Investment Strategy

Investment Strategy

CYS is a specialty finance company created with the objective of achieving consistent risk adjusted investment income.

We invest in Agency RMBS collateralized by fixed rate single-family residential mortgage loans (primarily 15 and 30 years), adjustable-rate mortgages ("ARMs"), which have coupon rates that reset monthly, or Hybrid ARMs, which have a coupon rate that is fixed for an initial period (typically three, five, seven or ten years) and thereafter reset at regular intervals. In addition, our investment guidelines permit investments in collateralized mortgage obligations issued by a government agency or government-sponsored entity that are collateralized by Agency RMBS ("CMOs"), and credit risk transfer securities, such as Structured Agency Credit Risk (“STACR”) debt securities issued by Freddie Mac, Connecticut Avenue Securities ("CAS") issued by Fannie Mae, or similar securities issued or sponsored by a U.S. government-sponsored entity ("GSE") where their cash flows track the credit risk performance of a notional reference pool of mortgage loans. We had no investments in CMOs, STACRs, CAS, or other similar securities as of December 31, 2017 and 2016. In addition, we invest in debt securities issued by the United States Department of the Treasury (the "U.S. Treasury") or a government-sponsored entity that are not backed by collateral but, in the case of government agencies, are backed by the full faith and credit of the U.S. government ("U.S. Treasuries"), and, in the case of government-sponsored entities, are backed by the integrity and creditworthiness of the issuer ("U.S. Agency Debentures").

We make investment decisions based on various factors, including, but not limited to, relative value, expected cash flow yield, supply and demand, costs of financing and hedging, liquidity, expected future interest rate volatility and the overall shape of the U.S. Treasury and interest rate swap yield curves. We do not attribute any particular quantitative significance to any of these factors, and the weight given to these factors varies depending on market conditions and economic trends. We believe that this strategy enables us to pay dividends and manage our book value throughout changing interest rate and credit cycles, and provide attractive long-term returns to investors.

Our investment strategy is designed to:

  • maintain an investment portfolio consisting primarily of Agency RMBS that generates risk-adjusted investment income;
  • manage financing, interest and prepayment rate risks;
  • capitalize on discrepancies in the relative valuations in the Agency RMBS market;
  • manage cash flow to provide for regular quarterly distributions to stockholders;
  • manage credit risk;
  • manage the impact that changing interest rates have on our net income and book value, or stockholders' equity;
  • invest opportunistically in assets within our investment guidelines;
  • maintain our qualification as a REIT; and
  • exempt us from the registration requirements of the Investment Company Act.

Our income is generated primarily from the difference between the interest income we earn on our investment portfolio and the cost of our borrowings and hedging activities, which difference is commonly referred to as net spread. We believe the most prudent approach to generating a positive net spread is to manage our liabilities to mitigate the interest rate risks of our investments. Generally, we seek to employ short-term financing for our Agency RMBS portfolio, and we utilize various hedging instruments, such as interest rate swaps, swaptions and caps to hedge the interest rate risk associated with the short-term financing of our portfolio. In the future, we may employ longer-term financing of our portfolio, and use other hedging techniques from time to time, including interest rate floors, collars and Eurodollar and U.S. Treasury futures, to protect against adverse interest rate movements.

Since our investments vary by interest rate, prepayment speed and maturity, the leverage we employ to fund our asset purchases cannot be precisely matched to the terms or performance of our assets. Based on our experience, because our assets are not match-funded, changes in interest rates may impact our net income and the market value of our assets. Our approach to managing our investment portfolio is to take a longer term view of assets and liabilities, such that our net income and mark-to-market valuations at the end of a financial reporting period will not significantly influence our strategy of maximizing cash distributions to stockholders and achieving capital appreciation over the long-term.