CYS Investments, Inc. (CYS)

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CYS Investments, Inc. (CYS)

Q1 2013 Earnings Call

April 18, 2013 9:00 a.m. ET


Richard E. Cleary – Chief Operating Officer and Assistant Secretary

Kevin E. Grant – Founder, Chief Executive Officer, President, and Chairman of the Board

Frances Spark – Chief Financial Officer and Treasurer

William Sheehan – Managing Director, Investments


Steve C. DeLaney – JMP Securities LLC

Mark Devries – Barclays

Nick Agarwal - Wells Fargo Securities

Michael R. Widner - KBW

Douglas Harter – Credit Suisse

Eugene Fox – Cardinal Capital Management

Ken Bruce – Bank of America Merrill Lynch

Arren Cyganovich - Evercore Partners

Jim Young – West Family Investments



Good morning and welcome to the CYS Investments Inc. 2013 First Quarter Earnings Conference Call. During management’s presentation, your line will be in a listen-only mode. At the conclusion of management’s remarks, there will be a question-and-answer session. I will provide you with instructions to enter the Q&A queue after management’s comments.

Management has requested that we remind you that certain information presented and certain statements made during management’s presentation with respect to future financial or business performance, strategies or expectations may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements indicate or are based on management’s beliefs, assumptions, and expectations of CYS’ future performance, taking into account information currently in the Company’s possession. Beliefs, assumptions and expectations are subject to change, risk and uncertainty as a result of possible events or factors, not all of which are known to management or within its control. If management’s underlying beliefs, assumptions, and expectations prove incorrect or change, then the Company’s performance and its business, financial condition, liquidity, and results of operations may vary materially from those expressed, anticipated, or contemplated in any of their forward-looking statements.

In any event, actual results may differ. Management invites you to refer to the forward-looking statement disclaimer contained in the company’s Annual Report on Form 10-K filed with the SEC, which provides a description of some of the factors that could have a material impact on the Company’s performance and could cause actual results to differ from those that may be expressed in forward-looking statements.

The company has asked me to note that the content of this conference call contains time-sensitive information that is accurate only as of today, Thursday, April 18, 2013. The company does not intend to and undertakes no duty to update the information to reflect future events or circumstances.

For opening remarks and introductions, I will now turn the call over to Rick Cleary, CYS’ Chief Operating Officer. Please go ahead, Mr. Cleary.

Richard Cleary

Thanks John. Good morning and welcome to CYS 2013 First Quarter Earnings Conference Call. Today’s call is being recorded and access to the recording will be available on the company’s website at beginning at 3 pm Eastern Time this afternoon.

To better understand our results, it’d be helpful to have the press release that we issued last night. As in past releases, the earnings release includes information regarding non-GAAP financial measures, including reconciliation of those measures to GAAP measures, which will be discussed on this call.

I’d now like to turn the call over to our CEO, Kevin Grant.

Kevin Grant

Thank you, Rick. Good morning and welcome to our first quarter 2013 earnings conference call. A usual joining Rick and me this morning is our CFO, Frances Spark and Bill Sheehan from our investment team. We very much look forward to your questions.

Q1 was a fascinating quarter. There is a lot I would like touch on in the macro environment but let me start by walking through the improved spread environment and how we are approaching it. Currently we see the net spread on a hedged basis to be about 120 basis points in the 15-year market but closer to 150 basis in the 30-year market. And as you read our release, you will see that we have added some 30-year securities.

The pickup available in the 30-year market widened substantially in February and we benefitted in two important ways. First, by having few 30-year mortgages going into the period we experienced only a small impact on our NAVs. And second, this cheapening provided an opportunity to allocate capital to the 30-year sector, thus taking advantage of the opportunity. We very much welcome the opportunity.

During the quarter, the 10-year treasury did a 35 basis point round trip swing, yet short rates hardly moved. This played very well into our strategy of holding predominantly 15-year mortgages and avoiding the volatility of this 30-year except when they are exceptionally cheap. Additionally, implied volatility in the options markets continued to fall making hedging cost in the cap market even cheaper. The markets are keenly tuned in to every hint from the Fed, especially anything related to the end of QE, also known as Operation [Taper].

Over the past several weeks, numerous Fed officials have noted that the Fed is studying and considering how and when to scale back their asset purchases and even the Chairman has mentioned it in hearings and public statements. There is meaningful coverage in the FOMC meeting minutes as well. This tells us that the Fed understands there are costs to QE. It also tells us that the Fed maybe sensing sustainable employment growth might be underway notwithstanding the last print, despite the substantial fiscal drag from the sequester and other systemic drags on growth in the U.S.

As I watched the MBS markets early in Q1, mortgage spreads seem to hit a wall where buyers simply said ROEs were not sufficient to make a levered equity investment. Spreads, particularly in the 30 year market bounced off that level and remain toady at better level than we have had in many, many months actually nearly a year. So for our business it appears the bond markets have tested the bounds of minimum ROE in Q1 and the markets, the 30-year market in particular, has re-priced for better ROE. This is good news.

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