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Derivative Instruments and Hedging Activities (Tables)

6 Months Ended

Jun. 30, 2020

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, 2020 and December 31, 2019.


	June 30, 2020
	Derivative Assets						Derivative Liabilities
(in thousands)	Fair Value		Notional		Fair Value		Notional
Inverse interest-only securities	$	72,822	$	361,933	$	—	$	—
Interest rate swap agreements	—		—		—		4,479,000



TBAs	37,705		2,036,000		(1,298)		1,200,000





Total	$	110,527	$	2,397,933	$	(1,298)	$	5,679,000


	December 31, 2019
	Derivative Assets						Derivative Liabilities
(in thousands)	Fair Value		Notional		Fair Value		Notional
Inverse interest-only securities	$	69,469	$	397,137	$	—	$	—
Interest rate swap agreements	102,268		2,725,000		—		36,977,470


Swaptions, net	7,801		1,257,000		—		—
TBAs	8,011		9,584,000		(6,711)		(2,157,000)


U.S. Treasury futures	502		380,000		—		—
Markit IOS total return swaps	—		—		(29)		41,890

Total	$	188,051	$	14,343,137	$	(6,740)	$	34,862,360

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,
		2020		2019		2020		2019
Interest rate risk management
TBAs	Gain (loss) on other derivative instruments	$	75,680	$	28,964	$	(90,378)	$	138,475
Short U.S. Treasuries	Gain (loss) on other derivative instruments	—		—		—		(6,801)
U.S. Treasury futures	Gain (loss) on other derivative instruments	(3,464)		42,721		22,508		46,448
Put and call options for TBAs	Gain (loss) on other derivative instruments	—		—		—		(7,666)

Interest rate swaps - Payers	Loss on interest rate swap, cap and swaption agreements	(122,053)		(422,602)		(1,159,388)		(661,570)
Interest rate swaps - Receivers	Loss on interest rate swap, cap and swaption agreements	12,418		289,626		912,371		453,227
Swaptions	Loss on interest rate swap, cap and swaption agreements	62,713		48,525		(50,501)		43,993
Interest rate caps	Loss on interest rate swap, cap and swaption agreements	—		(4,324)		—		(7,684)
Markit IOS total return swaps	Gain (loss) on other derivative instruments	—		103		(2,430)		(477)


Non-risk management

Inverse interest-only securities	Gain (loss) on other derivative instruments	4,390		8,876		13,438		14,963

Total		$	29,684	$	(8,111)	$	(354,380)	$	12,908

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, 2020 and 2019:


	Three Months Ended June 30, 2020
(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	$	379,239	$	—	$	(17,306)	$	361,933	$	371,585	$	—
Interest rate swap agreements	56,158,068		24,104,324		(75,783,392)		4,479,000		45,825,536		(742,555)


Swaptions, net	1,376,000		587,000		(1,963,000)		—		582,429		(4,500)
TBAs, net	1,761,000		7,582,000		(6,107,000)		3,236,000		1,717,868		(26,688)

U.S. Treasury futures	875,000		—		(875,000)		—		104,385		(7,495)


Markit IOS total return swaps	—		—		—		—		—		—

Total	$	60,549,307	$	32,273,324	$	(84,745,698)	$	8,076,933	$	48,601,803	$	(781,238)


	Three Months Ended June 30, 2019
(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	$	456,433	$	—	$	(19,822)	$	436,611	$	447,550	$	—
Interest rate swap agreements	38,396,277		3,904,000		(1,830,000)		40,470,277		38,903,453		14,114
Interest rate cap contracts	2,500,000		—		(2,500,000)		—		1,779,121		(8,690)

Swaptions, net	5,900,000		7,300,000		(9,325,000)		3,875,000		5,959,615		50,089
TBAs, net	10,168,000		36,172,000		(36,918,000)		9,422,000		8,790,560		76,683



U.S. Treasury futures	1,310,000		3,200,000		(3,210,000)		1,300,000		1,267,692		20,626
Markit IOS total return swaps	47,073		—		(1,537)		45,536		46,088		—

Total	$	58,777,783	$	50,576,000	$	(53,804,359)	$	55,549,424	$	57,194,079	$	152,822


	Six Months Ended June 30, 2020
(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	$	397,137	$	—	$	(35,204)	$	361,933	$	380,238	$	—
Interest rate swap agreements	39,702,470		48,487,435		(83,710,905)		4,479,000		44,346,426		(334,502)


Swaptions, net	1,257,000		1,017,000		(2,274,000)		—		1,318,956		(50,700)
TBAs, net	7,427,000		20,073,000		(24,264,000)		3,236,000		3,328,819		(125,483)

U.S. Treasury futures	(380,000)		8,230,000		(7,850,000)		—		527,170		23,004


Markit IOS total return swaps	41,890		—		(41,890)		—		20,394		(2,077)

Total	$	48,445,497	$	77,807,435	$	(118,175,999)	$	8,076,933	$	49,922,003	$	(489,758)


	Six Months Ended June 30, 2019
(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	$	476,299	$	—	$	(39,688)	$	436,611	$	457,177	$	—
Interest rate swap agreements	29,523,605		14,498,633		(3,551,961)		40,470,277		36,991,058		3,931
Interest rate cap contracts	2,500,000		—		(2,500,000)		—		2,137,569		(8,690)

Swaptions, net	63,000		13,200,000		(9,388,000)		3,875,000		3,569,343		25,774
TBAs, net	6,484,000		78,905,000		(75,967,000)		9,422,000		8,802,365		147,597
Short U.S. Treasuries	(800,000)		—		800,000		—		(14,365)		(23,172)
U.S. Treasury futures	—		4,510,000		(3,210,000)		1,300,000		708,895		20,626
Put and call options for TBAs, net	(1,767,000)		—		1,767,000		—		(222,633)		(32,962)

Markit IOS total return swaps	48,265		—		(2,729)		45,536		46,768		—

Total	$	36,528,169	$	111,113,633	$	(92,092,378)	$	55,549,424	$	52,476,177	$	133,104

____________________

(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, 2020 and December 31, 2019:


	June 30, 2020
							Net Carrying Value ⁽⁴⁾
(in thousands)	Notional Amount ⁽¹⁾		Cost Basis ⁽²⁾		Market Value ⁽³⁾		Derivative Assets		Derivative Liabilities
Purchase contracts	$	5,539,000	$	5,836,137	$	5,866,185	$	31,346	$	(1,298)
Sale contracts	(2,303,000)		(2,433,663)		(2,427,304)		6,359		—
TBAs, net	$	3,236,000	$	3,402,474	$	3,438,881	$	37,705	$	(1,298)


	December 31, 2019
							Net Carrying Value ⁽⁴⁾
(in thousands)	Notional Amount ⁽¹⁾		Cost Basis ⁽²⁾		Market Value ⁽³⁾		Derivative Assets		Derivative Liabilities
Purchase contracts	$	10,223,000	$	10,557,745	$	10,565,556	$	8,011	$	(200)
Sale contracts	(2,796,000)		(2,902,858)		(2,909,369)		—		(6,511)
TBAs, net	$	7,427,000	$	7,654,887	$	7,656,187	$	8,011	$	(6,711)

___________________

(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 Interest Rate Swap Payers

As of June 30, 2020 and December 31, 2019, 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 (LIBOR or the OIS rate):


(notional in thousands)
June 30, 2020
Swaps Maturities	Notional Amount		Weighted Average Fixed Pay Rate		Weighted Average Receive Rate		Weighted Average Maturity (Years)



2023	$	2,281,500	0.023	%	0.080	%	2.98
2024 and Thereafter	1,497,500		0.257	%	0.080	%	6.99
Total	$	3,779,000	0.116	%	0.080	%	4.57


(notional in thousands)
December 31, 2019
Swaps Maturities	Notional Amount		Weighted Average Fixed Pay Rate		Weighted Average Receive Rate		Weighted Average Maturity (Years)
2020	$	3,640,000	1.806	%	1.937	%	0.83
2021	15,740,977		1.681	%	1.910	%	1.47
2022	2,578,640		1.911	%	1.901	%	2.74
2023	215,000		3.057	%	1.910	%	3.90
2024 and Thereafter	8,739,092		2.224	%	1.935	%	7.20
Total	$	30,913,709	1.878	%	1.921	%	3.14

Schedule of Interest Rate Swap Receivers

Additionally, as of June 30, 2020 and December 31, 2019, 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 (LIBOR or the OIS rate):


(notional in thousands)
June 30, 2020
Swaps Maturities	Notional Amounts		Weighted Average Pay Rate		Weighted Average Fixed Receive Rate		Weighted Average Maturity (Years)




2024 and Thereafter	$	700,000	0.080	%	0.419	%	9.76
Total	$	700,000	0.080	%	0.419	%	9.76


(notional in thousands)
December 31, 2019
Swaps Maturities	Notional Amounts		Weighted Average Pay Rate		Weighted Average Fixed Receive Rate		Weighted Average Maturity (Years)
2020	$	250,000	1.953	%	2.258	%	0.06
2021	915,000		1.894	%	2.516	%	1.10
2022	—		—	%	—	%	0.00
2023	—		—	%	—	%	0.00
2024 and Thereafter	7,623,761		1.937	%	2.232	%	8.64
Total	$	8,788,761	1.933	%	2.262	%	7.61

Schedule of Interest Rate Swaptions

As of December 31, 2019, the Company had the following outstanding interest rate swaptions that were utilized as macro-economic hedges:


	December 31, 2019
(notional and dollars in thousands)	Option												Underlying Swap
Swaption	Expiration	Cost		Fair Value		Average Months to Expiration	Notional Amount		Average Fixed Pay Rate		Average Receive Rate		Average Term (Years)
Purchase contracts:
Payer	< 6 Months	$	24,700	$	16,095	3.20	$	7,525,000	2.27	%	3M Libor		10.0



Receiver	< 6 Months	$	4,100	$	342	1.10	$	500,000	3M Libor		1.55	%	10.0



Sale contracts:




Receiver	< 6 Months	$	(20,800)	$	(8,636)	3.24	$	(6,768,000)	3M Libor		1.28	%	10.0

Schedule of Total Return Swaps

As of December 31, 2019, the Company had the following total return swap agreements in place:


(notional and dollars in thousands)
December 31, 2019
Maturity Date	Current Notional Amount		Fair Value		Cost Basis		Unrealized Gain (Loss)
January 12, 2043	$	(18,625)	$	5	$	(30)	$	35
January 12, 2044	(23,265)		(34)		(29)		(5)

Total	$	(41,890)	$	(29)	$	(59)	$	30