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CYS Investments notes high cost of hedging

It's not so much rising rates that is making things tough in mortgage REIT land (REM -0.9%), says CYS Investments (CYS +1.9%) CEO Kevin Grant, presenting at Barlcays. It's that the cost of hedging has gotten so high (presentation slides).

Forward rates imply 4% on the 10-year Treasury yield in 2014, and he questions how the economy might fare in such an environment. Don't underestimate the negative impact to the economy from the end of the refinancing boom, says Grant. He's been through a few of these cycles, and like night follows day, within weeks after somebody refinances, they go out and buy a car. It's therefore no surprise auto sales have been strong this year, but that could be about to end.

CYS has given up some of its big opening pop following the maintenance of its $0.34 per share dividend. Higher rates are again taking a toll, the 10-year Treasury yield up to 2.96%.


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