CYS Investments, Inc. (CYS)

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CYS Investments, Inc. (CYS)

Q3 2013 Earnings Call

October 17, 2013, 9:00 AM ET


Richard Cleary - Chief Operating Officer and Assistant Secretary

Kevin Grant - Chief Executive Officer, President and Chairman-Board of Directors

Frances Spark - Chief Financial Officer and Treasurer

William Shean - Managing Director


Steve DeLaney - JMP Securities

Mark DeVries - Barclays

Stephen Laws - Deutsche Bank

Dan Altscher - FBR

Joel Houck - Wells Fargo Securities

Douglas Harter - Credit Suisse

Jason Stewart - Compass Point

Arren Cyganovich - Evercore

Jim Fowler - Harvest Capital

Ken Bruce - Bank of America

Kevin Barry - Claxton


Richard Cleary

Good morning and welcome to CYS Investments' 2013 third quarter earnings conference call. I'm Rick Cleary, Chief Operating Officer of the company. During our presentation, your line will be in a listen-only mode. At the conclusion of our remarks, there will be a question-and-answer session. The operator will provide you with instructions to enter the Q&A queue after our comments.

Today's call is being recorded and access to that recording will be available on our website at, beginning at 3:00 PM Eastern Time this afternoon.

Please be reminded that certain information presented and certain statements made during this morning'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 management's 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 operation may vary materially from those expressed, anticipated or contemplated in any of their forward-looking statements.

In any event, actual results may differ. You're invited to refer to the forward-looking statement disclaimer contained in the company's Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC, which provide a description of some of the factors that could have a material effect on the company's performance and could cause actual results to differ from those that may be expressed in forward-looking statements.

Also please note that the content of this conference call contains time-sensitive information that is accurate only as of today, Thursday, October 17, 2013. The company does not intend to and undertakes no duty to update the information to reflect future events or circumstances.

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

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

Kevin Grant

Thank you, Rick, and good morning and welcome to our third quarter 2013 earnings conference call. As usual, joining Rick and me this morning is our CFO, Frances Spark; and Bill Shean from our investment team. We look forward to your questions.

During the quarter, we reduced our exposure to the more volatile 30-year and 20-year mortgage markets, while maintaining the earnings power of the business. And at quarter end, 93% of our repo borrowings were covered by hedge.

The volatility in the second quarter of 2013 continued into Q3, as we had to deal with an unending series of rational surprises from Washington. The list is long. Larry Summers was off the radar, then he was the administration's favorite, then he withdrew himself from consideration.

The Fed saw a strengthening economy at the beginning of the quarter and succeeded in getting the market to price in nearly at 100% probability of beginning to taper in September. Then they announced a full continuation of QE with only one to center. Payrolls are not actually growing as fast as they originally were reported and July payroll number was revised down sharply, and of course, we now have no fresh data due to the shutdown.

The debt ceiling process is generating a whole new set of surprises and this will continue as congress merely postponed and prolonged the fight. Our founding fathers truly created a torture chamber.

The one Washington event over the past few months that seems to have settled down at the bond market is the nomination of Janet Yellen, as next Chair of the Fed. This is the most powerful government position for business, especially for mortgage-REIT industry, which is very sensitive to Fed policy and also guidance about future policy.

Immediately following Dr. Yellen's nomination, the bond market almost instantly settled down and exhibited very small changes, as new economic data came through. In contrast, when Larry Summers was still a possibility, 15 basis point days in the bond market were the norm.

So what does the market see in Janet Yellen? Perhaps she is an uber-dove, but I really don't think so. When there is inflation, there are no doves. And someone as studious as Janet Yellen will not be ignorant to signs of genuine inflation risks.

Her reputation is that of a person, who is highly data-driven, being one of few who had the confidence to challenge Alan Greenspan on data and win. With Yellen, I think we'll get polices that are driven by the facts and the data, and this creates a Fed response function that we can all understand.

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