity was up 10 days compared to Q2 at 57 days.
Turning to our residential credit financing strategy, our discipline in accessing the securitization markets throughout the year has kept our net exposure to our unsecuritized whole loan book appropriately sized with only $805 million on the balance sheet to end the quarter. 92% of our GAAP consolidated whole loan portfolio is term funded through our residential securitizations with a weighted average financing rate of 3.05%, approximately 450 basis points below the current non-QM cost of funds. As the securitization market slowed in October and the cost of funds to access the securitization market has steadily risen, we remain well positioned with significant warehouse capacity, approximately $1.4 billion, across multiple partners with staggered renewal dates. Given our favorable positioning, we will continue to monitor the securitization market and are prepared to be opportunistic.
Shifting to MSR financing, we drew on our MSR warehouse facility during the quarter for $250 million and after quarter end executed the accordion for a total facility of $500 million. To reiterate our message from last quarter, we put this facility in place primarily for liquidity purposes and expect to maintain lower leverage on this business. Overall, the upward trend in interest rates impacted our total cost of funds for the quarter, rising by 44 basis points to 154 basis points in Q3. Meanwhile, our average repo rate for the quarter was 225 basis points compared to 81 basis points in the prior quarter.
Our activity in the securitization market also impacted funding costs, increasing the weighting of securitizations on the composition of cost of funds, along with higher effective rates previously referenced above of 3.05% compared to 2.73%, resulting in an increase of 5 basis points to cost of funds. Finally, swaps positively impacted cost of funds during the quarter, as previously mentioned, by 85 basis points, more than twice the benefit in comparison to Q2. Lastly, as David mentioned earlier, Annaly maintained an abundant liquidity profile with $6.1 billion of unencumbered assets, down modestly from the prior quarter at $6.3 billion. Much of the reduction in unencumbered assets was due to the pledging of a portion of our MSR to the previously mentioned warehouse facility and higher leverage levels on Agency MBS.
With that, we will turn it over to questions, operator.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Bose George of KBW. Please go ahead.
Hey, everyone. Good morning. Can I start just asking about mark-to-market book value so far this quarter?
Sure, Bose. Good morning. Obviously the turbulence continued into October, notwithstanding the fact that we did pick up a few percentage points this week. Nonetheless, as of last night, book was off 6%-7%, at roughly $18.60.
Okay, great. Thank you. Then, you know, your current dividend implies a net ROE of around, I guess, 17.5-ish. And is that an attainable economic return on your portfolio? Then just in your comments, you know, you noted the EAD next quarter will be more in line with the dividend. But when you think about the dividend, should we really be focusing more on the economic return, you know, versus the EAD just given your Treasury futures?
Sure, Bose. To your point, we discussed this with you last quarter actually. Economic return or economic earnings is how we think about it. Just to review, Serena's comments, as she mentioned, we do expect to earn the dividend this quarter. Earnings available for distribution is moderating. Also to Serena's point, swap income is becoming an increasing portion of that EAD as short rates are increasing. Futures do impact or benefit the economic income or economic return but don't flow through EAD. There's some non-economic factors that may bring EAD down. Nonetheless, to the point of moderation, there are real economic factors that are influencing earnings. For example, you know, as we sit here today, leverage, you know, will likely be lower.
Financing costs are going up and some swaps are rolling off. We do have to take those into consideration. With respect to the actual earnings yield, as you mentioned, we're right around 18% on quarter end book. It's above the peer set as it has been really since the onset of COVID, and it's above where we've been historically. We'll obviously take a look at that, as you know, the market evolves, and make a determination as to what the appropriate yield should be. As we've said consistently, we expect to maintain a competitive yield with the peer set, but also sustainable and in line with our historical average payout ratio. To give you a summary, we feel good about Q4.
We'll see how rates evolve over the next number of months and always look at the dividend in conjunction with our board and come up with the appropriate payout ratio.
Okay, great. Thanks a lot.
You bet, Bose.
The next question comes from Doug Harter of Credit Suisse. Please go ahead.
Thanks. Can you talk about, you know, how you're thinking about leverage balancing, you know, kind of near term volatility versus kind of the wide level of spreads and, you know, kind of what you might be looking for in order to either take up or take down leverage from here?
Sure. We did take down leverage, somewhat modestly, as we started the quarter. Where we sit today is around 6.75 turns, and we feel good about it. Agency MBS as well as other sectors we invest in is historically cheap. Also volatility is historically high. The technical factors associated with agency specifically in terms of Fed runoff and where flows are coming from have also been somewhat negative. What we're looking for in terms of, you know, how we're managing the portfolio is a decline in volatility and, money to flow into fixed income and particularly Agency MBS. We're comfortable with the current leverage level currently. It is elevated to where we've been.
At the end of the day, assets are cheap, and we do expect there to be a decline in volatility. You know, with spreads at historically wide levels, we're certainly comfortable with where we're at now.
I guess in that construct, you know, with, you know, knowing that there is volatility, I mean, why not kind of lean into that, let leverage kind of creep higher, you know, and sort of take a longer term view and absorb near term volatility?
Let's talk about the last six weeks and what we've gone through with the market, and just to frame out how we're thinking about things. You know, candidly, Doug, there has been virtually no good news over the past six weeks for fixed income investors, beginning with the Jackson Hole speech in late August, where, you know, that was probably one of the most hawkish speeches we've seen from the Fed in quite some time. Subsequent to that, we move into September. We get a strong payrolls number. Then, CPI ticks up from 5.9% to 6.3%. Again, not good news.
We go into the September Fed meeting, where the dot plots exceeded what the market was pricing with a 4 3/8 rate at the end of 2022 projected, as well as you know reinforcing that hawkish tone. We get into late September, and we have the U.K. gilt debacle, which led to a 140 basis points sell-off in gilts over the course of about five days, which is for a very developed market like the U.K., is stunning. The Bank of England intervention. We move into October with September payrolls showing very strong results, 3.5% unemployment rate, as well as 5% year-over-year wage gains.
Following that, September CPI at 6.6%, which is obviously, or core CPI, which is obviously quite high. All of this explains, I think, why we had a trough-to-peak sell-off across U.S. yields of about 120 basis points and 35 basis points wider MBS spread. We have to be respectful of all of that. Now, we're sitting here at the quarter end with $4.3 billion in cash in agency MBS unencumbered. But we feel like we wanna maintain our liquidity until we get out of this and we get some better news. We do expect things to turn. Obviously the economy. You know, we've seen signs of slowing, but remains resilient, with a strong labor market and underlying inflation, which we haven't seen turn yet.
We need to really see a turn before, you know, we would incrementally add to our portfolio. Does that help?
Very helpful. Thank you, David.
You bet.
Next question comes from Rick Shane of JP Morgan. Please go ahead.
Good morning, everyone, and thanks for taking my question. I'm very intrigued by the hedge mix on page 11, and I find it particularly interesting in the context of what we've seen for mortgage rates. We've had this incredible event, which is that between December 2021 and today, we basically reset the channel markers in terms of mortgage rates from a low to a high. Those extremes were the lowest and highest in more than 20 years. We've seen your hedge ratio shift or how your hedge composition shift fairly significantly. As we approach potentially a peak in terms of mortgage rates, how would we expect this to shift?
I'm particularly concerned about the swap ratio and adding a lot of duration there in an environment where you might actually start to see speeds pick up at some point in the future.
Sure. I'm assuming you're asking like, are we hedging too much? Are we like, putting like, too many hedges? That seems to be my understanding.
No, yes, but I think the real question is, from our point of view, not being as sophisticated at this as you are, how do you mitigate that risk of being overhedged, if rates do start to shift? You know, is that what we're seeing in terms of this mix shift on the hedge portfolio?
Sure. If you look at recently the performance of mortgages, you will see a correlation with the rates. The correlation is that as rates sell off, mortgages underperform. We expect this short-term negative correlation to persist. This is opposite of what it used to be in the long run. Usually risk off days are market rally days. We are in an environment which David really, like, very nicely described in the previous question, that we are in a very different environment that risk off environments are like market sell off environments. That explains a little bit of our high hedge ratios. I see your point and we have been looking into that. The point when we realize that correlation is turning off, we will do the appropriate actions. To reiterate, we do not take interest rate positions right now.
We are trying to fully hedge, and we are cognizant that correlation is on the other side of the system. Does that help?
It does. It actually puts language around some of the things that we're seeing we struggle to explain as well in terms of risk on, risk off as well. Thank you.
Yeah. It has been like this episode has been an environment where risk off is coming with a rate sell-off. That's why it is particularly difficult for the financial players in the system that, especially that you hear a lot on the financial news, that 60/40 portfolio and all that kind of stuff. All they are really trying to describe is that this correlation break the other way around, and that's why it is very difficult.
Got it. Okay. Thank you.
Thanks, Rick.
Once again, if you would like to ask a question, please press star then one. The next question comes from Trevor Cranston of JMP Securities. Please go ahead.
Hey, thanks. Good morning. Question on the composition of the agency portfolio. You know, you guys have obviously been moving up in coupon, as the current coupon has increased substantially over the course of the year. Can you talk about sort of how much liquidity and float there is, say like above 5% coupons today and kind of on incrementally with the current coupon where it is right now, kind of what coupons you'd be sort of looking to move into, within the agency portfolio? Thanks.
Yeah. That's a good point. The liquidity above fives, which are like 5.5% sixes are very thin. In fact, like, the movements are so fast that we have been skipping coupons. Like David and I have been doing this like over like 25 years. We have never seen like coupon skipping like this. Production coupons skip from 2.5 to 5 like in very, very short period of time, and now even fives at $96 price. There is not that much liquidity in 5.5% and above. But actually that's the wrong word to say. There is not that much flow in 5.5% and sixes above. That's why like when we say up in coupon, we usually mean fives.
We shifted most of our lower coupon exposure into fives and it's like $96 price. Especially with the concern that Rick was raising on the previous question, we really like that price point, $96-$98 price point. I think where we stand right now, that will probably be most of our focus going forward.
Yeah. Trevor, one more point about market liquidity. I think everybody's heard about some of the dislocations that have been exhibited in markets. Yes, liquidity is constrained, whether it's Treasuries or Agency MBS or across the spectrum. You know, this is largely a function of volatility, and when volatility does subside, liquidity will certainly improve. Nonetheless, you know, you have to be very gentle with your approach to managing fixed income portfolios in the current environment.
Yeah. Okay, that makes sense. One question on the MSR. You know, obviously valuations continued to move higher this quarter. Can you talk sort of theoretically, for low coupon MSR, kind of where you view the cap in terms of valuation and if there's, you know, a point somewhere soon where the duration of it could actually become positive?
Yeah, I'll start, and Ken can certainly add. You know, we are certainly in the context of that cap. If you just look at the increase in valuation on the quarter, it's only 0.1 of a multiple, and we had roughly 100 basis point increase in rates across the curve. The MSR CPR went down roughly 30%. So you're starting to see that crest here. Ken, feel free to add.
Yeah. Your point, I mean, look, the cash flows are fully extended. There's only so slow the pools can pay, but the certainty of them paying slower continues as rates rise. You know, on an option adjusted basis, it gets more favorable. The other point is when you own MSR, you manage lots of cash balances. As rates rise, the servicer, the owner of the MSR, earns more return on those cash balances. That negative duration, particularly in the front end of the curve, continues. There's always gonna be that negative duration.
Yeah. That flow effectively provides more income as short rates do rise, obviously. Another point to note in terms of the construction of our MSR, we feel very good about what we own. You know, we've achieved a lot of growth over the past year. You know, the overall MSR is 400 basis points out of the money, and the credit is quite good. With respect to how housing evolves, we think that asset is going to perform very well for us.
To add to both David and Ken, the discount MSR may not be hedging interest rate risk anymore, but it is still hedging the turnover risk in the mortgage market. Turnover risk is the biggest risk after volatility subsides in the mortgage market. We like where we stand on the discount MSR.
Okay. That's a good point. Thank you.
Thank you, Trevor.
This concludes our question and answer session. I would like to turn the conference back over to CEO, David Finkelstein, for any closing remarks.
Thank you, Andrea, and thanks everybody for joining us, this morning. Good luck over the next number of months, and we'll talk to you soon.
The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.