Agency RMBS were accounting for 100% of the portfolio last quarter but have dropped to 94%. 6% of the portfolio is now in U.S. treasuries. Replacing the 15-year agency RMBS with 3-year U.S treasuries offered CYS higher interest income as a result of special financing. This change also gave them lower price volatility. This company runs a relatively safe portfolio. The preferred stock is currently trading at a discount to call value. My lower price targets for the preferred shares take historical prices into account.
YS Investments (CYS) was running their entire portfolio in agency securities. This puts their preferred shares at less risk compared to mortgage REITs investing in non-agency securities. Recently, the portfolio has changed some. CYS-A is getting pretty close to the buy-under line. Over the last couple of years CYS-A has regularly been undervalued by investors. To avoid sending investors to sit in an “unrealized loss”, I’ve kept my price targets for buying the preferred shares lower than the fundamentals would otherwise justify.
Source: Seeking Alpha
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