Interest rate hedging risks at PennyMac
The bear case argued for PennyMac is that the company's approach to hedging interest rate risk on its mortgage servicing book can be inefficient and overly expensive.
The argument
While the guest is not overly concerned with PennyMac's leverage due to its cyclical nature, he expressed concern over how they manage and spend capital on interest rate hedging compared to peers who use alternative strategies.
The thesis, stress-tested
✓ What validates it
- ✓Elevated hedging expenses relative to servicing income in upcoming quarterly reports
▸ Risks discussed
- ▸A decline in interest rate volatility could lower hedging costs
- ▸Increased mortgage origination volume could offset hedging inefficiencies
Hear it yourself
"You know, my gut is this economy doesn't mind where interest rates are right now. And even if the Fed were to hike short term rates, a couple of you you know, maybe a couple quarter point changes, I'm not sure how much this economy would slow down. So if that's, you know, their response to higher energy prices and, you know, other inflationary, forces, I don't know if it's gonna be effective. So I yeah. I mean, I guess, why not hike then? Well, yeah. You can make that argument. I think Warsh is gonna take his time. That's still my sense. We've talked about this before."
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