We use a variety of strategies to hedge a portion of our exposure to market risks, primarily interest rate risk and associated risks, including prepayment risk and extension risk. Our risk management strategy takes into consideration our risk / return profile for the current environment and incorporates our investment strategy, the cost of hedging transactions, and our intention to continue to qualify as a REIT. Our hedging strategies are generally not designed to protect our net asset value from spread risk.
The principal instruments that we use to hedge a portion of our exposure to interest rate, prepayment, and extension risks are interest rate swaps and interest rate swaptions. We also utilize TBA contracts, U.S. Treasury securities, and U.S. Treasury futures contracts, primarily through short sales.
As of December 31, 2018, our interest rate hedge portfolio totaled $78.5 billion and covered 94% of our repo funding, other debt and net TBA position.
| HEDGE PORTFOLIO SUMMARY
As of December 31, 2018 |
| ($ in MM,
except per share amounts) |
Notional /
Market Value
12/31/2018 |
Duration
12/31/2018  |
Net Hedge
Gains / Losses
Q4 2018 |
Net Hedge
Gains / Losses Per Share Q4 2018 |
| Interest Rate Swaps |
$51,625 |
(4.3) |
$(1,084) |
$(2.15) |
| Payer Swaptions |
3,500 |
(2.1) |
(65) |
(0.13) |
| U.S. Treasuries, Net Short |
23,398 |
(6.3) |
(611) |
(1.21) |
Total / Q4 2018  |
$78,523 |
(4.1) |
$(1,760) |
$(3.49) |
Duration is a measurement of market price sensitivity to interest rate movements and represents the estimated percentage change in the market value of our mortgage assets and our hedge portfolio caused by a parallel change in short- and long-term interest rates. The duration of our investment portfolio tends to increase when interest rates rise and decrease when interest rates fall. As of December 31, 2018, we had a net duration gap of 0.2 years.
DURATION GAP SENSITIVITY 
As of December 31, 2018 |
|
Rates
-100 bps |
Duration
12/31/2018 |
Rates
+100 bps |
| Mortgage Assets: |
|
|
|
| 30 Year MBS |
2.7 |
4.7 |
6.1 |
| 15 Year MBS |
2.6 |
3.3 |
3.8 |
| Total Mortgage Assets |
2.7 |
4.5 |
5.8 |
| Liabilities and Hedges |
(4.3) |
(4.3) |
(4.3) |
| Net Duration Gap |
(1.6) |
0.2 |
1.5 |
Changes in interest rates and changes in MBS spreads can impact the market value of our equity. The charts below outline the impact of interest rate and mortgage basis movements on our NAV.
| Interest Rate Sensitivity
As of December 31, 2018 (based on instantaneous parallel shifts in interest rates) |
| Interest Rate Shock (bps) |
Estimated Change in
Portfolio Market Value |
Estimated Change as a %
of Tangible Equity |
| -100 |
(0.7)% |
(7.3)% |
| -50 |
(0.1)% |
(1.0)% |
| +50 |
(0.3)% |
(3.1)% |
| +100 |
(0.9)% |
(9.3)% |
| mbs spread sensitivity ("basis risk")
As of December 31, 2018 |
| MBS Spread Shock (bps) |
Estimated Change in
Portfolio Market Value |
Estimated Change as a %
of Tangible Equity |
| -25 |
1.4% |
14.3% |
| -10 |
0.6% |
5.7% |
| +10 |
(0.6)% |
(5.7)% |
| +25 |
(1.4)% |
(14.3)% |
