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CYS Investments: An important mid-sized agency mortgage REIT


Nov. 20 2020, Updated 3:51 p.m. ET

CYS Investments is a mid-sized agency mortgage REIT

CYS Investments (CYS) is a diversified agency mortgage REIT that invests all across the agency mortgage-backed security (or MBS) space. Mortgage-backed securities are pools of similar mortgages packaged into a security. This increases the liquidity of individual mortgages, which makes them more attractive to investors and has the additional benefit of lowering rates to the borrower. You can see how a pool is broken down into different tranches below.

CYS invests in two basic types of MBS:

  1. Agency pass-through securities, which are garden-variety To-Be-Announced mortgages
  2. Seasoned agency MBS

CYS also invests in collateralized mortgage obligations, which are bonds backed by MBS that offer the investor specific exposure to prepayments, credit, et cetera. As a REIT, CYS must pay out 90% of its earnings as dividends or else it’s subject to corporate taxes.

CYS Investments is a major purchaser of MBS

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Mortgage REITs are some of the biggest institutional purchasers of mortgage-backed securities. As such, they’re some of the biggest ultimate lenders in the mortgage market. Pension funds, REITs, foreign investors, and the Fed are the biggest buyers of mortgage-backed securities. Quantitative easing disrupted that a bit, with the Fed being the biggest purchaser by far.

To put the Fed’s buying in perspective, Annaly Capital—the biggest mortgage REIT in the U.S.—currently has about $87 billion in assets. At its peak, the Fed was purchasing almost half of Annaly’s balance sheet (about $40 billion) of agency MBS a month.

As the Fed exits QE, REITs are returning to their role as large providers of mortgage financing in the U.S.

CYS Investments versus its peers

CYS purchases only agency mortgage-backed securities. This means it buys only government-guaranteed (or government-sponsored) securities—those issued by Fannie Mae, Freddie Mac, or Ginnie Mae. So the company takes no credit risk. All of its risk is interest rate risk.

CYS mainly invests in fixed-rate mortgages. This means the best comps are American Capital Agency (AGNC) and Annaly Capital (NLY). Other agency REITs, like MFA Financial (MFA) or Capstead (CMO), invest primarily in adjustable-rate securities. These REITs tend to have less interest rate risk than AGNC for similar amounts of leverage. Finally, there are non-agency REITs like Newcastle (NCT), which invest in non-agency MBS. This means they take credit risk.


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