Derivative Instruments and Hedging Activities (Tables)

9 Months Ended

Sep. 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 September 30, 2020 and December 31, 2019.

	September 30, 2020
	Derivative Assets				Derivative Liabilities
(in thousands)	Fair Value		Notional		Fair Value		Notional
Inverse interest-only securities	$	67,468	$	338,646	$	—	$	—
Interest rate swap agreements	—		—		—		12,394,818
Swaptions, net	10,791		6,000,000		—		—
TBAs	18,460		3,947,000		(3,551)		2,289,000
U.S. Treasury futures	1,170		866,600		—		—
Total	$	97,889	$	11,152,246	$	(3,551)	$	14,683,818

	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				Nine Months Ended
(in thousands)		September 30,				September 30,
		2020		2019		2020		2019
Interest rate risk management
TBAs	Gain on other derivative instruments	$	60,993	$	82,964	$	(29,385)	$	221,439
Short U.S. Treasuries	Gain on other derivative instruments	—		—		—		(6,801)
U.S. Treasury futures	Gain on other derivative instruments	4,448		(359)		26,956		46,089
Put and call options for TBAs	Gain on other derivative instruments	—		—		—		(7,666)
Interest rate swaps - Payers	Gain (loss) on interest rate swap, cap and swaption agreements	8,269		(172,856)		(1,151,119)		(834,426)
Interest rate swaps - Receivers	Gain (loss) on interest rate swap, cap and swaption agreements	(7,879)		211,086		904,492		664,313
Swaptions	Gain (loss) on interest rate swap, cap and swaption agreements	1,011		32,390		(49,490)		76,383
Interest rate caps	Gain (loss) on interest rate swap, cap and swaption agreements	—		—		—		(7,684)
Markit IOS total return swaps	Gain on other derivative instruments	—		(888)		(2,430)		(1,365)
Non-risk management
Inverse interest-only securities	Gain on other derivative instruments	155		4,139		13,593		19,102
Total		$	66,997	$	156,476	$	(287,383)	$	169,384

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 nine months ended September 30, 2020 and 2019:

	Three Months Ended September 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	$	361,933	$	—	$	(23,287)	$	338,646	$	350,876	$	—
Interest rate swap agreements	4,479,000		7,915,818		—		12,394,818		7,595,385		—
Swaptions, net	—		6,000,000		—		6,000,000		239,130		—
TBAs, net	3,236,000		21,358,000		(18,358,000)		6,236,000		4,760,456		82,490
U.S. Treasury futures	—		2,552,500		(1,685,900)		866,600		986,795		3,291
Total	$	8,076,933	$	37,826,318	$	(20,067,187)	$	25,836,064	$	13,932,642	$	85,781

	Three Months Ended September 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	$	436,611	$	—	$	(20,668)	$	415,943	$	427,222	$	—
Interest rate swap agreements	40,470,277		17,874,435		(16,511,217)		41,833,495		41,180,308		38,044
Interest rate cap contracts	—		—		—		—		—		—
Swaptions, net	3,875,000		1,000,000		(3,125,000)		1,750,000		2,650,815		37,365
TBAs, net	9,422,000		40,347,000		(39,906,000)		9,863,000		9,107,707		94,505
U.S. Treasury futures	1,300,000		3,567,000		(4,547,000)		320,000		657,022		26,939
Markit IOS total return swaps	45,536		—		(1,769)		43,767		46,088		—
Total	$	55,549,424	$	62,788,435	$	(64,111,654)	$	54,226,205	$	54,069,162	$	196,853

	Nine Months Ended September 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	$	—	$	(58,491)	$	338,646	$	370,379	$	—
Interest rate swap agreements	39,702,470		56,403,253		(83,710,905)		12,394,818		32,006,660		(334,502)
Swaptions, net	1,257,000		7,017,000		(2,274,000)		6,000,000		956,387		(50,700)
TBAs, net	7,427,000		41,431,000		(42,622,000)		6,236,000		3,809,515		(42,993)
U.S. Treasury futures	(380,000)		10,782,500		(9,535,900)		866,600		681,497		26,295
Markit IOS total return swaps	41,890		—		(41,890)		—		13,547		(2,077)
Total	$	48,445,497	$	115,633,753	$	(138,243,186)	$	25,836,064	$	37,837,985	$	(403,977)

	Nine Months Ended September 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	$	—	$	(60,356)	$	415,943	$	447,082	$	—
Interest rate swap agreements	29,523,605		32,373,068		(20,063,178)		41,833,495		38,402,820		41,975
Interest rate cap contracts	2,500,000		—		(2,500,000)		—		1,417,216		(8,690)
Swaptions, net	63,000		14,200,000		(12,513,000)		1,750,000		3,259,802		63,139
TBAs, net	6,484,000		119,252,000		(115,873,000)		9,863,000		8,905,264		242,102
Short U.S. Treasuries	(800,000)		—		800,000		—		(61,097)		(23,172)
U.S. Treasury futures	—		8,077,000		(7,757,000)		320,000		691,414		47,565
Put and call options for TBAs, net	(1,767,000)		—		1,767,000		—		(147,606)		(32,962)
Markit IOS total return swaps	48,265		—		(4,498)		43,767		45,964		—
Total	$	36,528,169	$	173,902,068	$	(156,204,032)	$	54,226,205	$	52,960,859	$	329,957

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(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 September 30, 2020 and December 31, 2019:

	September 30, 2020
							Net Carrying Value (4)
(in thousands)	Notional Amount (1)		Cost Basis (2)		Market Value (3)		Derivative Assets		Derivative Liabilities
Purchase contracts	$	8,789,000	$	9,196,682	$	9,210,143	$	16,768	$	(3,307)
Sale contracts	(2,553,000)		(2,700,653)		(2,699,205)		1,692		(244)
TBAs, net	$	6,236,000	$	6,496,029	$	6,510,938	$	18,460	$	(3,551)

	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)

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(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 September 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)
September 30, 2020
Swaps Maturities	Notional Amount		Weighted Average Fixed Pay Rate		Weighted Average Receive Rate		Weighted Average Maturity (Years)
2022	$	7,415,818	0.042	%	0.090	%	1.91
2023	2,281,500		0.023	%	0.090	%	2.73
2024 and Thereafter	1,497,500		0.257	%	0.090	%	6.74
Total	$	11,194,818	0.067	%	0.090	%	2.72

(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 September 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)
September 30, 2020
Swaps Maturities	Notional Amounts		Weighted Average Pay Rate		Weighted Average Fixed Receive Rate		Weighted Average Maturity (Years)
2024 and Thereafter	$	1,200,000	0.090	%	0.442	%	9.68
Total	$	1,200,000	0.090	%	0.442	%	9.68

(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 September 30, 2020 and December 31, 2019, the Company had the following outstanding interest rate swaptions that were utilized as macro-economic hedges:

	September 30, 2020
(notional and dollars in thousands)	Option						Underlying Swap
Swaption	Expiration	Cost Basis		Fair Value		Average Months to Expiration	Notional Amount		Average Pay Rate		Average Receive Rate		Average Term (Years)
Purchase contracts:
Payer	< 6 Months	$	5,780	$	6,942	3.36	$	3,000,000	1.23	%	SOFR		10.0
Receiver	< 6 Months	$	4,000	$	3,849	3.36	$	3,000,000	SOFR		0.23	%	10.0

	December 31, 2019
(notional and dollars in thousands)	Option						Underlying Swap
Swaption	Expiration	Cost		Fair Value		Average Months to Expiration	Notional Amount		Average 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