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| 8-K - FORM 8-K - CYS Investments, Inc. | d595550d8k.htm |
 Investment
Outlook - September 2013
Kevin E. Grant, CFA
Chief Executive Officer
Exhibit 99.1
Barclays Global Financial Services Conference
September 10, 2013 |
 Forward Looking
Statements 2
This presentation contains forward-looking statements, within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that are based on management’s beliefs and assumptions, current expectations, estimates and
projections. Such statements, including information relating to the Company’s
expectations for future distributions and market conditions, are not considered
historical facts and are considered forward-looking information under the federal securities laws. This information may contain words such
as “believes,” “plans,” “expects,” “intends,”
“estimates” or similar expressions.
This information is not a guarantee of the Company’s future performance and is subject to
risks, uncertainties and other important factors that could cause the Company’s
actual performance or achievements to differ materially from those expressed or implied by this forward-looking information and
include, without limitation, changes in the Company’s distribution policy, changes in the
Company’s ability to pay distributions, changes in the market value and yield of
our assets, changes in interest rates and the yield curve, net interest margin, return on equity, availability and terms of financing and
hedging and various other risks and uncertainties related to our business and the economy,
some of which are described in our filings with the SEC. Given these
uncertainties, you should not rely on forward-looking information. The Company undertakes no obligations to update any forward-looking
information, whether as a result of new information, future events or
otherwise. |
 CYS Overview
Focus on Cost
Efficiency
Target Assets
Agency Residential Mortgage Backed Securities
A Real Estate Investment Trust Formed in January 2006
Ample Financing
Sources
Financing lines with 37
lenders
Swap agreements with 18 counterparties
Dividend Policy
Self managed: highly scalable
Senior
Management
Kevin Grant, CEO, President, Chairman
Frances Spark, CFO
Company intends to distribute all or substantially all of its REIT
taxable income
3 |
 Investment
Environment: 15 Year -
Hedged vs. Unhedged
15 Year Hedged
(i)
15 Year Unhedged
(ii)
Borrow Short
Invest Long
Sept 6, 2013
15 Year Fixed Hedged with Swaps, April 2009 –
September 2013
0.00
1.00
2.00
3.00
4.00
5.00
Source: Bloomberg.
Note: Spreads calculated as: (i) 15 year CC Index = 50% 4 year
swap, and (ii) 15 year Current Coupon Index
4 |
 Investment
Environment: 30 Year -
Hedged vs. Unhedged
30 Year Hedged
30 Year Unhedged
5
30 Year Fixed Hedged with Swaps, April 2009 –
September 2013
0.75
1.25
1.75
2.25
2.75
3.25
3.75
4.25
4.75
5.25
Borrow Short
Invest Long
Sept 6, 2013
Note: Spread calculated as: (i) 30 year CC Index - 90% 5 year swap Source: Bloomberg
|
 Volatility in
the Cap/Floor Markets Hit a Low in Mid-March
30 Year MBS Cheapened Meaningfully Relative
to 15 Year MBS
Yield Curve
Creates positive carry
Very low cost of financing
Good ROE
Hedge flexibility very important
Fed still fighting deflation
30 Year MBS Priced for Operation Taper
Source: Bloomberg
6
April 2012 –
Sept 2013
January 2005 –
Sept 2013
5 Year Swap vs. 1 Month LIBOR
30 Yr MBS -
15 Yr MBS Spread
7 Yr Cap/Floor Implied Vol
October 2012 –
Sept 2013 |
 7
Source: Board of Governors of the Federal Reserve
Actual Economic Performance:
Sluggish vs. Fed Projections |
 8
Appropriate Timing
of Policy Firming
Ten Year Treasury
August 2011 –
September 2013,
and Implied Projection
•
Creates Significant Headwinds for the Economy
•
Housing Will Struggle
•
Corporate Interest Expense will rise
+25
-25
Appropriate Pace
of Policy Firming
Target Fed Funds Rate at Year End
Overview of FOMC Participants Assessments
of Appropriate Monetary Policy
Can the Economy Withstand
The Implied Path of 10 Year UST ?
•
Forward Rate Guidance is the Fed’s Most Impactful Tool
•
Appropriate Timing and Pace will drive the Yield Curve
%
Transition to a Normalized Yield Curve:
Will the Fed’s Forecast Pan Out?
Source: Federal Reserve June 2013 Forecast, Bloomberg, CYS
1
3
14
1
3.5
4.5
4
3
2.5
2
1.5
1
0.5
0 |
 Operation Taper:
Confused Messaging or Intentional Market Test?
•
Refi Activity has Rapidly Dropped
-
Gain on sale windfall may be over
•
Purchase Activity slower to react
•
Origination Volume Will Decrease
Before the Joint Economic Committee, U.S. Congress
May 22, 2013
Primary Mortgage Rate
January 2012 -
Sept 2013
"If we see continued
improvement and we have
confidence that that's going to be
sustained then we could in the
next few meetings ... take a step
down in our pace of purchases."
•
Banks Will be Pushed to Government Bonds
-
Gov’t ROE’s now better than Credit ROE’s
•
Home Affordability Now Diminished
“What is the Fed’s exit strategy,
the steps you’ll undertake and
when do you anticipate
executing this? “
Source: Thomson Reuters, Bloomberg
JEC Chair Brady
Federal Reserve Chairman Bernanke
9
3.30
3.50
3.70
3.90
4.10
4.30
4.50
4.70 |
 Fed Guidance
– Markets Expect a Change Soon
“…keep the target range for the federal funds
rate at 0 to 1/4 percent and anticipates that
exceptionally low levels for the federal funds
rate are likely to be warranted at least through
mid-2015.”
1
FOMC Meeting Minutes, September 2012 , Released October 4, 2012
“…
maintain its existing policy of reinvesting
principal payments from its holdings of agency
debt and agency mortgage-backed securities in
agency mortgage-backed securities..”
“…increase policy accommodation by
purchasing additional agency mortgage-
backed securities at a pace of $40 billion per
month.”
No Change
May Vary Pace Up/Down
No Change
10
Post Testimony
Testimony
Prior
to
May
22
1 |
 Fed Voters:
Imminent Turnover Creates Substantial Uncertainty
Duke
Yellen
Raskin
Powell
Stein
Pianalto
Evans
Bullard
George
Source: federalreserve.gov, Barclays, Macroeconomic Advisers, LLC, Bank of America
Merrill Lynch, Bloomberg, Wall Street Journal, Indiana University, Marketwatch, Thomson Reuters, Federal Reserve
Bank of Atlanta, Federal Reserve Bank of Chicago, Federal Reserve Bank of Cleveland, Maryland
Consumer Rights Coalition, Boston Globe, Businessweek, Newsweek, Washington Post, CNBC.
Fisher
Kocherlakota
Plosser
Hawkish
Dovish
Neutral
Bernanke
2013
Voters
2014
Voters
Summers
Tarullo
X = resigned, or term ending in 2014
? = role uncertain
11
Dudley
Rosengren
Dudley |
 12
Yellen (Age 66)
Summers (Age 59)
Quantitative
Easing
Believes QE is effective, indeed powerful.
Source: Macroeconomic Advisers, Barclays
Balance Sheet
Expansion Policies
Must be considered in a cost-benefit framework.
Focused on financial stability risks, has concerns regarding
costs of further expanding the Fed’s balance sheet.
Must be considered in a cost-benefit framework.
Favors more aggressive asset purchase programs than Bernanke -
and than the FOMC -
undertook.
Forward
Guidance
Links financial stability risks to rates being very low for too
long
-
i.e.any
policy
that
keeps
rates
lower
for
longer.
Less
inclined to move to more-aggressive forward rate guidance.
Prefers more aggressive forward rate guidance than the FOMC.
Labor Force
Participation
Concerned about hysteresis, but believes that there is not
much evidence of an increase in structural unemployment.
Yellen likely more inclined to delay.
Concerned about hysteresis, but inclined to believe that
cyclical unemployment may have already become
structural unemployment.
If Summers believes that there could be less slack in the
economy (than Yellen), he may be more likely to raise rates
when the unemployment rate reaches 6½%.
Thesis Developing on a Larry Summers Fed:
Significant
Questions
about
FOMC
Approach
in
2014
-
2018
(-
2022?)
In the short term, Yellen and Summers are more alike than different, and both are constrained
by current FOMC and Chairman guidance - monetary policy will remain broadly
the same. Policy
differences will arise only if the economy evolves differently from FOMC expectations.
Skeptical, and more concerned about financial stability risks of a
very long period of low rates. More cautious about increasing
the pace of asset purchases, should the economy weaken. |
 13
Summers’
Approval Process:
A
Prolonged,
Rocky
Path
Through
a
Liberal
Gauntlet
1
No Republican has expressed
support for any Obama nominee.
Many Republicans are critical of
Summers’
support
of
stimulus
spending programs and Dodd-Frank.
Democrats hold a two vote majority,
however, at least three democrats
are expected to oppose Summers.
Losing three Democrats will
preempt
Summers’
advancing
to
Senate confirmation vote without
Republican backing.
In July, over 1/3 of the Senate
Democratic caucus signed a letter
urging Obama to nominate Yellen.
Senate Banking Committee
N = 22
1
Wall Street Journal, Sept. 6, 2013
2
Huffington Post, Sept. 5, 2013
Committee Member
Status
Mike Crapo, ID (Rnkg Member)
No support expressed
Bob Corker TN
No support expressed
Tom Coburn, OK
No support expressed
Dean Heller, NV
No support expressed
Mike Johanns NE
No support expressed
Mark Kirk, IL
No support expressed
Jerry Moran, KS
No support expressed
Richard Shelby, AL
No support expressed
Patrick J. Toomey, PA
No support expressed
David Vitter, LA
No support expressed
Committee Member
Status
Tim Johnson, SD (Chairman)
Likely In Favor¹
Sherrod Brown OH
Likely Against¹
Kay Hagan, NC
Potentially Against²
Heidi Heitkamp, ND
Unknown
Joe Manchin III, WV
Unknown
Robert Menendez, NJ
Unknown
Jeff Merkley, KS
Likely Against¹
Jack Reed, RI
Unknown
Charles E. Schumer, NY
Unknown
Jon Tester, MT
Unknown
Mark R. Warner, IL
Unknown
Elizabeth Warren, MA
Likely Against¹
R: 10
D: 12 |
 Central
Banks: Decidedly
More
Accommodative
-
Focus
on
Global
Deflation
Risk
14
Note: Raghuram Rajan succeeded Duvvuri Subbarao as the 23rd Governor of the Reserve Bank of
India on September 4, 2014. Draghi
EU
Hawkish
Dovish
Neutral
Draghi
EU
Bernanke
USA
Rajan
India
Kuroda
Japan
Canada
Poloz
Kuroda
Japan
Carney
UK
Xiaochuan
China
Xiaochuan
China
Australia
Stevens
Australia
Stevens
New Zealand
Wheeler
New Zealand
Wheeler
Tombini
Brazil
Tombini
Brazil |
 Update: GSE
Reform •
Wind Down FNMA & FreddieMac over 5 Years
•
Existing Securities Become Explicit Full Faith &
Credit of US Treasury (like GNMAs)
U.S. Senators Bob Corker, R-Tenn., Mark Warner, D-Va., Mike Johanns, R-Neb., Jon
Tester, D-Mont., Dean Heller, R-Nev., Heidi Heitkamp, D-N.D., Jerry Moran, R-Kan., and
Kay Hagan, D-N.C., all members of the Senate Banking, Housing and Urban Affairs
Committee •
Creates Federal Mortgage Insurance Corp. (FMIC)
•
Credit Support comes in the form of Insurance
•
Managed by a Government Technocrat
•
No Portfolio Business
•
Obama supports principal ideas in this bill.
•
Bipartisan support on the Senate Banking
Committee
FNMAs and Freddie Macs converge on GNMA Prices
Committee Hearings and markup this Fall,
potential for 2014 adoption
•
Simpler, fungible securities
•
TBA market intact
•
New “Insurance Tranches”
traded by Institutional Investors
Impact
Corker Warner Provisions
15 |
 Economic
Recovery Below Normal Pace U.S. Regular Conventional Gas Price
$ per gal
Updated 9/3/2013
Capacity Utilization: Manufacturing
%
Updated 8/15/2013
Civilian Unemployment Rate
%
Updated 9/6/2013
CPI-U All Items, Core
% Change
-
Year
to
Year
Updated 8/15/2013
Total Nonfarm Private Payroll Employment
Updated 9/5/2013
Total Unemployed + All Marginally Attached + Total
Employed Part Time for Economic Reasons (U6)
Updated 9/6/13
Source: S&P, Federal Reserve Bank of St. Louis, Fiserv, and Macromarkets LLC / Haver
Analytics, BLS, Challenger, Gray & Christmas, US Dept. of Energy, NYMEX
16 |
 Mortgage Market
Shrinkage Likely to Continue 17
Residential Mortgage Debt Decline Driven By:
1.
2.
3.
4.
5.
6.
7.
8.
Mortgage Debt
Outstanding
2007 -2013
Source: FRB, Freddie Mac
Single Family
Mortgage Origination Volume
1992 –
2013E
1992
1997
2002
2007
2012
2.0T
1.9T
Refinance Originations
Home Purchase Originations
1,000
0
2,000
3,000
4,000
Mortgage Debt Outstanding
Growth Rate
0.00%
0.50%
1.00%
9.75
10.00
10.25
10.50
10.75
11.00
11.25
11.50
1.50%
2.00%
3.50%
4.00%
4.50%
0.50%
2.00%
1.50%
1.00%
9.50
8.75
9.00
9.25
Home prices now reset lower
Delevering Consumers/Homeowners
Psychology of lower leverage
Low volume of new and existing home sales
All-cash home purchase transactions, and higher downpayments
Scheduled principal payments
High percentage of cash-in refi’s versus cash-out refi’s.
QM Rules Restrictive |
 Economics of
Forward Purchase Source: Bloomberg, 9/6/13
18 |
 19
Portfolio Composition and Dividends
1
As of 6/30/13
Total Agency RMBS: $17,211 million
CYS Common Stock Dividends
September
2009
–
June
2013
CYS Agency RMBS Portfolio
Hybrid ARMs:
15%
15 Year Fixed:
34%
30 Year Fixed:
45%
20 Year
Fixed:
6%
1
Note: the December 2012 dividend was composed of $0.40 quarterly cash dividend, and $0.52
special cash dividend.
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
$0.80
$0.90
$1.00 |
 20
Portfolio Characteristics
CYS Agency RMBS Portfolio Characteristics*
* As of 6/30/13
Par Value
Fair Value
Weighted Average
Asset Type
(in thousands)
Cost/Par
Fair
Value/Par
MTR
(1)
Coupon
CPR
(2)
15 Year Fixed Rate
$5,582,309
$5,773,741
$104.51
$103.43
N/A
3.17%
15.2%
20 Year Fixed Rate
1,028,057
1,044,339
104.91
101.58
N/A
3.15%
7.6%
30 Year Fixed Rate
7,683,260
7,837,908
104.30
102.01
N/A
3.59%
7.8%
Hybrid ARMs
2,511,218
2,555,271
103.74
101.75
74.8
2.59%
17.4%
Total/Weighted
Average
$16,804,844
$17,211,259
$104.32
$ 102.42
3.27%
13.5%
(2) CPR, or “Constant Prepayment Rate,” is a method of expressing the prepayment
rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or
year. Specifically, the constant prepayment rate is an annualized version of the prior three
month prepayment rate. Securities with no prepayment history are excluded from this calculation.
(1) MTR, or “Months to Reset” is the number of months remaining before the fixed
rate on a hybrid ARM becomes a variable rate. At the end of the fixed period, the variable rate will be determined
by the margin and the pre-specified caps of the ARM. After the fixed period, 100% of the
hybrid ARMS in the portfolio reset annually. |
 21
(1)
Drop income is a component of our net income accounted for as net gain from investments on
our statement of operations and therefore excluded from our Core Earnings. (2)
Core earnings is defined as net income (loss) available to common shares excluding net gain
(loss) on investments, net realized gain (loss) on termination of swap and cap contracts
and unrealized appreciation (depreciation) on swap and cap contracts.
Financial Information
Three Months Ended
Income Statement Data
(in
000's)
6/30/2013
3/31/2013
Total investment income
$ 81,551
$ 73,101
Interest expense
14,047
15,031
Operating expenses
5,671
5,553
Total expenses
19,718
20,584
Net investment income
61,833
52,517
Net gain (loss) from investments
(656,295)
(78,811)
Net gain (loss) from swap and cap contracts
196,176
10,091
Net income
(loss)
(398,286)
(16,203)
Dividend on preferred shares
(3,995)
(1,453)
Net income (loss) available to common shares
($402,281)
($17,656)
Net income (loss) per common share (diluted)
($2.32)
($0.10)
Drop income per common share (diluted)
$0.19
$0.15
Core Earnings per common share (diluted)
$0.18
$0.17
Distributions per common share
$0.34
$0.32
Non-GAAP Measure/Reconciliation
(in
000's)
NET INCOME (LOSS) AVAILABLE TO COMMON SHARES
(402,281)
(17,656)
Net (gain) loss from investments
656,295
78,811
Net (gain) loss from termination of swap and cap contracts
(7,329)
(8,630)
Net unrealized (appreciation) depreciation on swap and cap contracts
(215,546)
(23,417)
Core Earnings
$31,139
$29,108
(2)
(1) |
 22
(1)
The average settled Agency RMBS is calculated by averaging the month end cost basis of settled
Agency RMBS during the period. (2)
The average total Agency RMBS is calculated by averaging the month end cost basis of Agency
RMBS during the period. (3)
The average repurchase agreements are calculated by averaging the month end repurchase
agreements balance during the period. (4)
The average Agency RMBS liabilities are calculated by averaging the month end repurchase
agreements balance plus average unsettled Agency RMBS during the period. (5)
The
average
net
assets
are
calculated
by
averagingthe
month
end
net
assets during the period.
(6)
The average common shares outstanding are calculated by averaging the daily common shares
outstanding during the period. (7)
The
leverageratio
is
calculated
by
dividing
(i)
the
Company's
repurchase
agreements
balance
plus
payable
for
securities
purchased
minus
receivable
for
securities
sold
by
(ii)
net
asset.
(8)
The average yield on settled Agency RMBS for the period is calculated by dividing interest
income from Agency RMBS by average settled Agency RMBS. (9)
The average yield on total Agency RMBS including drop income for
the period is calculated by dividing interest income from Agency RMBS
plus
drop
income
by
average
totalAgency
RMBS.
(10)
The
average
cost
of
funds
and
hedge
for
the
period
is
calculated
by
dividing
total
interest
expense,
including
net
swap
and
cap
interest
income
(expense),
by
average
repurchase
agreements.
(11)
The
adjusted
average
cost
of
funds
and
hedge
for
the
period
is
calculated
by
dividingtotal
interest
expense,
including
net
swap
and
cap
interestincome
(expense),
by
average
Agency
RMBS
liabilities.
(12)
The interest rate spread net of hedge for the period is calculated by subtracting average cost
of funds and hedge from average yield on Agency RMBS. (13)
The
interest
rate
spread
net
of
hedge
including
drop
income
for
the
period
is
calculated
by
subtracting
adjusted
average
cost
of
funds
and
hedge
from
average
total
yield
on
Agency
RMBS
including
drop
income
assets.
(14)
The operating expense ratio for the period is calculated by dividing operating expenses by
average net assets. *All percentages are annualized.
Three Months Ended
Key Balance Sheet Metrics
June 30, 2013
March 31, 2013
Average settled Agency RMBS
(1)
$15,974,500
$16,066,672
Average total Agency RMBS
(2)
$19,944,791
$20,200,479
Average repurchase agreements
(3)
$13,871,404
$14,107,740
Average Agency RMBS liabilities
(4)
$17,841,695
$18,241,547
Average net assets
(5)
$2,321,128
$2,357,333
Average common shares outstanding
(6)
174,145
174,864
Leverage ratio (at period end)
(7)
7.5:1
7.8:1
Key Performance Metrics*
Average yield on settled Agency RMBS
(8)
2.03%
1.80%
Average yield on total Agency RMBS including drop income
(9)
2.27%
1.97%
Average cost of funds and hedge
(10)
1.17%
1.05%
Adjusted average cost of funds and hedge
(11)
0.91%
0.81%
Interest rate spread net of hedge
(12)
0.86%
0.75%
Interest rate spread net of hedge including drop income
(13)
1.36%
1.16%
Operating expense ratio
(14)
0.98%
0.94%
Financial Information |
 History of
Transparent and Consistent Financial Reporting CYS uses Financial Reporting for
Investment Companies CYS Financial Reporting
–
Transparent and Best in Class
Schedule of investments
NAVs have reflected mark-to-market accounting since inception
Realized and unrealized losses taken through income statement
in period incurred
No OCI account on balance sheet
23 |
 Barclays
Global Financial Services Conference September 10, 2013
Investment Outlook -
September 2013
Kevin E. Grant, CFA
Chief Executive Officer |