Solid Cash Flows: Fed Tightening

Key Takeaways • We are in a low return environment characterized by interest rates that will spend more time in a narrower range than in recent history, large global pools of negative yielding debt, and a global economy still needing the continued support of central banks. • In the context of this view, we believe that investment returns from high quality assets with stable funding such as those in our portfolio offer a compelling opportunity for shareholders • In the near term, the following factors may be a headwind to earnings and dividend coverage: • Basis between 3-month LIBOR and short-term repo rates: repo rates remain elevated due to the Fed's pause at 2.5% on Fed Funds as well as certain technical factors which we anticipate may resolve themselves by 4Q 2019. As the portfolio is structured today, any change in the Fed's policy towards an ease in 2020 will offset the headwind to earnings • Short-term prepayment speeds that could rise due to seasonal factors and the temporary drop in mortgage rates • Refinancing incentive is a key driver of unexpected rises in prepayments. While we have structured our portfolio to minimize refinancing incentive exposure, we anticipate an increase in prepayments. A healthy level of cash-out refinancing is already factored into our prepayment expectations • We have observed that historically, flat or inverted yield curves resolve themselves within a 6-9 month period to a steeper yield curve. We believe the current environment will evolve in a manner over the intermediate term that ultimately supports higher net interest spreads. DYNEX CAPITAL INC. 6

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