Edgar Filing: CYS Investments, Inc.

CYS 10Q 2013 Q1

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________

FORM 10-Q

__________________________________



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 001-33740

__________________________________

CYS Investments, Inc.

(Exact name of registrant as specified in its charter)

__________________________________



Maryland	20-4072657
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

890 Winter Street, Suite 200 Waltham, Massachusetts	02451
(Address of principal executive offices)	(Zip Code)

(617) 639-0440

(Registrant’s telephone number, including area code)

__________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:



Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class	Outstanding at April 19, 2013
Common Stock ($0.01 par value)	174,609,333

Table of Contents

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Table of Contents



		Page

PART I.	Financial Information	1

Item 1.	Financial Statements	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42

Item 4.	Controls and Procedures	45

PART II.	Other Information	45

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	Mine Safety Disclosures.	45

Item 5.	Other Information	45

Item 6.	Exhibits	45

	SIGNATURES	47

Table of Contents

PART I. Financial Information

Item 1. Financial Statements

CYS INVESTMENTS, INC.

CONDENSED STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)



(In thousands, except per share numbers)	March 31, 2013		December 31, 2012*
ASSETS:
Investments in securities, at fair value (including pledged assets of $14,587,741 and $14,831,648, respectively)	$	20,301,944	$	20,861,718
Derivative assets, at fair value	135,427		124,169
Cash and cash equivalents	13,463		13,882
Receivable for securities sold and principal repayments	414,936		10,343
Interest receivable	44,817		46,558
Other assets	542		826
Total assets	20,911,129		21,057,496
LIABILITIES:
Repurchase agreements	13,760,475		13,981,307
Derivative liabilities, at fair value	58,464		98,575
Payable for securities purchased	4,657,501		4,515,501
Payable for cash received as collateral	32,471		28,910
Distribution payable	57,115		1,243
Accrued interest payable (including accrued interest on repurchase agreements of $4,164 and $11,717, respectively)	21,584		28,863
Accrued expenses and other liabilities	1,443		435
Total liabilities	18,589,053		18,654,834
Commitments and contingencies (note 6)	—		—
NET ASSETS	$	2,322,076	$	2,402,662
Net assets consist of:
Series A Cumulative Redeemable Preferred Stock, $0.01 par value, 50,000 shares authorized (3,000 shares issued and outstanding, liquidation preference of $25.00 per share or $75,000 in aggregate)	$	72,369	$	72,369
Common Stock, $0.01 par value, 500,000 shares authorized (174,600 and 174,924 shares issued and outstanding, respectively)	1,746		1,749
Additional paid in capital	2,230,457		2,237,512
Retained earnings	17,504		91,032
NET ASSETS	$	2,322,076	$	2,402,662
NET ASSET VALUE PER COMMON SHARE	$	12.87	$	13.31

__________________

* Derived from audited financial statements.

See notes to condensed financial statements.

Table of Contents

CYS INVESTMENTS, INC.

CONDENSED SCHEDULES OF INVESTMENTS

MARCH 31, 2013 (UNAUDITED)

INVESTMENTS IN SECURITIES – UNITED STATES OF AMERICA



(In thousands)	Face Amount		Fair Value
Fixed Income Securities - 874.3%^(c)
Mortgage Pass-Through Agency RMBS - 864.0%^(c)
Fannie Mae Pools - 798.4%^(c)
2.15%, due 10/1/2042 - 2/1/2043 (a)(b)	$	141,891	$	147,108
2.18%, due 11/1/2042 (a)(b)	34,171		35,462
2.24%, due 10/1/2042 (a)(b)	49,231		51,180
2.26%, due 11/1/2042 (a)(b)	43,293		45,049
2.34%, due 11/1/2042 (a)(b)	73,140		76,277
2.37%, due 1/1/2043 (a)(b)	97,379		101,808
2.39%, due 10/1/2042 (a)(b)	23,152		24,192
2.40%, due 9/1/2042 (a)(b)	38,130		39,815
2.41%, due 1/1/2043 (a)(b)	24,981		26,079
2.42%, due 7/1/2042 - 11/1/2042 (a)(b)	139,773		146,109
2.43%, due 10/1/2042 (a)(b)	180,890		189,133
2.44%, due 7/1/2042 - 5/1/2043 (a)(b)	75,451		78,561
2.45%, due 6/1/2042 - 11/1/2042 (a)(b)	139,177		145,223
2.50%, due 2/1/2028 - 5/1/2028 (a)	2,073,683		2,153,249
2.51%, due 10/1/2042 (a)(b)	141,090		147,890
2.57%, due 7/1/2042 (a)(b)	43,304		45,366
2.59%, due 8/1/2042 (a)(b)	33,515		35,109
2.61%, due 7/1/2042 (a)(b)	43,445		45,479
2.63%, due 4/1/2042 (a)(b)	35,026		36,673
2.70%, due 6/1/2042 (a)(b)	64,712		67,821
2.78%, due 1/1/2042 (a)(b)	40,273		42,735
2.79%, due 4/1/2042 (a)(b)	161,867		169,824
2.80%, due 3/1/2042 - 11/1/2042 (a)(b)	188,365		197,794
2.81%, due 2/1/2042 (a)(b)	51,526		54,098
2.83%, due 2/1/2042 (b)	30,633		32,194
2.85%, due 12/1/2041 (a)(b)	50,425		53,068
2.87%, due 1/1/2042 (a)(b)	55,579		58,501
2.89%, due 2/1/2042 (a)(b)	36,654		38,500
3.00%, due 2/1/2027 - 3/1/2028 (a)	4,875,073		5,141,453
3.00%, due 2/1/2032 - 1/1/2033 (a)	949,421		993,055
3.00%, due 12/1/2037 (a)	53,442		55,172
3.00%, due 10/1/2042 (a)	46,009		46,945
3.01%, due 12/1/2040 (a)(b)	91,970		96,455
3.04%, due 9/1/2041 (a)(b)	36,168		38,040
3.05%, due 9/1/2041 (a)(b)	33,057		34,698
3.06%, due 6/1/2042 (a)(b)	37,321		39,404
3.21%, due 9/1/2041 (a)(b)	75,547		79,589
3.24%, due 3/1/2041 (a)(b)	14,327		15,093
3.34%, due 8/1/2041 (a)(b)	25,582		27,097
3.38%, due 5/1/2041 (a)(b)	17,554		18,555
3.50%, due 12/1/2025 - 5/1/2027 (a)	884,268		938,250

Table of Contents

CYS INVESTMENTS, INC.

CONDENSED SCHEDULES OF INVESTMENTS - (Continued)

MARCH 31, 2013 (UNAUDITED)



	Face Amount		Fair Value
3.50%, due 9/1/2042 - 7/1/2043 (a)	$	5,519,853	$	5,818,948
3.61%, due 6/1/2041 (a)(b)	45,102		47,914
3.98%, due 9/1/2039 (a)(b)	11,338		12,061
4.00%, due 1/1/2026 - 6/1/2026 (a)	443,494		474,782
4.50%, due 4/1/2030 - 11/1/2030 (a)	110,501		119,726
4.50%, due 11/1/2041 (a)	238,385		257,175
Total Fannie Mae Pools	17,619,168		18,538,709
Freddie Mac Pools - 60.6%^(c)
2.19%, due 2/1/2043 (a)(b)	29,983		31,127
2.22%, due 12/1/2042 (a)(b)	49,872		51,802
2.30%, due 11/1/2042 (a)(b)	97,587		101,559
2.43%, due 6/1/2042 (a)(b)	37,720		39,455
2.46%, due 7/1/2042 (a)(b)	44,994		47,023
2.50%, due 3/1/2028 (a)	280,351		290,813
2.51%, due 9/1/2042 (a)(b)	118,750		124,453
2.54%, due 7/1/2042 (a)(b)	39,795		41,657
2.56%, due 11/1/2042 - 2/1/2043 (a)(b)	172,884		180,079
2.58%, due 2/1/2043 (a)(b)	49,212		51,126
2.59%, due 3/1/2042 (a)(b)	33,338		35,027
2.79%, due 12/1/2041 (a)(b)	39,136		41,046
3.30%, due 1/1/2041 (a)(b)	34,600		36,683
3.50%, due 6/1/2043	100,000		104,980
3.50%, due 4/1/2026 - 2/1/2027 (a)	170,320		179,790
4.50%, due 12/1/2024 - 5/1/2025 (a)	46,978		50,084
Total Freddie Mac Pools	1,345,520		1,406,704
Ginnie Mae Pools - 5.0%^(c)
3.50%, due 7/20/2040(a)(b)	97,493		103,959
4.00%, due 1/20/2040(a)(b)	12,276		13,167
Total Ginnie Mae Pools	109,769		117,126
Total Mortgage Pass-Through Agency RMBS (Cost - $19,938,746)	19,074,457		20,062,539
Agency Debentures - 5.6% (c)
1.60%, due 12/24/2020	132,305		130,777
Total Agency Debentures (Cost - $131,655)	132,305		130,777
U.S. Treasury Notes - 4.3%^(c)
0.75%, due 12/31/2017 (a)	100,000		100,133
Total U.S. Treasury Notes (Cost - $99,634)	$	100,000	$	100,133
Other investments (Cost - $7,291)^(d) - 0.4%^(c)	9,445		8,495
Total Investments in Securities (Cost - $20,177,326)	$	19,316,207	$	20,301,944

Table of Contents

CYS INVESTMENTS, INC.

CONDENSED SCHEDULES OF INVESTMENTS - (Continued)

MARCH 31, 2013 (UNAUDITED)



Interest Rate Cap Contracts - 6.9%^(c)
Expiration	Cap Rate		Notional Amount		Fair Value
12/30/2014	2.07	%	$	200,000	$	39
10/15/2015	1.43	%	300,000		407
11/8/2015	1.36	%	200,000		317
5/23/2019	2.00	%	300,000		7,613
6/1/2019	1.75	%	300,000		8,690
6/29/2019	1.50	%	300,000		9,994
7/2/2019	1.50	%	300,000		10,267
7/16/2019	1.25	%	500,000		19,073
3/26/2020	1.25	%	500,000		25,940
3/30/2020	1.25	%	700,000		35,698
7/25/2022	1.75	%	500,000		41,162
Total Interest Rate Cap Contracts (Cost, $162,768)			$	4,100,000	$	159,200



Interest Rate Swap Contracts - (3.5%)^(c)(e)
Expiration	Pay Rate		Notional Amount		Fair Value
5/26/2013(h)	1.60	%	$	100,000	$	(207	)
6/28/2013(h)	1.38	%	300,000		(790		)
7/15/2013(h)	1.37	%	300,000		(930		)
12/15/2013	1.31	%	400,000		(2,791		)
12/16/2013	1.26	%	400,000		(2,663		)
12/16/2013(h)	1.28	%	500,000		(3,350		)
12/17/2013	1.32	%	400,000		(2,810		)
7/1/2014(h)	1.72	%	100,000		(1,685		)
7/16/2014	1.73	%	250,000		(4,389		)
8/16/2014	1.35	%	200,000		(2,687		)
9/23/2014	1.31	%	500,000		(6,887		)
10/6/2014	1.17	%	240,000		(2,854		)
2/14/2015	2.15	%	500,000		(16,295		)
6/2/2016	1.94	%	300,000		(13,039		)
12/19/2016	1.43	%	250,000		(7,101		)
4/24/2017(f)(h)	1.31	%	500,000		(11,135		)
7/13/2017(h)	0.86	%	750,000		(2,138		)
9/6/2017	0.77	%	250,000		614
9/6/2017(i)	0.77	%	500,000		1,087
9/6/2017	0.77	%	250,000		667
11/29/2017(g)(i)	0.87	%	500,000		1,965
2/19/2018(h)	1.03	%	500,000		(2,266		)
2/21/2018(h)	1.02	%	500,000		(2,089		)
2/27/2018(h)	0.96	%	500,000		(464		)
Interest Rate Swap Contracts (Cost, $0)			$	8,990,000	$	(82,237	)

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LEGEND


(a)	Securities or a portion of the securities are pledged as collateral for repurchase agreements, interest rate swap contracts, or forward settling transactions.

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CYS INVESTMENTS, INC.

CONDENSED SCHEDULES OF INVESTMENTS - (Continued)

MARCH 31, 2013 (UNAUDITED)


(b)	The coupon rate shown on floating or adjustable rate securities represents the rate at March 31, 2013.


(c)	Percentage of net assets.


(d)	Comprised of investments that were individually less than 1% of net assets.


(e)	The Company’s interest rate swap contracts receive a floating rate set quarterly to three month LIBOR.


(f)	The interest rate swap effective date is April 24, 2013 and does not accrue any income or expense until that date.


(g)	The interest rate swap effective date is November 29, 2013 and does not accrue any income or expense until that date.


(h)	The fair value has been offset against derivative assets with the same counterparty in accordance with master netting arrangements. These amounts are included in Derivative assets, at fair value on the statement of assets and liabilities.


(i)	The fair value has been offset against derivative liabilities with the same counterparty in accordance with master netting arrangements. These amounts are included in Derivative liabilities, at fair value on the statement of assets and liabilities.

See notes to condensed financial statements.

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CYS INVESTMENTS, INC.

CONDENSED SCHEDULES OF INVESTMENTS - (Continued)

DECEMBER 31, 2012 (UNAUDITED)*

INVESTMENTS IN SECURITIES – UNITED STATES OF AMERICA



(In thousands)	Face Amount		Fair Value
Fixed Income Securities - 868.3%^(c)
Mortgage Pass-Through Agency RMBS - 865.9%^(c)
Fannie Mae Pools - 822.8%^(c)
2.15%, due 2/1/2043(b)	$	100,000	$	103,991
2.16%, due 10/1/2042(b)	44,800		46,452
2.17%, due 3/1/2043(b)	30,000		31,167
2.18%, due 11/1/2042(b)	34,926		36,246
2.24%, due 10/1/2042(b)	49,605		51,511
2.26%, due 11/1/2042(b)	45,372		47,149
2.34%, due 11/1/2042(b)	75,085		78,162
2.38%, due 1/1/2043(a)(b)	100,237		104,444
2.40%, due 9/1/2042 - 10/1/2042(a)(b)	63,216		65,915
2.41%, due 7/1/2042 - 9/1/2042(a)(b)	69,629		72,585
2.42%, due 11/1/2042(a)(b)	75,395		78,710
2.43%, due 2/1/2043(b)	25,000		26,174
2.44%, due 7/1/2042 - 10/1/2042(a)(b)	241,204		251,833
2.45%, due 10/1/2042 - 11/1/2042(b)	87,021		90,808
2.46%, due 6/1/2042(a)(b)	57,508		60,021
2.50%, due 2/1/2028 - 3/1/2028	1,900,000		1,985,203
2.51%, due 10/1/2042(a)(b)	146,723		153,519
2.57%, due 7/1/2042 - 2/1/2043(a)(b)	130,372		136,513
2.58%, due 8/1/2042(a)(b)	34,217		35,801
2.60%, due 2/1/2043(b)	50,000		52,406
2.62%, due 7/1/2042(a)(b)	46,138		48,256
2.63%, due 4/1/2042(a)(b)	35,609		37,264
2.70%, due 6/1/2042(a)(b)	67,729		70,933
2.79%, due 1/1/2042 - 3/1/2042(a)(b)	85,732		89,912
2.80%, due 2/1/2042 - 11/1/2042(a)(b)	349,671		366,718
2.81%, due 2/1/2042(a)(b)	55,367		58,090
2.84%, due 2/1/2042(a)(b)	32,607		34,247
2.85%, due 12/1/2041(a)(b)	53,238		55,952
2.87%, due 1/1/2042(a)(b)	59,639		63,234
2.89%, due 2/1/2042(a)(b)	40,377		42,409
3.00%, due 1/1/2041(a)(b)	29,557		31,002
3.00%, due 2/1/2027 - 12/1/2027(a)	6,794,861		7,183,772
3.00%, due 2/1/2032 - 2/1/2033(a)	967,503		1,018,411
3.00%, due 10/1/2042(a)	46,277		47,556
3.02%, due 12/1/2040(a)(b)	101,591		106,680
3.04%, due 9/1/2041(a)(b)	38,752		40,639
3.05%, due 9/1/2041(a)(b)	36,363		38,205
3.06%, due 6/1/2042(b)	37,791		40,031
3.16%, due 9/1/2041(a)(b)	31,611		33,343
3.18%, due 11/1/2041(a)(b)	27,672		29,179
3.21%, due 9/1/2041(a)(b)	84,111		88,670

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CYS INVESTMENTS, INC.

CONDENSED SCHEDULES OF INVESTMENTS - (Continued)

DECEMBER 31, 2012 (UNAUDITED)*



	Face Amount		Fair Value
3.24%, due 3/1/2041(a)(b)	$	15,547	$	16,389
3.26%, due 4/1/2041(a)(b)	38,941		40,970
3.30%, due 5/1/2041(a)(b)	31,843		33,499
3.35%, due 8/1/2041(a)(b)	27,024		28,827
3.36%, due 6/1/2041(a)(b)	81,763		86,263
3.38%, due 5/1/2041(a)(b)	17,894		18,822
3.50%, due 7/1/2021(a)	207,091		219,747
3.50%, due 12/1/2025 - 2/1/2028(a)	1,481,478		1,572,774
3.50%, due 8/1/2042 - 3/1/2043(a)	3,209,041		3,425,338
3.61%, due 6/1/2041(a)(b)	49,197		52,170
3.65%, due 7/1/2040(a)(b)	29,174		30,810
3.99%, due 9/1/2039(b)	11,717		12,432
4.00%, due 1/1/2025 - 6/1/2026(a)	613,772		657,599
4.00%, due 8/1/2042(a)	106,594		114,664
4.50%, due 2/1/2028 - 11/1/2030(a)	136,333		147,730
4.50%, due 11/1/2041(a)	256,057		277,486
Total Fannie Mae Pools	18,695,972		19,768,633
Freddie Mac Pools - 38.0%^(c)
2.22%, due 12/1/2042(b)	50,184		52,100
2.30%, due 11/1/2042(a)(b)	99,093		103,022
2.43%, due 6/1/2042(a)(b)	38,618		40,336
2.45%, due 7/1/2042(a)(b)	46,980		49,027
2.52%, due 9/1/2042(a)(b)	122,825		128,547
2.54%, due 7/1/2042(a)(b)	41,200		43,077
2.55%, due 11/1/2042(b)	54,278		56,826
2.59%, due 3/1/2042(a)(b)	35,421		37,203
2.79%, due 12/1/2041(a)(b)	42,260		44,357
3.27%, due 6/1/2041(a)(b)	32,330		33,995
3.30%, due 1/1/2041(a)(b)	35,460		37,608
3.50%, due 4/1/2026 - 2/1/2027(a)	187,349		197,014
3.63%, due 6/1/2041(a)(b)	32,394		34,105
4.50%, due 12/1/2024 - 5/1/2025(a)	52,637		56,006
Total Freddie Mac Pools	871,029		913,223
Ginnie Mae Pools - 5.1%^(c)
3.50%, due 7/20/2040(a)(b)	101,626		108,469
4.00%, due 1/20/2040(a)(b)	12,875		13,818
Total Ginnie Mae Pools	114,501		122,287
Total Mortgage Pass-Through Agency RMBS (Cost - $20,560,760)	19,681,502		20,804,143
U.S. Treasury Bills - 1.6%^(c)
0.06%, due 2/7/2013(a)(d)	38,000		37,999
Total U.S. Treasury Bills (Cost - $37,995)	$	38,000	$	37,999
Other investments (Cost - $12,855)^(e) - 0.8%^(c)	20,473		19,576
Total Investments in Securities (Cost - $20,611,610)	$	19,739,975	$	20,861,718

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CYS INVESTMENTS, INC.

CONDENSED SCHEDULES OF INVESTMENTS - (Continued)

DECEMBER 31, 2012 (UNAUDITED)*



Interest Rate Cap Contracts - 5.1%^(c)
Expiration	Cap Rate		Notional Amount		Fair Value
12/30/2014	2.07	%	$	200,000	$	38
10/15/2015	1.43	%	300,000		386
11/8/2015	1.36	%	200,000		302
5/23/2019	2.00	%	300,000		6,714
6/1/2019	1.75	%	300,000		7,553
6/29/2019	1.50	%	300,000		8,686
7/2/2019	1.50	%	300,000		9,165
7/16/2019	1.25	%	500,000		17,255
7/16/2022	1.75	%	500,000		36,010
7/25/2022	1.75	%	500,000		36,880
Total Interest Rate Cap Contracts (Cost, $134,815)			$	3,400,000	$	122,989



Interest Rate Swap Contracts - (4.1%)^(c)(f)
Expiration	Pay Rate		Notional Amount		Fair Value
5/26/2013	1.60	%	$	100,000	$	(529	)
6/28/2013	1.38	%	300,000		(1,574		)
7/15/2013	1.37	%	300,000		(1,706		)
12/15/2013	1.31	%	400,000		(3,773		)
12/16/2013	1.26	%	400,000		(3,602		)
12/16/2013	1.28	%	500,000		(4,581		)
12/17/2013	1.32	%	400,000		(3,838		)
7/1/2014	1.72	%	100,000		(2,049		)
7/16/2014	1.73	%	250,000		(5,309		)
8/16/2014	1.35	%	200,000		(3,246		)
9/23/2014	1.31	%	500,000		(8,167		)
10/6/2014	1.17	%	240,000		(3,405		)
2/14/2015	2.15	%	500,000		(18,564		)
6/2/2016	1.94	%	300,000		(14,320		)
12/19/2016	1.43	%	250,000		(7,996		)
4/24/2017(g)	1.31	%	500,000		(11,556		)
7/13/2017	0.86	%	750,000		(4,117		)
9/6/2017	0.77	%	250,000		33
9/6/2017	0.77	%	250,000		26
9/6/2017	0.77	%	500,000		(243		)
11/29/2017(h)	0.87	%	500,000		1,121
Interest Rate Swap Contracts (Cost, $0)			$	7,490,000	$	(97,395	)

__________________

LEGEND

* Derived from audited financial statements.


(a)	Securities or a portion of the securities are pledged as collateral for repurchase agreements, interest rate swap contracts or forward settling transactions.


(b)	The coupon rate shown on floating or adjustable rate securities represents the rate at December 31, 2012.


(c)	Percentage of net assets.


(d)	Zero coupon bond, rate shown represents purchase yield.


(e)	Comprised of investments that were individually less than 1% of net assets.


(f)	The Company’s interest rate swap contracts receive a floating rate set quarterly to three month LIBOR.

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CYS INVESTMENTS, INC.

CONDENSED SCHEDULES OF INVESTMENTS - (Continued)

DECEMBER 31, 2012 (UNAUDITED)*


(g)	The interest rate swap effective date is April 24, 2013 and does not accrue any income or expense until that date.


(h)	The interest rate swap effective date is November 29, 2013 and does not accrue any income or expense until that date.

See notes to condensed financial statements.

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CYS INVESTMENTS, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)



	Three Months Ended March 31,
(In thousands, except per share numbers)	2013			2012
INVESTMENT INCOME:
Interest income from Agency RMBS	$	72,101		$	64,147
Other income	1,000			1,222
Total investment income	73,101			65,369
EXPENSES:
Interest	15,031			6,853
Compensation and benefits	3,320			3,164
General, administrative and other	2,233			1,955
Total expenses	20,584			11,972
Net investment income	52,517			53,397
GAINS AND (LOSSES) FROM INVESTMENTS:
Net realized gain (loss) on investments	46,680			5,173
Net unrealized appreciation (depreciation) on investments	(125,491		)	27,977
Net gain (loss) from investments	(78,811		)	33,150
GAINS AND (LOSSES) FROM SWAP AND CAP CONTRACTS:
Net swap and cap interest income (expense)	(21,956		)	(11,506		)
Net gain (loss) on termination of swap and cap contracts	8,630			—
Net unrealized appreciation (depreciation) on swap and cap contracts	23,417			(5,923		)
Net gain (loss) from swap and cap contracts	10,091			(17,429		)
NET INCOME (LOSS)	$	(16,203	)	$	69,118
DIVIDENDS ON PREFERRED STOCK	(1,453		)	—
NET INCOME (LOSS) AVAILABLE TO COMMON SHARES	$	(17,656	)	$	69,118
NET INCOME (LOSS) PER COMMON SHARE BASIC & DILUTED	$	(0.10	)	$	0.66

See notes to condensed financial statements.

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CYS INVESTMENTS, INC.

CONDENSED STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)



(In thousands)	Three Months Ended March 31, 2013
Net income (loss):
Net investment income	$	52,517
Net realized gain (loss) on investments	46,680
Net unrealized appreciation (depreciation) on investments	(125,491		)
Net gain (loss) from swap and cap contracts	10,091
Net income (loss)	(16,203		)
Dividends on preferred stock	(1,453		)
Net income (loss) available to common shares	(17,656		)
Capital transactions:
Net proceeds (payments) from issues and repurchase of common shares	(7,829		)
Net proceeds from issuance of preferred shares	—
Distributions to common stockholders	(55,872		)
Amortization of share based compensation	771
Increase (decrease) in net assets from capital transactions	(62,930		)
Total increase (decrease) in net assets	(80,586		)
Net assets:
Beginning of period	2,402,662
End of period	$	2,322,076

See notes to condensed financial statements.

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CYS INVESTMENTS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Three Months Ended March 31,
(In thousands)	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(16,203	)	$	69,118
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Purchase of investment securities	(12,061,807		)	(4,764,173		)
Premium paid on interest rate caps	(65,260		)	—
Proceeds from disposition of investment securities	11,554,270			314,522
Proceeds from termination of interest rate caps	41,250			—
Proceeds from paydowns of investment securities	942,664			543,180
Amortization of share based compensation	771			693
Amortization of premiums and discounts on investment securities	45,837			16,910
Amortization of premiums on interest rate cap contracts	4,687			960
Net realized (gain) loss on investments	(46,680		)	(5,173		)
Net (gain) loss on termination of swap and cap contracts	(8,630		)	—
Net unrealized (appreciation) depreciation on investments	125,491			(27,977		)
Net unrealized (appreciation) depreciation on swap and cap contracts	(23,417		)	5,923
Change in assets and liabilities:
Receivable for securities sold and principal repayments	(404,593		)	(111,368		)
Interest receivable	1,741			(6,337		)
Other assets	284			285
Payable for securities purchased	142,000			3,171,681
Payable for cash received as collateral	3,561			—
Accrued interest payable	(7,279		)	(53		)
Accrued expenses and other liabilities	1,008			497
Net cash used in operating activities	229,695			(791,312		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements	35,282,869			17,917,781
Repayments of repurchase agreements	(35,503,701		)	(17,563,926		)
Net proceeds (payments) from issuance and repurchase of common shares	(7,829		)	436,592
Distributions paid	(1,453		)	—
Net cash provided by (used in) financing activities	(230,114		)	790,447
Net increase (decrease) in cash and cash equivalents	(419		)	(865		)
CASH AND CASH EQUIVALENTS - Beginning of period	13,882			11,508
CASH AND CASH EQUIVALENTS - End of period	$	13,463		$	10,643
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	41,563		$	21,037
SUPPLEMENTAL DISCLOSURES OF NONCASH FLOW INFORMATION:
Distributions declared, not yet paid	$	57,115		$	58,069

See notes to condensed financial statements.

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CYS INVESTMENTS, INC.

CONDENSED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION

CYS Investments, Inc. (the “Company”) was formed as a Maryland corporation on January 3, 2006, and commenced operations on February 10, 2006. The Company has elected to be taxed and intends to continue to qualify as a real estate investment trust (“REIT”) and is required to comply with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), with respect thereto. Since March 2008, the Company has primarily purchased residential mortgage-backed securities that are issued and the principal and interest of which are guaranteed by a federally chartered corporation (“Agency RMBS”), such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. government such as the Government National Mortgage Association (“Ginnie Mae”), or U.S. Treasuries securities. On December 10, 2012 the Company's board of directors amended and restated its investment guidelines to permit the company to invest in (i) Agency RMBS, (ii) collateralized mortgage obligations issued by a government agency or government-sponsored entity that are collateralized by Agency RMBS and (iii) debt securities issued by the United States Department of Treasury ("U.S. Treasury Securities") or a government sponsored entity that is not backed by collateral but, in the case of government agencies, is backed by the full faith and credit of the U.S. government, and, in the case of government sponsored entities, is backed by the integrity and creditworthiness of the issuer (“US Agency Debentures”). The Company’s common stock and Series A Cumulative Redeemable Preferred Stock, $25.00 liquidation preference (the "Series A Preferred Stock") trade on the New York Stock Exchange under the symbols “CYS” and "CYS PrA," respectively.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim unaudited condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The interim unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2012, included in the annual report on Form 10-K. The results for interim periods are not necessarily indicative of the results to be expected for the fiscal year.

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Clarification of the Scope of Audit and Accounting Guide Investment Companies (“ASC 946”), prior to its deferral in February 2008. Under ASC 946, the Company uses financial reporting for investment companies.

Segment Reporting

The Company operates as a single segment reporting to the Chief Executive Officer, who manages the entire investment portfolio.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those management estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash held in banks and highly liquid investments with original maturities of three months or less. Interest income earned on cash and cash equivalents is recorded in other income.

Interest Rate Swap and Cap Contracts

The Company utilizes interest rate swaps and caps to hedge the interest rate risk associated with the financing of its portfolio. Specifically, the Company seeks to hedge the exposure to potential interest rate mismatches between the interest earned on investments and the borrowing costs caused by fluctuations in short term interest rates. In a simple interest rate swap, one investor pays a floating rate of interest on a notional principal amount and receives a fixed rate of interest on the same notional principal amount for a specified period of time. Alternatively, an investor may pay a fixed rate and receive a floating rate. In a simple interest rate cap, one investor pays a premium for a notional principal amount based on a capped interest rate (the “cap rate”). If the floating interest rate (the “floating rate”) exceeds the cap rate, the investor receives a payment from the

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cap counterparty equal to the difference between the floating rate and the cap rate on the same notional principal amount for a specified period of time. Alternatively, an investor may receive a premium and pay the difference in cap rate and floating rate.

During the term of the interest rate swap or cap, the Company makes or receives periodic payments and unrealized gains or losses are recorded as a result of marking the swap and cap to their fair value. When the swap or cap is terminated, the Company records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Company’s cost basis in the contract, if any. The periodic payments, amortization of premiums on cap contracts and any realized or unrealized gains or losses are reported under gains and losses from swap and cap contracts in the statements of operations. Swaps involve a risk that interest rates will move contrary to the Company’s expectations, thereby increasing the Company’s payment obligation.

Because the Company uses financial reporting for investment companies, its investments, including its interest rate swap and cap contracts, are carried at fair value with changes in fair value included in earnings. Consequently, there would be no impact to designating interest rate swaps and caps as cash flow or fair value hedges under GAAP.

The Company's interest rate swap and cap contracts are subject to master netting arrangements. The Company is exposed to credit loss in the event of nonperformance by the counterparty to the swap or cap limited to the amount of collateral posted that exceeds the fair value of the contract. As of March 31, 2013 and December 31, 2012, the Company did not anticipate nonperformance by any counterparty. Should interest rates move unexpectedly, the Company may not achieve the anticipated benefits of the interest rate swap or cap and may realize a loss.

Investment Valuation

The Company has established a pricing committee responsible for establishing valuation policies and procedures as well as approving valuations on a monthly basis at a pricing meeting. The pricing committee is made up of individuals from the accounting team, the investment team and senior management.

Agency RMBS, Agency Debentures and U.S. Treasury securities are generally valued on the basis of valuations provided by third party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, broker quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security.

Interest rate swaps and caps are generally valued using valuations provided by broker quotations. Such broker quotations are based on the present value of fixed and projected floating rate cash flows over the term of the swap contract. Future cash flows are discounted to their present value using swap rates provided by electronic data services or by broker.

Collateralized loan obligations ("CLOs") are generally valued using valuations provided by broker quotations, as derived from such brokers’ pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and asked prices, prices or yields of securities with similar characteristics, default rates, recovery rates, prepayment rates, reinvestment rates, and information pertaining to the issuer, as well as industry and economic events.

Fair values of long-lived assets, including real estate, are primarily derived internally and are based on observed sales transactions for similar assets. For real estate, fair values are based on discounted cash flow estimates which reflect current and projected lease profiles and available industry information about capitalization rates and expected trends in rents and occupancy.

All valuations received from third party pricing services or broker quotes are non-binding. The Company does not adjust any of the prices received from third party pricing services or brokers, and all prices are reviewed by the Company. This review includes comparisons of similar market transactions, alternative third party pricing services and broker quotes, or comparisons to a pricing model. To ensure the proper fair value hierarchy, the Company reviews the third party pricing service’s methodology to understand whether observable or unobservable inputs are being used.

Agency RMBS

The Company’s investments in Agency RMBS consist of whole-pool pass-through certificates backed by fixed rate, monthly reset adjustable-rate loans (“ARMs”) and hybrid ARMs, the principal and interest of which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Hybrid ARMs have interest rates that have an initial fixed period (typically three, five, seven or ten years) and thereafter reset at regular intervals in a manner similar to ARMs.

Forward Settling Transactions

The Company may engage in forward settling transactions. The Company records forward settling transactions on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment on the settlement date for the securities purchased. Securities purchased on a forward settling basis are carried at fair value and only begin

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earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract. Among other forward settling transactions, the Company may transact in to-be-announced securities (“TBAs”). As with other forward settling transactions, a seller agrees to issue TBAs at a future date. However, the seller does not specify the particular securities to be delivered. Instead, the Company agrees to accept any security that meets specified terms such as issuer, interest rate and terms of underlying mortgages. The Company records TBAs on the trade date utilizing information associated with the specified terms of the transaction as opposed to the specific mortgages. TBAs are carried at fair value and begin earning interest on the settlement date. Losses may occur due to the fact that the actual underlying mortgages received may be less favorable than those anticipated by the Company.

As of March 31, 2013 and December 31, 2012, the Company had pledged Agency RMBS with a fair value of $4.6 million and $10.4 million, respectively, on its open forward settling transactions.

Repurchase Agreements

Repurchase agreements are borrowings that are collateralized by the Company’s Agency RMBS and are carried at their amortized cost, which approximates their fair value due to their short term nature, generally 30-90 days. The Company’s repurchase agreement counterparties are large institutional dealers in fixed income securities. Collateral is valued daily and counterparties may require additional collateral when appropriate. Counterparties have the right to sell or repledge collateral pledged for repurchase agreements.

Investment Transactions and Income

The Company records its transactions in securities on a trade date basis. Realized gains and losses on securities transactions are recorded on an identified cost basis. Interest income and expense are recorded on the accrual basis. Interest income on Agency RMBS and Agency Debentures is accrued based on outstanding principal amount of the securities and their contractual terms. Interest on CLOs is accrued at a rate determined based on estimated future cash flows and adjusted prospectively as future cash flow amounts are recast. For CLOs placed on nonaccrual status or when the Company cannot reliably estimate cash flows, the cost recovery method is used. Amortization of premium and accretion of discount are recorded using the yield to maturity method, and are included in investment income in the statements of operations. The Company does not estimate prepayments when calculating the yield to maturity. The amount of premium or discount associated with a prepayment is recorded through investment income on the statements of operations as they occur.

Reclassification and Presentation

The condensed statements of operations for the three months ended March 31, 2012 had previously provided combined disclosure of investment income - interest income which was expanded as interest income from Agency RMBS and other income in the presentation herein.

Compensation and Benefits

Included in the Company’s compensation and benefits are salaries, incentive compensation, benefits, share based compensation and the expense relating to restricted stock granted to non-employees (prior to the internalization of the Company's management, which became effective on September 1, 2011 (the "Internalization"). The Company accounts for share based compensation using the fair value based methodology prescribed by ASC 718, Share-Based Payment (“ASC 718”). Compensation cost related to restricted common stock issued is measured at its estimated fair value at the grant date and recognized as expense over the vesting period.

Income Taxes

The Company has elected to be taxed as a REIT and intends to continue to comply with provisions of the Code with respect thereto. As a REIT, the Company generally will not be subject to federal or state income tax on income that it currently distributes to its stockholders. To maintain its qualification as a REIT, the Company must distribute at least 90% of its REIT taxable income to its stockholders and meet certain other tests relating to assets and income.

Earnings Per Share (“EPS”)

Basic EPS is computed using the two class method by dividing net income (loss), after adjusting for the impact of unvested stock awards deemed to be participating securities, by the weighted average number of common shares outstanding calculated excluding unvested stock awards. Diluted EPS is computed by dividing net income (loss), after adjusting for the impact of unvested stock awards deemed to be participating securities, by the weighted average number of common shares outstanding calculated excluding unvested stock awards, giving effect to common stock options and warrants, if they are not anti-dilutive. See note 3 for EPS computations.

Recent Accounting Pronouncements

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In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (Topic 210), Balance Sheet. The update addresses implementation issues about ASU 2011-11 and applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with ASC 210-20-45 or ASC 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The guidance was effective January 1, 2013 and was applied retrospectively. This guidance does not amend the circumstances in which the Company offsets its derivative positions. As a result, the guidance does not have a material effect on the Company's financial statements.

3. EARNINGS PER SHARE

Components of the computation of basic and diluted EPS were as follows (in thousands except per share numbers):



	Three Months Ended March 31,
	2013			2012
Net income (loss)	$	(16,203	)	$	69,118
Less preferred stock dividends	(1,453		)	—
Net income (loss) available to common shares	(17,656		)	69,118
Less dividends paid:
Common shares	(55,587		)	(57,691		)
Unvested shares	(285		)	(378		)
Undistributed earnings	(73,528		)	11,049
Basic weighted average shares outstanding:
Common shares	174,134			103,952
Basic earnings per common share:
Distributed earnings	$	0.32		$	0.55
Undistributed earnings	(0.42		)	0.11
Basic earnings per common share	$	(0.10	)	$	0.66
Diluted weighted average shares outstanding:
Common shares	174,134			103,952
Net effect of dilutive warrants ⁽¹⁾	—			—
	174,134			103,952
Diluted earnings per common share:
Distributed earnings	$	0.32		$	0.55
Undistributed earnings	(0.42		)	0.11
Diluted earnings per common share	$	(0.10	)	$	0.66


(1)	For the three months ended March 31, 2013 and 2012, the Company had an aggregate of 131 stock options outstanding with a weighted average exercise price of $30.00 that were not included in the calculation of EPS, as their inclusion would have been anti-dilutive. These instruments may have a dilutive impact on future EPS.

4. INVESTMENTS IN SECURITIES AND INTEREST RATE SWAP AND CAP CONTRACTS AND OTHER ASSETS

The Company’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. ASC 820, Fair Value Measurements, classifies these inputs into the following hierarchy:

Level 1 Inputs—Quoted prices for identical instruments in active markets.

Level 2 Inputs—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs—Instruments with primarily unobservable value drivers.

Excluded from the tables below are financial instruments carried on the accompanying financial statements at cost basis, which is deemed to approximate fair value, primarily due to the short duration of these instruments, including cash and cash equivalents, receivables, payables and borrowings under repurchase arrangements with initial terms of 120 days or less. The

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fair value of these instruments is determined using level two inputs. The following tables provide a summary of the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012:



March 31, 2013	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Agency RMBS	$	—	$	20,062,539	$	—	$	20,062,539
U.S. Treasury Notes	100,133		—		—		100,133
Agency Debentures	—		130,777		—		130,777
Other Investments	—		—		8,495		8,495
Derivative assets	—		135,427		—		135,427
Total	$	100,133	$	20,328,743	$	8,495	$	20,437,371
Liabilities
Derivative liabilities	$	—	$	58,464	$	—	$	58,464



December 31, 2012	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Agency RMBS	$	—	$	20,804,143	$	—	$	20,804,143
U.S. Treasury Bills	37,999		—		—		37,999
Other Investments	—		—		19,576		19,576
Derivative assets	—		124,169		—		124,169
Total	$	37,999	$	20,928,312	$	19,576	$	20,985,887
Liabilities
Derivative liabilities	$	—	$	98,575	$	—	$	98,575

Other investments is comprised of CLOs and real estate assets. The table below presents a reconciliation of changes in other investments classified as Level 3 in the Company’s financial statements for the three months ended March 31, 2013 and 2012. A discussion of the method of fair valuing these assets is included above in “Investment Valuation.” CLOs are generally valued using valuations provided by broker quotations. The Company validates the broker quotations using internal discounted cash flow models. The significant unobservable inputs used in the fair value measurement of the Company’s CLOs are prepayment rates, probability of default, and recovery rate in the event of default. Significant changes in any of those inputs in isolation would result in a materially different fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity upon default and a directionally opposite change in the assumption used for prepayment rates. The weighted average inputs to the models as of March 31, 2013 and December 31, 2012 were:



	Constant Prepayment Rate		Default Rate		Recovery Rate		Recovery Lag
March 31, 2013	20	%	2	%	60	%	6 Months
December 31, 2012	20	%	2	%	69	%	6 Months

Fair values of real estate assets are valued based on discounted cash flow models. The significant unobservable input used in the fair value measurement is capitalization rates, which the Company estimated to be between 4% and 5% at March 31, 2013 and December 31, 2012. The Company did not own any real estate assets during the three months ended March 31, 2012.

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Level 3 Fair Value Reconciliation



(In thousands)	Three Months Ended March 31,
Other investments	2013			2012
Beginning balance level 3 assets	$	19,576		$	18,675
Cash payments recorded as a reduction of cost basis	(236		)	(1,057		)
Change in net unrealized appreciation (depreciation)	(5,518		)	3,797
Net purchases (sales)	(10,455		)	—
Net gain (loss) on sales	5,128			—
Transfers into (out of) level 3	—			—
Ending balance level 3 assets	$	8,495		$	21,415

The Agency RMBS portfolio consisted of Agency RMBS as follows:



March 31, 2013	Par Value		Fair Value		Weighted Average
Asset Type	(in thousands)				Cost/Par		Fair Value/Par		MTR⁽¹⁾		Coupon		CPR⁽²⁾
15 Year Fixed Rate	$	8,774,166	$	9,228,421	$	104.38	$	105.18	N/A		2.98	%	14.9	%
20 Year Fixed Rate	1,059,923		1,112,782		104.94		104.99		N/A		3.16	%	5.7	%
30 Year Fixed Rate	5,957,689		6,283,218		105.14		105.46		N/A		3.53	%	8.8	%
Hybrid ARMs	3,282,679		3,438,118		103.70		104.74		74.5		2.64	%	15.4	%
Total/Weighted Average	$	19,074,457	$	20,062,539	$	104.53	$	105.18	74.5	⁽³⁾	3.11	%	13.4	%



December 31, 2012	Par Value		Fair Value		Weighted Average
Asset Type	(in thousands)				Cost/Par		Fair Value/Par		MTR⁽¹⁾		Coupon		CPR⁽²⁾
10 Year Fixed Rate	$	207,091	$	219,747	$	103.60	$	106.11	N/A		3.50	%	19.4	%
15 Year Fixed Rate	11,092,374		11,717,136		104.32		105.63		N/A		3.05	%	16.1	%
20 Year Fixed Rate	1,087,835		1,148,932		104.96		105.62		N/A		3.17	%	10.1	%
30 Year Fixed Rate	3,571,692		3,817,488		105.78		106.88		N/A		3.59	%	8.9	%
Hybrid ARMs	3,722,510		3,900,840		103.54		104.79		74.3		2.71	%	19.1	%
Total/Weighted Average	$	19,681,502	$	20,804,143	$	104.47	$	105.70	74.3	⁽³⁾	3.10	%	15.8	%

__________________


⁽¹⁾	MTR, or “Months to Reset” is the number of months remaining before the fixed rate on a hybrid ARM becomes a variable rate. At the end of the fixed period, the variable rate will be determined by the margin and the pre-specified caps of the ARM. After the fixed period, 100% of the hybrid ARMS in the portfolio reset annually.


⁽²⁾	CPR, or “Constant Prepayment Rate,” is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the constant prepayment rate is an annualized version of the prior three month prepayment rate. Securities with no prepayment history are excluded from this calculation.


⁽³⁾	Weighted average months to reset of our Hybrid ARM portfolio.

As of March 31, 2013 and December 31, 2012, the Company’s Agency RMBS were purchased at a net premium to their par value with approximately $864.5 million and $879.6 million, respectively, of unamortized premium included in their cost basis. The premium purchase price is due to the average coupon interest rates on these investments being higher than prevailing market rates.

In order to mitigate its interest rate exposure, the Company enters into interest rate swap and cap contracts. The Company did not enter into any interest rate swap and cap contract transactions during the three months ended March 31, 2012. The Company had the following activity in interest rate swap and cap transactions during the three months ended March 31, 2013 (in thousands):

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Three Months Ended March 31, 2013
Trade Date	Transaction	Notional
February 2013	Opened	$	1,500,000
March 2013	Terminated	(500,000		)
March 2013	Opened	1,200,000
Net Increase		$	2,200,000

As of March 31, 2013 and December 31, 2012, the Company had pledged Agency RMBS and U.S Treasury securities with a fair value of $118.5 million and $127.6 million, respectively, as collateral on interest rate swap and cap contracts. The Company had Agency RMBS and U.S. Treasuries of $29.2 million and cash of $32.5 million pledged to it as collateral for its interest rate cap contracts as of March 31, 2013. In addition, the Company had Agency RMBS and U.S. Treasuries of $18.4 million and cash of $28.9 million pledged to it as collateral for its interest rate cap contracts as of December 31, 2012. Below is a summary of our interest rate swap and cap contracts open as of March 31, 2013 and December 31, 2012 and the net gain and loss on swap and cap contracts for the three months ended March 31, 2013 and 2012 (in thousands):



Derivatives not designated as hedging instruments under ASC 815^(a)
Interest Rate Swap Contracts	Notional Amount		Fair Value			Statement of Assets and Liabilities Location
March 31, 2013	$	4,440,000	$	(58,464	)	Derivative liabilities, at fair value
March 31, 2013	4,550,000		(23,773		)	Derivative assets, at fair value^(b)
December 31, 2012	6,490,000		(98,575		)	Derivative liabilities, at fair value
December 31, 2012	1,000,000		1,180			Derivative assets, at fair value

Interest Rate Cap Contracts	Notional Amount		Fair Value			Statement of Assets and Liabilities Location
March 31, 2013	$	4,100,000	$	159,200		Derivative assets, at fair value
December 31, 2012	3,400,000		122,989			Derivative assets, at fair value



		Amount of Gain or (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments Under ASC 815^(a)	Location of Gain or (Loss) Recognized in Income on Derivative	Three Months Ended March 31,
		2013		2012
Interest rate swap and cap contracts	Net gain (loss) from swap and cap contracts	$	10,091	$	(17,429	)

__________________


(a)	See note 2 for additional information on the Company’s purpose for entering into interest rate swaps and caps and the decision not to designate them as hedging instruments.


(b)	Netted against interest rate cap contracts on the statement of assets and liabilities in accordance with master netting agreements.

Credit Risk

At March 31, 2013 and December 31, 2012, the Company continued to have minimal exposure to credit losses on its mortgage assets by owning principally Agency RMBS. The payment of principal and interest on Agency RMBS is guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. In September 2008, both Freddie Mac and Fannie Mae were placed in the conservatorship of the United States government.

On August 5, 2011, Standard & Poor’s downgraded the U.S.’s credit rating to AA+ for the first time. Because Fannie Mae and Freddie Mac are in conservatorship of the U.S. Government, the implied credit ratings of Agency RMBS guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae were also downgraded to AA+. While this downgrade did not have a significant impact on the fair value of the Agency RMBS in the Company’s portfolio, it has increased the uncertainty regarding the credit risk of Agency RMBS.

5. BORROWINGS

The Company leverages its Agency RMBS portfolio through the use of repurchase agreements. Each of the borrowing vehicles used by the Company bears interest at floating rates based on a spread above or below the LIBOR. The fair value of borrowings under repurchase agreements approximates their carrying amount due to the short term nature of these financial instruments.

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Certain information with respect to the Company’s borrowings is summarized in the following tables. Each of the borrowings listed is contractually due in one year or less (dollars in thousands).



March 31, 2013
Outstanding repurchase agreements	$	13,760,475
Interest accrued thereon	$	4,164
Weighted average borrowing rate	0.41		%
Weighted average remaining maturity (in days)	31.7
Fair value of the collateral⁽¹⁾	$	14,464,628



December 31, 2012
Outstanding repurchase agreements	$	13,981,307
Interest accrued thereon	$	11,717
Weighted average borrowing rate	0.48		%
Weighted average remaining maturity (in days)	19.6
Fair value of the collateral⁽¹⁾	$	14,693,645

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(1)	Collateral for repurchase agreements consists of Agency RMBS, U.S. Treasuries and Agency Debentures.

At March 31, 2013 and December 31, 2012, the Company did not have any borrowings under repurchase agreements where the amount at risk exceeded 10% of net assets.

6. COMMITMENTS AND CONTINGENCIES

The Company enters into certain contracts that contain a variety of indemnifications, principally with brokers. As of March 31, 2013 and December 31, 2012, no claims have been asserted under these indemnification agreements. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2013 and December 31, 2012.

7. SHARE CAPITAL

The Company has authorized 500,000,000 shares of common stock having par value of $0.01 per share. As of March 31, 2013 and December 31, 2012, the Company had issued and outstanding 174,599,736 and 174,924,149 shares of common stock, respectively. The Company’s common stock transactions during the three months ended March 31, 2013 and 2012 are as follows (in thousands):



	Three Months Ended March 31, 2013					Three Months Ended March 31, 2012
	Shares		Amount			Shares	Amount
Shares sold in public offerings or issued as restricted stock	329		$	681		33,385	$	437,285
Shares repurchased or canceled	(653	)	(7,739		)	—	—
Net increase (decrease)	(324	)	$	(7,058	)	33,385	$	437,285

The Company has authorized 50,000,000 shares of preferred stock having a par value of $0.01 per share. As of March 31, 2013 and December 31, 2012, 3,000,000 shares of 7.75% Series A Preferred Stock ($25.00 liquidation preference) were issued and outstanding. The Series A Preferred Stock will not be redeemable before August 3, 2017, except under circumstances where it is necessary to preserve our qualification as a REIT, for federal income tax purposes and the occurrence of certain change of control. On or after August 3, 2017, the Company may, at its option, redeem any or all of the shares of the Series A Preferred Stock at $25.00 per share plus any accumulated and unpaid dividends to, but not including, the redemption date. The Series A Preferred Stock has no stated maturity and is not subject to any sinking fund or mandatory redemption.

Equity Offerings

On February 1, 2012, the Company closed a public offering of 28,750,000 shares of its common stock at a public offering price of $13.28 per share for total net proceeds of approximately $377.3 million, after the underwriting discount and commissions and expenses.

On July 16, 2012, the Company closed a public offering of 46,000,000 shares of its common stock at a public offering price of $13.70 per share for total net proceeds of approximately $622.2 million, after the underwriting discount and commissions and expenses.

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On August 3, 2012, the Company closed a public offering of 3,000,000 shares of its Series A Preferred Stock, liquidation preference of $25.00 per share, for total net proceeds of approximately $72.4 million, after the underwriting discount and commissions and expenses.

Dividend Reinvestment and Direct Stock Purchase Plan (“DSPP”)

The Company sponsors a dividend reinvestment and direct stock purchase plan through which stockholders may purchase additional shares of common stock by reinvesting some or all of the cash dividends received on shares of common stock.

Stockholders may also make optional cash purchases of shares of common stock subject to certain limitations detailed in the plan prospectus. For the three months ended March 31, 2012, the Company issued 1,486,699 shares under the plan raising approximately $19.9 million of net proceeds. For the three months ended March 31, 2013 the Company did not issue any shares under the plan. As of March 31, 2013 and December 31, 2012, there were approximately 4.1 million shares available for issuance under the plan.

Restricted Stock Awards

For the three months ended March 31, 2013 and 2012, the Company granted 329,345 and 189,034 shares of restricted stock, respectively, to certain of its directors, officers and employees.

Equity Placement Program (“EPP”)

On June 7, 2011, the Company entered into a sales agreement with JMP Securities LLC whereby the Company may, from time to time, publicly offer and sell up to 15.0 million shares of the Company’s common stock through at-the-market transactions and/or privately negotiated transactions. For the three months ended March 31, 2013, the Company did not issue any shares under the plan. For the three months ended March 31, 2012, the Company issued 2,959,732 shares under the plan raising approximately $39.7 million. As of March 31, 2013 and December 31, 2012, approximately 3.1 million shares of common stock remained available for issuance and sale under the sales agreement.

Share Repurchase Program

On November 15, 2012, the Company announced that its board of directors had authorized the repurchase of shares of the Company’s common stock having an aggregate value of up to $250 million. For the three months ended March 31, 2013, the Company repurchased 640,791 shares with a weighted average purchase price of $11.81 or approximately $7.6 million in the aggregate. The Company did not make any repurchases during 2012.

8. FINANCIAL HIGHLIGHTS

In accordance with financial reporting requirements applicable to investment companies, the Company has included below certain financial highlight information for the three months ended March 31, 2013 and 2012:

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	Per Common Share
	Three Months Ended March 31,
	2013				2012
Net asset value, beginning of period	$	13.31			$	13.02
Net income (loss):
Net investment income	0.30			^(a)	0.51			^(a)
Net gain (loss) from investments and swap and cap contracts	(0.39		)	^(a)	0.15			^(a)
Net income (loss)	(0.09		)		0.66
Dividends on preferred stock	(0.01		)	^(a)	—
Net income (loss) available to common shares	(0.10		)		0.66
Capital transactions:
Distributions to common stockholders	(0.32		)		(0.50		)
Issuance/Repurchase of common and preferred shares and amortization of share based compensation	(0.02		)	^(a)	(0.04		)	^(a)
Net decrease in net asset value from capital transactions	(0.34		)		(0.54		)
Net asset value, end of period	$	12.87			$	13.14
Net asset value total return (%)	(0.90		)%	^(b)	4.76		%	^(b)
Market value total return (%)	2.11		%	^(b)	3.41		%	^(b)
Ratios to Average Net Assets
Expenses before interest expense	0.94		%	^(c)	1.46		%	^(c)
Total expenses	3.49		%	^(c)	3.41		%	^(c)
Net investment income	8.91		%	^(c)	15.19		%	^(c)

__________________


(a)	Calculated based on average shares outstanding during the period. Average shares outstanding include vested and unvested restricted shares and differs from weighted average shares outstanding used in calculating EPS (see note 3).


(b)	Not computed on an annualized basis.


(c)	Computed on an annualized basis.

9. SUBSEQUENT EVENTS

On April 1, 2013, an aggregate of 9,597 shares of restricted common stock were granted to certain directors as a portion of their compensation for serving on the Company’s board of directors.

The CPR of the Company’s Agency RMBS portfolio was approximately 12.1% for the month of April 2013.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this Quarterly Report on Form 10-Q, we refer to CYS Investments, Inc. as “we,” “us,” “our company,” or “our,” unless we specifically state otherwise or the context indicates otherwise. The following defines certain of the commonly used terms in this quarterly report on Form 10-Q: RMBS refers to residential mortgage-backed securities; agency securities or Agency RMBS refers to our RMBS that are issued or whose principal and interest payments are guaranteed by a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”); ARMs refers to adjustable-rate mortgage loans that typically have interest rates that adjust annually to an increment over a specified interest rate index; and hybrids refers to ARMs that have interest rates that are fixed for a specified period of time and, thereafter, generally adjust annually to an increment over a specified interest rate index.

The following discussion should be read in conjunction with our financial statements and accompanying notes included in Item 1 of this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on February 15, 2013.

Forward Looking Statements

When used in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission (“SEC”) or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, may involve known and unknown risks, uncertainties and assumptions. The forward-looking statements we make in this Quarterly Report on Form 10-Q include, but are not limited to, statements about the following:


•	the effect of movements in interest rates on our assets and liabilities (including our hedging instruments) and our net income;


•	our investment, financing and hedging strategy and the success of these strategies;


•	the effect of increased prepayment rates on our portfolio;


•	our ability to convert our assets into cash or extend the financing terms related to our assets;


•	the effect of widening credit spreads and/or shifts in the yield curve on the value of our assets and investment strategy;


•	the types of indebtedness we may incur;


•	our ability to quantify risks based on historical experience;


•	our ability to be taxed as a real estate investment trust (“REIT”) and to maintain an exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”);


•	our assessment of counterparty risk;


•	our ability to meet short term liquidity requirements with our cash flow from operations and borrowings;


•	our liquidity;


•	our asset valuation policies;


•	our distribution policy; and


•	the effect of recent U.S. Government actions on interest rates and the housing and credit markets.

Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. The following factors could cause actual results to vary from our forward-looking statements:


•	the factors referenced in this Quarterly Report on Form 10-Q;


•	changes in our investment, financing and hedging strategy;


•	the adequacy of our cash flow from operations and borrowings to meet our short term liquidity requirements;


•	the liquidity of our portfolio;

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•	unanticipated changes in our industry, interest rates, the credit markets, the general economy or the real estate market;


•	changes in interest rates and the market value of our Agency RMBS;


•	changes in the prepayment rates on the mortgage loans underlying our Agency RMBS;


•	our ability to borrow to finance our assets;


•	changes in government regulations affecting our business;


•	our ability to maintain our qualification as a REIT for federal income tax purposes;


•	our ability to maintain our exemption from registration under the Investment Company Act and the availability of such exemption in the future; and


•	risks associated with investing in real estate assets, including changes in business conditions and the general economy.

These and other risks, uncertainties and factors, including those described elsewhere in this report, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a specialty finance company created with the objective of achieving consistent risk-adjusted investment income. We seek to achieve this objective by investing, on a leveraged basis, in Agency RMBS. 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”), U.S. Treasury Securities and U.S. Agency Debentures, although we had not invested in any CMOs as of March 31, 2013. We commenced operations in February 2006, and completed our initial public offering in June 2009. Our common stock and our 7.75% Series A Cumulative Redeemable Preferred Stock, $25.00 liquidation preference (the "Series A Preferred Stock") trade on the New York Stock Exchange under the symbols “CYS” and "CYS PrA," respectively.

We earn investment income from our investment portfolio, and we use leverage to seek to enhance our returns. Our net investment income is generated primarily from the difference, or net spread, between the interest income we earn on our investment portfolio and the cost of our borrowings and hedging activities. The amount of net investment income we earn on our investments depends in part on our ability to control our financing costs, which comprise a significant portion of our operating expenses. Although we leverage our portfolio investments in Agency RMBS to seek to enhance our potential returns, leverage also may exacerbate losses.

While we use hedging to mitigate some of our interest rate risk, we do not hedge all of our exposure to changes in interest rates. This is because there are practical limitations on our ability to insulate our portfolio from all potential negative consequences associated with changes in short term interest rates in a manner that will allow us to achieve attractive spreads on our portfolio.

In addition to investing in issued pools of Agency RMBS, we regularly utilize forward settling transactions, including forward-settling purchases of Agency RMBS where the pool is “to-be-announced” (“TBAs”). Pursuant to these TBAs, we agree to purchase, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. For our other forward settling transactions, we agree to purchase, for future delivery, Agency RMBS. However, unlike our TBAs, these forward settling transactions reference an identified Agency RMBS.

We have elected to be taxed as a REIT and have complied, and intend to continue to comply, with the provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), with respect thereto. Accordingly, we generally do not expect to be subject to federal income tax on our REIT taxable income that we currently distribute to our stockholders if certain asset, income and ownership tests and recordkeeping requirements are fulfilled. Even if we maintain our qualification as a REIT, we may be subject to some federal, state and local taxes on our income.

Factors that Affect our Results of Operations and Financial Condition

A variety of industry and economic factors may impact our results of operations and financial condition. These factors include:


•	interest rate trends;

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•	prepayment rates on mortgages underlying our Agency RMBS, and credit trends insofar as they affect prepayment rates;


•	competition for investments in Agency RMBS;


•	actions taken by the U.S. Government, including the U.S. Federal Reserve (the "Federal Reserve") and the U.S. Treasury;


•	credit rating downgrades of the United States’ and certain European countries’ sovereign debt; and


•	other market developments.

In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These factors include:


•	our degree of leverage;


•	our access to funding and borrowing capacity;


•	our borrowing costs;


•	our hedging activities;


•	the market value of our investments; and


•	the REIT requirements and the requirements to qualify for a registration exemption under the Investment Company Act.

We anticipate that, for any period during which changes in the interest rates earned on our assets do not coincide with interest rate changes on the corresponding liabilities, such assets will likely change in value more slowly than the corresponding liabilities. Consequently, changes in interest rates, particularly short term interest rates, may significantly influence our net investment income.

Our net investment income may be affected by a difference between actual prepayment rates and our projections. Prepayments on loans and securities may be influenced by changes in market interest rates and homeowners’ ability and desire to refinance their mortgages. To the extent we have acquired assets at a premium or discount to par value, changes in prepayment rates may impact our anticipated yield.

Trends and Recent Market Impacts

U.S. Macroeconomic

The most significant driver of long and short term interest rates, and therefore our investing environment, has been the Federal Reserve. In September 2012, the U.S. Federal Reserve Open Market Committee ("FOMC") announced an open-ended program to purchase an additional $40 billion of Agency RMBS per month until the unemployment rate, among other economic indicators, showed signs of improvement. The Federal Reserve also announced that it will keep the target range for the Federal Funds Rate between zero and 0.25% through at least mid-2015.

For the period from December 13, 2012 through March 12, 2013 the Federal Reserve made $227.5 billion net purchases of Agency RMBS, or approximately $75.8 billion per month. The Federal Reserve provided further guidance to the market in December 2012 by stating that it intended to keep the Federal Funds Rate close to zero while the unemployment rate is above 6.5% and as long as inflation does not rise above 2.5%. In December 2012, the Federal Reserve also announced that it would initially begin buying $45 billion of long-term Treasury bonds each month and noted that such amount may increase in the future.

In the FOMC minutes released on April 10, 2013, all but a few participants thought that, given the current economic outlook, it would be appropriate for the FOMC to continue purchasing Agency RMBS and longer-term Treasury securities at about the current pace at least through midyear 2013. A number of these participants anticipated that the pace would be tapered down around midyear 2013. A few others thought that it would be appropriate for the FOMC to purchase securities at the current pace through the third quarter of 2013 before beginning to adjust the pace, and a few saw the current rate of purchases continuing at least through the end of 2013, with two participants specifying that some purchases would likely extend into 2014. When tapering is priced into the market, the long end of the yield curve will likely steepen, which should create a more favorable reinvesting environment for the Company.

U.S. Employment

After the good employment report for February 2013 of 236,000 jobs added, which dramatically out-paced consensus estimates of 165,000, the March 2013 employment report was weaker than expected. The March 2013 change in nonfarm payroll employment was 88,000 compared to the consensus estimate of 190,000. However, upward revisions to February 2013

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may have tempered the impact on rates as the yield on the 10 year U.S. Treasury dropped only five basis points to 1.71% on the news. While the U.S. unemployment rate declined in March to 7.6% from 7.8% in December 2012, the seasonally adjusted participation rate has reached its lowest levels since 1979 at 63.3% in March 2013.

U.S. Housing

The U.S. housing market has continued to improve. U.S. home prices rose 0.6% from December 2012 to January 2013, and have been on an upward trend since February 2012, averaging 0.54% per month. In addition to home prices, housing starts have continued to improve. Building permits hit their highest level since 2008 in February 2013 at 939,000.

Interest Rates

As described above, the actions by the Federal Reserve have flattened the yield curve. Short rates have no room to go down while the Federal Reserve has put pressure on the long end of the curve, bringing the rate on 10 year Treasuries down 36 basis points from 2.21% at March 2012 to 1.85% at March 2013. Below is a graph of the yield curve at March 31, 2013 and March 31, 2012.

The spread between the yield on par-priced Fannie Mae Agency RMBS backed by 15 year fixed rate mortgage loans (currently 46% of our Agency RMBS portfolio) and the three year interest rate swap rate (the current weighted average maturity of our interest rate swaps is 2.8 years) has widened since its low in July of 2012.

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Reinvestment Environment

The below table shows three potential Agency RMBS investments and their respective net interest margins as of April 11, 2013:



	30 Yr. 3.5%		15 Yr. 3%		10X1 ARMS
Asset Yield	2.35	%	1.75	%	1.50	%
Financing Rate	0.40	%	0.40	%	0.40	%
Hedge Cost ⁽¹⁾	0.47	%	0.32	%	0.25	%
Net interest margin	1.48	%	1.03	%	0.85	%

⁽¹⁾ Assumed 5 Year Swap Hedge Ratio	75	%	50	%	40	%

During the three months ended March 31, 2013 the average yield on the Company's purchases of Agency RMBS was 2.09%.

Prepayments

During the three months ended March 31, 2013 our portfolio had an average constant prepayment rate ("CPR") of 17.49%. Using the U.S. 10 year Treasury as a proxy, interest rates rose slightly during the first quarter of 2013, and the mortgage refinance index fluctuated during the quarter in a range of 3,956.6 to 4,916.7. These market forces have assisted slightly in keeping prepayments down, however, an important component is our diligence examining the prepayment characteristics of every bond in the portfolio. We monitor every bond and react if the prepayment attributes turn negative. This diligence can be seen when comparing our prepayments for the quarter to the respective grouping by vintage ("cohorts"). See

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below for a table showing our fixed rate portfolio prepayments compared to their respective cohorts for the three months ended March 31, 2013:

Government Activity

On October 4, 2012, the Federal Housing Finance Authority (the “FHFA”) released its white paper entitled "Building a New Infrastructure for the Secondary Mortgage Market" (the “FHFA White Paper”). This release follows up on the FHFA's February 21, 2012 Strategic Plan for Enterprise Conservatorships, which set forth three goals for the next phase of the Fannie Mae and Freddie Mac conservatorships. These three goals are to (i) build a new infrastructure for the secondary mortgage market, (ii) gradually contract Fannie Mae and Freddie Mac's presence in the marketplace while simplifying and shrinking their operations, and (iii) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.

The FHFA White Paper proposes a new infrastructure for Fannie Mae and Freddie Mac that has two basic goals. The first goal is to replace the current, outdated infrastructures of Fannie Mae and Freddie Mac with a common, more efficient infrastructure that aligns the standards and practices of the two entities, beginning with core functions performed by both entities such as issuance, master servicing, bond administration, collateral management and data integration. The second goal is to establish an operating framework for Fannie Mae and Freddie Mac that is consistent with the progress of housing finance reform and encourages and accommodates the increased participation of private capital in assuming credit risk associated with the secondary mortgage market. The FHFA recognizes that there are a number of impediments to their goals which may or may not be surmountable, such as the absence of any significant secondary mortgage market mechanisms beyond Fannie Mae, Freddie Mac and Ginnie Mae, and that their proposals are in the formative stages. As a result, it is unclear if the proposals will be enacted. If such proposals are enacted, it is unclear how closely what is enacted will resemble the proposals from the FHFA White Paper or what the effects of the enactment will be.

On September 13, 2012, the Federal Reserve, announced a third round of quantitative easing ("QE3"), which is an open-ended program designed to expand the Federal Reserve's holdings of long-term securities by purchasing an additional $40 billion of Agency RMBS per month until key economic indicators, such as the unemployment rate, show signs of improvement. The Federal Reserve also announced that it would keep the target range for the Federal Funds Rate between zero and 0.25% through at least mid-2015.

The Federal Reserve provided further guidance to the market in December 2012 by stating that it intended to keep the Federal Funds Rate close to zero while the unemployment rate is above 6.5% and as long as inflation does not rise above 2.5%.

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In December 2012, the Federal Reserve also announced that it would initially begin buying $45 billion of long-term Treasury bonds each month and noted that such amount may increase in the future.

On January 4, 2012, the Federal Reserve released a report titled “The U.S. Housing Market: Current Conditions and Policy Considerations” to Congress, which provided a framework for thinking about certain issues and tradeoffs that policy makers might consider. It is unclear how future legislation may impact the housing finance market and the investing environment for Agency RMBS as the method of reform is undecided and has not yet been defined by the regulators.

In February 2011, the U.S. Department of the Treasury along with the U.S. Department of Housing and Urban Development released a report titled “Reforming America’s Housing Finance Market” to Congress outlining recommendations for reforming the U.S. housing system, specifically Fannie Mae and Freddie Mac, and transforming government involvement in the housing market. It is unclear how future legislation may impact the housing finance market and the investing environment for Agency RMBS as the method of reform is undecided and has not yet been defined by the regulators.

Dodd-Frank Act

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") into law. The Dodd-Frank Act is extensive, complicated and comprehensive legislation that impacts practically all aspects of banking and represents a significant overhaul of many aspects of the regulation of the financial services industry. Although many provisions remain subject to further rulemaking, the Dodd-Frank Act implements numerous and far-reaching regulatory changes that affect financial companies, including us and other banks and institutions which are important to our business model. Certain notable rules are, among other things:

•

Requiring regulation and oversight of large, systemically important financial institutions ("SIFI") by establishing an interagency council on systemic risk and implementation of heightened prudential standards and regulation by the Board of Governors of the Federal Reserve for SIFI (including nonbank financial companies), as well as the implementation of the Federal Deposit Insurance Corporation (“FDIC”) resolution procedures for liquidation of large financial companies to avoid market disruption;


•	applying the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, savings and loan holding companies and systemically important nonbank financial companies;


•	limiting the Federal Reserve’s emergency authority to lend to nondepository institutions to facilities with broad-based eligibility, and authorizing the FDIC to establish an emergency financial stabilization fund for solvent depository institutions and their holding companies, subject to the approval of Congress, the Secretary of the U.S. Treasury and the Federal Reserve;


•	creating regimes for regulation of over-the-counter derivatives and non-admitted property and casualty insurers and reinsurers;


•	implementing regulation of hedge fund and private equity advisers by requiring such advisers to register with the SEC;


•	providing for the implementation of corporate governance provisions for all public companies concerning proxy access and executive compensation; and


•	reforming regulation of credit rating agencies.

Qualified Mortgages

The Dodd-Frank Act requires that lenders make a good faith effort to ensure consumers have an ability to repay new mortgage loans based on verified and documented information. To accomplish this, the Dodd-Frank Act created the Consumer Financial Protection Bureau ("CFPB"), which was assigned the responsibility of defining Qualified Mortgage (“QM”). The key factor for lenders and originators is that loans which meet the QM standard give lenders “safe harbor” against future claims that the loans violated “ability to repay” requirements. In January 2013, the CFPB published the definition of a QM. An important part of the QM definition is the cap on how much income can go toward debt: along with the other tests, mortgages made to people who have debt-to-income ratios less than or equal to 43 percent will be considered QM. This requirement helps ensure consumers are borrowing only what they can likely afford and it creates one level of protection for lenders. Before the crisis, many consumers took on mortgages they could not afford based on their incomes, and the QM rules are intended to protect consumers going forward. For a temporary, transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards, such as eligibility for purchase by Fannie Mae or Freddie Mac, will be considered QMs. Agency RMBS will continue to be a large portion of the overall mortgage market, and we believe that, as a result of this rule-making, it is unlikely that lenders will be willing to make loans without the safe harbor protections of QM.

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Lenders will be more deliberate and the resulting mortgages will be more consistent and will result in more predictable prepayments. We do not expect this to impact the current supply of Agency RMBS.

Many of the provisions of the Dodd-Frank Act, including certain provisions described above are subject to further study, rulemaking and the discretion of regulatory bodies. As the hundreds of regulations called for by the Dodd-Frank Act are promulgated, we will continue to evaluate their impact. It is unclear how this legislation may impact the borrowing environment, investing environment for Agency RMBS and interest rate swaps as much of the bill’s implementation has not yet been defined by the regulators.

For a discussion of additional risks relating to our business see “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on February 15, 2013.

Financial Condition

As of March 31, 2013 and December 31, 2012, the Agency RMBS in our portfolio were purchased at a net premium to their par value due to the average interest rates on these investments being higher than the prevailing market rates at the time of purchase. As of March 31, 2013 and December 31, 2012, we had approximately $864.5 million and $879.6 million, respectively, of unamortized premium included in the cost basis of our investments.

As of March 31, 2013 and December 31, 2012, our Agency RMBS portfolio consisted of the following assets:



March 31, 2013	Par Value		Fair Value		Weighted Average
Asset Type	(in thousands)				Cost/Par		Fair Value/Par		MTR⁽¹⁾		Coupon		CPR⁽²⁾
15 Year Fixed Rate	$	8,774,166	$	9,228,421	$	104.38	$	105.18	N/A		2.98	%	14.9	%
20 Year Fixed Rate	1,059,923		1,112,782		104.94		104.99		N/A		3.16	%	5.7	%
30 Year Fixed Rate	5,957,689		6,283,218		105.14		105.46		N/A		3.53	%	8.8	%
Hybrid ARMs	3,282,679		3,438,118		103.70		104.74		74.5		2.64	%	15.4	%
Total/Weighted Average	$	19,074,457	$	20,062,539	$	104.53	$	105.18	74.5	⁽³⁾	3.11	%	13.4	%
December 31, 2012
10 Year Fixed Rate	$	207,091	$	219,747	$	103.60	$	106.11	N/A		3.50	%	19.4	%
15 Year Fixed Rate	11,092,374		11,717,136		104.32		105.63		N/A		3.05	%	16.1	%
20 Year Fixed Rate	1,087,835		1,148,932		104.96		105.62		N/A		3.17	%	10.1	%
30 Year Fixed Rate	3,571,692		3,817,488		105.78		106.88		N/A		3.59	%	8.9	%
Hybrid ARMs	3,722,510		3,900,840		103.54		104.79		74.3		2.71	%	19.1	%
Total/Weighted Average	$	19,681,502	$	20,804,143	$	104.47	$	105.70	74.3	⁽³⁾	3.10	%	15.8	%

__________________


(1)	MTR, or “Months to Reset” is the number of months remaining before the fixed rate on a hybrid ARM becomes a variable rate. At the end of the fixed period, the variable rate will be determined by the margin and the pre-specified caps of the ARM. After the fixed period, 100% of the hybrid ARMS in the portfolio reset annually.


(2)	CPR, or “Constant Prepayment Rate” is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the constant prepayment rate is an annualized version of the prior three month prepayment rate. Securities with no prepayment history are excluded from this calculation.


(3)	Weighted average months to reset of our ARM portfolio.

The CPR of the Company’s Agency RMBS portfolio was approximately 12.1% for the month of April 2013.

Actual maturities of Agency RMBS are generally shorter than stated contractual maturities (which range up to 30 years), as they are affected by the contractual lives of the underlying mortgages, periodic payments and prepayments of principal. As of March 31, 2013 and December 31, 2012, the average final contractual maturity of the mortgage portfolio is in year 2035 and 2033, respectively. The average expected life of our Agency RMBS reflects the estimated average period of time the securities in the portfolio will remain outstanding. The average expected lives of our Agency RMBS do not exceed five years, based upon the prepayment model obtained through subscription-based financial information service providers. The prepayment model considers current yield, forward yield, the steepness of the yield curve, current mortgage rates, the mortgage rate of the outstanding loan, loan age, margin and volatility. The actual lives of the Agency RMBS in our investment portfolio could be longer or shorter than those estimates depending on the actual prepayment rates experienced over the lives of the applicable securities.

Hedging Instruments

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We seek to hedge as much of the interest rate risk we determine is in the best interests of our stockholders. Our policies do not contain specific requirements as to the percentages or amount of interest rate risk we are required to hedge. No assurance can be given that our hedging activities will have the desired beneficial impact on our results of operations or financial condition.

Interest rate hedging may fail to protect or could adversely affect us because, among other things:


•	interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;


•	available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;


•	due to prepayments on assets and repayments of debt securing such assets, the duration of the hedge may not match the duration of the related liability or asset;


•	the credit quality of the hedging counterparty may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and


•	the hedging counterparty may default on its obligation to pay.

We engage in interest rate swaps and caps as a means of mitigating our interest rate risk on forecasted interest expense associated with repurchase agreements for the term of the swap contract. An interest rate swap is a contractual agreement entered into by two counterparties under which each agrees to make periodic payments to the other for an agreed period of time based upon a notional amount of principal. Under the most common form of interest rate swap, commonly known as a fixed-floating interest rate swap, a series of fixed interest rate payments on a notional amount of principal is exchanged for a series of floating interest rate payments on such notional amount. In a simple interest rate cap, one investor pays a premium for a notional principal amount based on a capped interest rate (the “cap rate”). When the floating interest rate (the “floating rate”) exceeds the cap rate, the investor receives a payment from the cap counterparty equal to the difference between the floating rate and the cap rate on the same notional principal amount for a specified period of time. Alternatively, an investor may receive a premium and pay the difference in cap rate and floating rate. Below is a summary of our interest rate swaps and caps as of March 31, 2013 and December 31, 2012:



				Weighted Average
March 31, 2013	Number of Contracts	Notional (000's)		Rate		Maturity	Fair Value (000's)
Interest Rate Swaps	24	$	8,990,000	1.226	%	January 2016	$	(82,237	)
Interest Rate Caps	11	4,100,000		1.498	%	May 2019	159,200

December 31, 2012
Interest Rate Swaps	21	$	7,490,000	1.270	%	August 2015	$	(97,395	)
Interest Rate Caps	10	3,400,000		1.622	%	July 2019	122,989

The current fair value of interest rate swaps and caps is heavily dependent on the prevailing market fixed rate, the corresponding term structure of floating rates (known as the yield curve) as well as the expectation of changes in future floating rates.

Liabilities

We have entered into repurchase agreements to finance some of our purchases of Agency RMBS. Borrowings under these agreements are secured by our Agency RMBS and bear interest at rates that have historically moved in close relationship to LIBOR. At March 31, 2013, we had approximately $13,760.5 million of liabilities pursuant to repurchase agreements with 25 counterparties that had weighted average interest rates of approximately 0.41%, and a weighted average maturity of 31.7 days. In addition, as of March 31, 2013, we had approximately $4,657.5 million in payable for securities purchased, a portion of which will be financed through repurchase agreements. At December 31, 2012, we had approximately $13,981.3 million million of liabilities pursuant to repurchase agreements with 23 counterparties that had weighted average interest rates of approximately 0.48%, and a weighted average maturity of 19.6 days. In addition, as of December 31, 2012 we had approximately $4,515.5 million in payable for securities purchased, a portion of which was financed through repurchase agreements. Below is a summary of our payable for securities purchased as of March 31, 2013 and December 31, 2012 (in thousands).

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March 31, 2013
Forward Settling Purchases	Settle Date	Par Value		Payable
FNMA - 30 Year 3.50% Fixed	4/11/2013	$	200,000	$	210,319
FNMA - 15 Year 2.50% Fixed	4/16/2013	250,000		258,073
FNMA - 15 Year 3.00% Fixed (a)	4/16/2013	—		17
FNMA - 30 Year 2.44% Hybrid ARM	4/26/2013	30,000		30,993
FNMA - 15 Year 2.50% Fixed	4/30/2013	70,000		72,639
FNMA - 30 Year 3.50% Fixed	5/13/2013	3,240,000		3,403,175
FHLMC - 30 Year 3.50% Fixed	5/13/2013	100,000		104,421
FNMA - 30 Year 3.50% Fixed	6/13/2013	550,000		577,864
		$	4,440,000	$	4,657,501



December 31, 2012
Forward Settling Purchases	Settle Date	Par Value		Payable
FNMA - 20 Year 3.0% Fixed	1/14/2013	$	300,000	$	316,122
FNMA - 30 Year 3.5% Fixed	1/14/2013	1,550,000		1,646,880
FNMA - 15 Year 2.5% Fixed	1/17/2013	950,000		993,307
FNMA - 15 Year 3.5% Fixed	1/17/2013	38,000		40,363
FNMA - 15 Year 4.5% Fixed	1/17/2013	16,000		17,232
FNMA - 30 Year 2.43% Hybrid ARM	1/24/2013	25,000		26,234
FNMA - 30 Year 2.60% Hybrid ARM	1/25/2013	50,000		52,259
FNMA - 30 Year 2.15% Hybrid ARM	1/29/2013	100,000		103,542
FNMA - 30 Year 2.57% Hybrid ARM	1/29/2013	82,000		85,618
FNMA - 30 Year 3.5% Fixed	2/12/2013	200,000		212,651
FNMA - 15 Year 2.5% Fixed	2/14/2013	950,000		990,186
FNMA - 30 Year 2.17% Hybrid ARM	2/25/2013	30,000		31,107
		$	4,291,000	$	4,515,501

_____________



(a)	A corresponding sale of $100.0 million par value was made with the same counterparty with the same settlement date leaving the disclosed net payable for securities purchased.

Summary Financial Data

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	Three Months Ended March 31,
(In thousands, except per share numbers)	2013			2012
INVESTMENT INCOME:
Interest income from Agency RMBS	$	72,101		$	64,147
Other income	1,000			1,222
Total investment income	73,101			65,369
EXPENSES:
Interest	15,031			6,853
Operating expenses	5,553			5,119
Total expenses	20,584			11,972
Net investment income	52,517			53,397
Net gain (loss) from investments	(78,811		)	33,150
GAINS AND (LOSSES) FROM SWAP AND CAP CONTRACTS:
Net swap and cap interest income (expense)	(21,956		)	(11,506		)
Net gain (loss) on termination of swap and cap contracts	8,630			—
Net unrealized appreciation (depreciation) on swap and cap contracts	23,417			(5,923		)
Net gain (loss) from swap and cap contracts	10,091			(17,429		)
NET INCOME (LOSS)	$	(16,203	)	$	69,118
DIVIDEND ON PREFERRED STOCK	(1,453		)	—
NET INCOME (LOSS) AVAILABLE TO COMMON SHARES	$	(17,656	)	$	69,118
Net income (loss) per common share (diluted)	$	(0.10	)	$	0.66
Distributions per common share	$	0.32		$	0.50

Key Balance Sheet Metrics
Average settled Agency RMBS ⁽¹⁾	$	16,066,672		$	9,238,905
Average total Agency RMBS ⁽²⁾	$	20,200,479		$	11,872,426
Average repurchase agreements ⁽³⁾	$	14,107,740		$	8,194,067
Average Agency RMBS liabilities ⁽⁴⁾	$	18,241,547		$	10,827,588
Average net assets ⁽⁵⁾	$	2,357,333		$	1,406,049
Average common shares outstanding ⁽⁶⁾	174,864			104,620
Leverage ratio (at period end) ⁽⁷⁾	7.8:1			7.7:1

Key Performance Metrics*
Average yield on settled Agency RMBS ⁽⁸⁾	1.80		%	2.78		%
Average yield on total Agency RMBS including drop income ⁽⁹⁾	1.97		%	2.68		%
Average cost of funds and hedge ⁽¹⁰⁾	1.05		%	0.90		%
Adjusted average cost of funds and hedge ⁽¹¹⁾	0.81		%	0.68		%
Interest rate spread net of hedge ⁽¹²⁾	0.75		%	1.88		%
Interest rate spread net of hedge including drop income ⁽¹³⁾	1.16		%	2.00		%
Operating expense ratio ⁽¹⁴⁾	0.94		%	1.46		%

___________


(1)	The average settled Agency RMBS is calculated by averaging the month end cost basis of settled Agency RMBS during the period.


(2)	The average total Agency RMBS is calculated by averaging the month end cost basis of Agency RMBS during the period.


(3)	The average repurchase agreements are calculated by averaging the month end repurchase agreements balance during the period.


(4)	The average Agency RMBS liabilities are calculated by averaging the month end repurchase agreements balance plus average unsettled Agency RMBS during the period.


(5)	The average net assets are calculated by averaging the month end net assets during the period.


(6)	The average common shares outstanding are calculated by averaging the daily common shares outstanding during the period.


(7)	The leverage ratio is calculated by dividing (i) the Company's repurchase agreements balance plus payable for securities purchased minus receivable for securities sold by (ii) net assets.

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(8)	The average yield on settled Agency RMBS for the period is calculated by dividing interest income from Agency RMBS by average settled Agency RMBS.


(9)	The average yield on total Agency RMBS including drop income for the period is calculated by dividing interest income from Agency RMBS plus drop income by average total Agency RMBS.


(10)	The average cost of funds and hedge for the period is calculated by dividing total interest expense, including net swap and cap interest income (expense), by average repurchase agreements.


(11)	The adjusted average cost of funds and hedge for the period is calculated by dividing total interest expense, including net swap and cap interest income (expense), by average Agency RMBS liabilities.


(12)	The interest rate spread net of hedge for the period is calculated by subtracting average cost of funds and hedge from average yield on Agency RMBS.


(13)	The interest rate spread net of hedge including drop income for the period is calculated by subtracting adjusted average cost of funds and hedge from average total yield on Agency RMBS including drop income.


(14)	The operating expense ratio for the period is calculated by dividing operating expenses by average net assets.


*	All percentages are annualized.

Core Earnings

Core Earnings represents a non-GAAP financial measure and is defined as net income (loss) available to common shares excluding net gain (loss) from investments, net gain (loss) on termination of swap contracts and net unrealized appreciation (depreciation) on swap and cap contracts. In order to evaluate the effective yield of the portfolio, management uses Core Earnings to reflect the net investment income of our portfolio as adjusted to include the net swap and cap interest income (expense). Core Earnings allows management to isolate the interest income (expense) associated with our swaps and caps in order to monitor and project our borrowing costs and interest rate spread. In addition, management utilizes Core Earnings as a key metric in conjunction with other portfolio and market factors to determine the appropriate leverage and hedging ratios, as well as the overall structure of the portfolio.

We adopted Accounting Standards Codification (“ASC”) 946, Clarification of the Scope of Audit and Accounting Guide Investment Companies (“ASC 946”), prior to its deferral in February 2008, while most, if not all, other public companies that invest only in Agency RMBS have not adopted ASC 946. Under ASC 946, we use financial reporting specified for investment companies, and accordingly, its investments are carried at fair value with changes in fair value included in earnings. Most other public companies that invest only in Agency RMBS include most changes in the fair value of their investments within other comprehensive income not in earnings. As a result, investors are not able to readily compare our results of operations to those of most of our competitors. We believe that the presentation of its Core Earnings is useful to investors because it provides a means to compare our Core Earnings to those of our peers. In addition, because Core Earnings isolates the net swap and cap interest income (expense) it provides investors with an additional metric to identify trends in the our portfolio as they relate to the interest rate environment.

The primary limitation associated with Core Earnings as a measure of our financial performance over any period is that it excludes the effects of net realized gain (loss) from investments. In addition, our presentation of Core Earnings may not be comparable to similarly-titled measures of other companies, which may use different calculations. As a result, Core Earnings should not be considered as a substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under GAAP.



(In thousands)	Three Months Ended March 31,
Non-GAAP Reconciliation:	2013			2012
NET INCOME AVAILABLE TO COMMON SHARES	$	(17,656	)	$	69,118
Net (gain) loss from investments	78,811			(33,150		)
Net (gain) loss on termination of swap contracts	(8,630		)	—
Net unrealized (appreciation) depreciation on swap and cap contracts	(23,417		)	5,923
Core Earnings	$	29,108		$	41,891

Results of Operations

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Net Income Available to Common Shares. Net income available to common shares decreased $86.8 million to a net loss of $17.7 million for the three months ended March 31, 2013, compared to net income of $69.1 million for the three months ended March 31, 2012. The major components of this decrease are detailed below.

Investment Income. Investment income, which primarily consists of interest income on Agency RMBS, increased by $7.7 million to $73.1 million for the three months ended March 31, 2013, as compared to $65.4 million for the three months ended

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March 31, 2012. The change in investment income was primarily due to the increased size of our portfolio. During the three months ended March 31, 2013, our average settled Agency RMBS portfolio was $16,066.7 million, compared to $9,238.9 million during the three months ended March 31, 2012. However, the increased income due to the size of our portfolio was partially offset by the decrease in the average settled yield on Agency RMBS. During the three months ended March 31, 2013 and 2012, our average yield on settled Agency RMBS was 1.80% and 2.78%, respectively. The impact of the change in investment income from the increased size of our Agency RMBS portfolio and change in average yield on Agency RMBS portfolio is shown below (in thousands):



Change in Size				Change in Yield				Change in Size & Yield
Change in average settled	$	6,827,767		Change in average yield	(0.98		)%	Change in average settled	$	6,827,767
2012 average yield	2.78		%	2012 average settled	9,238,905			Change in average yield	(0.98		)%
Change	$	47,406		Change	$	(22,686	)	Change	$	(16,766	)
								Total change	$	7,954

Interest Expense. Interest expense increased $8.2 million to $15.0 million for the three months ended March 31, 2013, as compared to $6.9 million for the three months ended March 31, 2012. The increase was due to the increase in our average amounts outstanding under our repurchase agreements and higher interest rates. During the three months ended March 31, 2013 and 2012, our average repurchase agreements were $14,107.7 million and $8,194.1 million, respectively. In addition, we had an average rate on our repurchase agreements of 0.43% and 0.33% during the three months ended March 31, 2013 and 2012, respectively. The impact of the change in interest expense from the increase in our average repurchase agreements outstanding and change in average rate on repurchase agreements is shown below (in thousands):



Change in Size				Change in Rate					Change in Size & Yield
Change in average outstanding	$	5,913,673		Change in average rate	0.09		%	^(a)	Change in average outstanding	$	5,913,673
2012 average rate	0.33		%	2012 average outstanding	8,194,067				Change in average rate	0.09		%	^(a)
Change	$	4,946		Change	$	1,877			Change	$	1,355
									Total change	$	8,178

___________


(a)	The average rate on repurchase agreements for the three months ended March 31, 2013 and 2012 was 0.426% and 0.335% respectively. Therefore the change in average rate is calculated as 0.09%.

Operating Expenses. For the three months ended March 31, 2013, operating expenses increased by $0.4 million to $5.6 million compared to $5.1 million for the three months ended March 31, 2012. However, expenses decreased as a percentage of net assets during the three months ended March 31, 2013 to 0.94% compared to 1.46% during the three months ended March 31, 2012. The decrease in expenses as a percentage of net assets was mainly attributable to our larger asset base. Our average net assets were $2,357.3 million and $1,406.0 million during the three months ended March 31, 2013 and 2012, respectively.

Net Gain (Loss) From Investments. Net gain from investments decreased by $112.0 million to a net loss of $78.8 million for the three months ended March 31, 2013, compared to $33.2 million gain for the three months ended March 31, 2012. Net realized gain from investments was $46.7 million for the three months ended March 31, 2013, compared to $5.2 million for the three months ended March 31, 2012. For the three months ended March 31, 2013, prices of Agency RMBS decreased, while for the three months ended March 31, 2012 prices of Agency RMBS increased. However, during the three months ended March 31, 2013, the size of our total Agency RMBS book was significantly larger at an average of $20,200.5 million compared to $11,872.4 million during the three months ended March 31, 2012.

Drop Income is a component of our net gain (loss) from investments on our statement of operations and therefore excluded from Core Earnings. The Company utilizes forward settling transactions for the majority of its purchases. This strategy enables the Company to purchase assets with specified features we consider attractive, such as loan size or geography. In this manner, the Company's investment team is able to more effectively manage prepayment risk, among other potential exposures. Drop income is the difference between the price of settling a transaction at the time the forward transaction is put in place and the price of settling a transaction forward. This difference is also the economic equivalent of the assumed net interest margin (yield minus financing costs) of the bond from trade date to settlement date. During the three months ended March 31, 2013 and 2012 we generated drop income of approximately $27.3 million and $15.4 million, respectively.

During the three months ended March 31, 2013, we sold CLOs with a par value of $11.0 million for a net gain of $5.1 million. We did not sell any CLOs during the three months ended March 31, 2012.

Net Gain (Loss) from Swap and Cap Contracts. Net gain from swap and cap contracts increased by $27.5 million to a gain of $10.1 million for the three months ended March 31, 2013, compared to a loss of $17.4 million for the three months

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ended March 31, 2012. The increase in net gain on swap and cap contracts was primarily due to the change in swap rates combined with the change in the size of our interest rate swap and cap portfolio. During the three months ended March 31, 2013 and 2012, our average interest rate swap and cap notional amount was $11,815.0 million and $5,440.0 million, respectively. During the three months ended March 31, 2013 and 2012, three year swap rates increased by 4 basis points and decreased by 6 basis points, respectively.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations for repurchase agreements, interest expense on repurchase agreements and the office lease at March 31, 2013 and December 31, 2012 (dollars in thousands).



March 31, 2013	Within One Year		One to Three Years		Three to Five Years		Total
Repurchase agreements	$	13,760,475	$	—	$	—	$	13,760,475
Interest expense on repurchase agreements, based on rates at March 31, 2013	9,018		—		—		9,018
Long term operating lease obligation	322		81		—		403
Total	$	13,769,815	$	81	$	—	$	13,769,896



December 31, 2012	Within One Year		One to three Years		Three to Five Years		Total
Repurchase agreements	$	13,981,307	$	—	$	—	$	13,981,307
Interest expense on repurchase agreements, based on rates at December 31, 2012	15,173		—		—		15,173
Long term operating lease obligation	320		162		—		482
Total	$	13,996,800	$	162	$	—	$	13,996,962

We enter into interest rate swap and cap contracts as a means of mitigating our interest rate risk on forecasted interest expense associated with repurchase agreements for the term of the swap or cap contract. At March 31, 2013 and December 31, 2012, we had interest rate swap and cap contracts with the following counterparties (dollars in thousands):

As of March 31, 2013



Counterparty	Total Notional		Fair Value			Amount At Risk ⁽¹⁾		Weighted Average Maturity in Years
BNP Paribas	$	250,000	$	614		$	1,399	4.4
Credit Suisse International	2,550,000		33,235			19,428		5.6
Deutsche Bank	1,340,000		(7,264		)	15,148		2.3
Goldman Sachs	1,800,000		(28,635		)	21,503		1.2
ING Capital Markets, LLC	300,000		9,994			94		6.2
Morgan Stanley Capital Markets	750,000		(5,136		)	4,673		4.4
Nomura Global Financial Products, Inc.	550,000		(17,428		)	6,319		2.3
The Bank of Nova Scotia	750,000		26,606			304		6.1
The Royal Bank of Scotland plc	3,700,000		48,108			43,929		3.5
UBS AG	300,000		10,267			177		6.3
Wells Fargo Bank, N.A.	800,000		6,602			3,910		5.4
Total	$	13,090,000	$	76,963		$	116,884

As of December 31, 2012

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Counterparty	Total Notional		Fair Value			Amount At Risk⁽¹⁾		Weighted Average Maturity in Years
BNP Paribas	$	250,000	$	26		$	2,159	4.7
Credit Suisse International	2,050,000		27,922			13,190		6.0
Deutsche Bank	1,340,000		(10,733		)	16,369		2.6
Goldman Sachs	1,800,000		(34,105		)	20,416		1.5
ING Capital Markets, LLC	300,000		8,685			585		6.5
Morgan Stanley Capital Markets	1,250,000		29,135			16,474		6.6
Nomura Global Financial Products, Inc.	550,000		(19,629		)	6,336		2.6
The Bank of Nova Scotia	250,000		33			1,627		4.7
The Royal Bank of Scotland plc	2,500,000		7,543			9,457		2.4
UBS AG	300,000		9,165			925		6.5
Wells Fargo Bank, N.A.	300,000		7,552			1,449		6.4
Total	$	10,890,000	$	25,594		$	88,987

_______


(1)	Equal to the fair value of pledged securities plus accrued interest income, minus the fair value of the interest rate swap and cap and accrued interest income and expense.

We enter into certain contracts that contain a variety of indemnification obligations, principally with our brokers and

counterparties to interest rate swap contracts and repurchase agreements. The maximum potential future payment amount we

could be required to pay under these indemnification obligations is unlimited. We have not incurred any costs to defend

lawsuits or settle claims related to these indemnification obligations. As a result, the estimated fair value of these agreements is

minimal. Accordingly, we recorded no liabilities for these agreements as of March 31, 2013 and December 31, 2012. In addition, as of March 31, 2013 and December 31, 2012, we had $4,657.5 million and $4,515.5 million payable for securities purchased, respectively, a portion of which either was or will be financed through repurchase agreements. A summary of our payable for securities purchased as of March 31, 2013 and December 31, 2012 is included in the “Financial Condition—Liabilities” section.

Off-Balance Sheet Arrangements

As of March 31, 2013 and December 31, 2012, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of March 31, 2013 and December 31, 2012, we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or had any intent to provide funding to any such entities.

Liquidity and Capital Resources

Our primary sources of funds are borrowings under repurchase arrangements and monthly principal repayments and interest payments on our investments. Other sources of funds may include proceeds from debt and equity offerings and asset sales. As of March 31, 2013 and December 31, 2012, we had repurchase agreements totaling $13,760.5 million and $13,981.3 million, respectively, with a weighted average borrowing rate of 0.41% and 0.48%, respectively. In addition, during the three months ended March 31, 2013 and 2012, we received $942.7 million and $543.2 million of principal repayments, respectively, and $74.8 million and $59.0 million of interest payments, respectively. We held cash and cash equivalents of $13.5 million and $13.9 million at March 31, 2013 and December 31, 2012, respectively.

During the three months ended March 31, 2013 and 2012, our operations provided (used) net cash of $229.7 million and $(791.3) million, respectively. During the three months ended March 31, 2013 and 2012, we had net purchases (sales) of securities (net of purchases, sales and principal repayments) of $(435.1) million and $3,906.5 million, respectively. The decrease in net purchases of securities was due to the fact that we did not raise any capital during the three months ended March 31, 2013, while during the three months ended March 31, 2012 we had a public offering of common stock on February 1, 2012 that raised approximately $377.3 million of net proceeds.

Through the DSPP, stockholders may purchase additional shares of common stock by reinvesting some or all of the cash dividends received on shares of common stock. Stockholders may also make optional cash purchases of shares of common stock subject to certain limitations detailed in the plan prospectus. We did not issue any shares under the plan during the three months ended March 31, 2013. During the three months ended March 31, 2012 we issued 1,486,699 shares under the plan, respectively, raising approximately $19.9 million of net proceeds. As of March 31, 2013 and December 31, 2012, there were approximately 4.1 million shares available for issuance under the DSPP.

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On June 7, 2011 we established the EPP whereby, from time to time, we may publicly offer and sell up to 15.0 million shares of our common stock in at-the-market transactions and/or privately negotiated transactions with JMP Securities LLC acting as sales agent. For the three months ended March 31, 2013 the Company did not issue any shares under the plan. During the three months ended March 31, 2012 we issued 2,959,732 shares under the plan raising approximately $39.7 million. As of March 31, 2013 and December 31, 2012, there were approximately 3.1 million shares of common stock remained available for issuance to be sold under the EPP.

On November 15, 2012, we announced that our board of directors authorized the repurchase of shares of our common stock having an aggregate value of up to $250 million. We intend to repurchase shares only when the purchase price is less than our estimate of our current net asset value per share of our common stock. For the three months ended March 31, 2013, we repurchased 640,791 shares with a weighted average purchase price of $11.81 or approximately $7.6 million in the aggregate. We did not make any repurchases during 2012.

The following tables present certain information regarding our risk exposure on our repurchase agreements as of March 31, 2013 and December 31, 2012 (dollars in thousands):

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March 31, 2013



Counterparty	Total Outstanding Borrowings		% of Total		% of Net Assets At Risk⁽¹⁾		Weighted Average Maturity in Days
Bank of America Securities LLC	$	1,031,076	7.5	%	2.4	%	24
Bank of Nova Scotia	653,583		4.7		0.9		13
Barclays Capital, Inc.	842,450		6.1		1.9		28
BNP Paribas Securities Corp	657,757		4.8		1.5		17
Cantor Fitzgerald & Co.	59,850		0.4		0.0		12
Citigroup Global Markets, Inc.	489,795		3.6		1.2		22
Credit Suisse Securities (USA) LLC	640,302		4.7		1.5		11
Daiwa Securities America, Inc.	306,525		2.2		0.7		51
Deutsche Bank Securities, Inc.	400,043		2.9		1.1		76
Goldman Sachs & Co.	1,036,840		7.5		2.6		44
Guggenheim Liquidity Services, LLC	282,817		2.1		0.7		23
Industrial and Commercial Bank of China Financial Services LLC	817,964		5.9		1.8		21
ING Financial Markets LLC	684,753		5.0		1.7		18
Jefferies & Company, Inc.	116,918		0.8		0.3		54
KGS Alpha Capital Markets	136,593		1.0		0.4		23
LBBW Securities LLC	141,504		1.0		0.4		26
Mitsubishi UFJ Securities (USA), Inc.	598,597		4.4		1.5		27
Mizuho Securities USA, Inc.	523,704		3.8		1.2		37
Morgan Stanley & Co. Inc.	740,673		5.4		1.7		34
Nomura Securities International, Inc.	576,221		4.2		1.3		54
RBC Capital Markets, LLC	824,311		6.0		2.1		71
South Street Securities LLC	375,922		2.7		1.0		40
The Royal Bank of Scotland PLC	186,528		1.4		0.5		11
UBS Securities LLC	738,863		5.4		1.8		41
Wells Fargo Securities, LLC	896,886		6.5		1.4		13
	$	13,760,475	100.0	%	31.6	%

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December 31, 2012



Counterparty	Total Outstanding Borrowings		% of Total		% of Net Assets At Risk⁽¹⁾		Weighted Average Maturity in Days
Bank of America Securities LLC	$	1,143,279	8.2	%	2.4	%	16
Bank of Nova Scotia	660,889		4.7		1.1		12
Barclays Capital, Inc.	1,129,106		8.1		2.3		30
BNP Paribas Securities Corp	662,360		4.7		1.5		17
Citigroup Global Markets, Inc.	463,815		3.3		1.1		21
Credit Suisse Securities (USA) LLC	645,179		4.6		1.2		15
Daiwa Securities America, Inc.	305,954		2.2		0.7		22
Deutsche Bank Securities, Inc.	539,094		3.8		1.4		21
Goldman Sachs & Co.	1,058,174		7.6		2.4		17
Guggenheim Liquidity Services, LLC	281,225		2.0		0.6		22
Industrial and Commercial Bank of China Financial Services LLC	808,414		5.8		1.7		20
ING Financial Markets LLC	377,353		2.7		0.9		14
KGS Alpha Capital Markets	138,697		1.0		0.4		19
LBBW Securities LLC	140,953		1.0		0.3		28
Mitsubishi UFJ Securities (USA), Inc.	627,315		4.5		1.4		17
Mizuho Securities USA, Inc.	520,638		3.7		1.1		18
Morgan Stanley & Co. Inc.	634,179		4.5		1.6		17
Nomura Securities International, Inc.	623,556		4.5		1.5		21
RBC Capital Markets, LLC	791,610		5.7		1.8		17
South Street Securities LLC	375,289		2.7		1.1		18
The Royal Bank of Scotland PLC	167,604		1.2		0.4		9
UBS Securities LLC	936,333		6.7		2.3		38
Wells Fargo Securities, LLC	950,291		6.8		1.3		13
Total	$	13,981,307	100.0	%	30.5	%

____________________


(1)	Equal to the fair value of pledged securities plus accrued interest income, minus the sum of repurchase agreement liabilities and accrued interest expense divided by net assets.

Our repurchase agreements contain typical provisions and covenants as set forth in the standard master repurchase agreement published by the Securities Industry and Financial Markets Association. Our repurchase agreements generally require us to transfer additional securities to the counterparty in the event the value of the securities then held by the counterparty in the margin account falls below specified levels and contain events of default in cases where we or the counterparty breaches our respective obligations under the agreement.

We receive margin calls from our repurchase agreement counterparties from time to time in the ordinary course of business similar to other entities in the specialty finance business. We receive two types of margin calls under our repurchase agreements. The first type, which are known as “factor calls,” are margin calls that occur each month and relate to the timing difference between the reduction of principal balances of our Agency RMBS, due to monthly principal payments on the underlying mortgages, and the receipt of the corresponding cash. The second type of margin call we may receive is a “valuation call”, which occurs due to market and interest rate movements. Both factor and valuation margin calls occur if the total value of our assets pledged as collateral to a counterparty drops beyond a threshold level, typically between $100,000 and $500,000. Both types of margin calls require a dollar for dollar restoration of the margin shortfall. Conversely, we may initiate margin calls to our counterparties when the value of our assets pledged as collateral with a counterparty increases above the threshold level, thereby increasing our liquidity. All unrestricted cash and cash equivalents, plus any unpledged securities, are available to satisfy margin calls

As of March 31, 2013 and December 31, 2012, we had approximately $1,484.9 million and $1,519.3 million, respectively, in Agency RMBS, U.S. Treasury securities and cash and cash equivalents available to satisfy future margin calls.

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To date, we have maintained sufficient liquidity to meet margin calls, and we have never been unable to satisfy a margin call, although no assurance can be given that we will be able to satisfy requests from our lenders to post additional collateral in the future.

An event of default or termination event under the standard master repurchase agreement would give our counterparty the option to terminate all repurchase transactions existing with us and make any amount due by us to the counterparty to be payable immediately.

We have made and intend to continue to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock. In order to qualify as a REIT and to avoid federal corporate income tax on the income that we distribute to our stockholders, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, on an annual basis. This requirement can impact our liquidity and capital resources.

For our short term (one year or less) and long term liquidity and capital resource requirements, we also rely on the cash flow from operations, primarily monthly principal and interest payments to be received on our Agency RMBS, as well as any securities offerings authorized by our board of directors.

Based on our current portfolio, leverage rate and available borrowing arrangements, we believe that our cash flow from operations and the utilization of borrowings will be sufficient to enable us to meet anticipated short term (one year or less) liquidity requirements such as funding our investment activities, funding our distributions to stockholders and for general corporate expenses. However, an increase in prepayment rates substantially above our expectations could cause a temporary liquidity shortfall due to the timing of the necessary margin calls on the financing arrangements and the actual receipt of the cash related to principal paydowns. If our cash resources are at any time insufficient to satisfy our liquidity requirements, we may have to issue debt or additional equity securities or sell Agency RMBS in our portfolio. If required, the sale of Agency RMBS at prices lower than their amortized cost would result in realized losses. We believe that we have additional capacity through repurchase agreements to leverage our equity further should the need for additional short term (one year or less) liquidity arise.

We may increase our capital resources by obtaining long term credit facilities or making public or private offerings of equity or debt securities. Such financing will depend on market conditions for capital raises and for the investment of any proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.

Qualitative and Quantitative Disclosures about Short Term Borrowings

The following table discloses quantitative data about our short term borrowings under repurchase agreements during the three months ended March 31, 2013 and 2012.



	Three Months Ended March 31,
(In millions)	2013			2012
Outstanding at period end	$	13,760		$	8,235
Weighted average rate at period end	0.41		%	0.34		%
Average outstanding during period ⁽¹⁾	$	14,108		$	8,194
Weighted average rate during period	0.43		%	0.33		%
Largest month end balance during period	$	14,544		$	8,344

_______________


(1)	Calculated based on the average month end balance during the period.

The rate on repurchase agreements was relatively unchanged during the three months ended March 31, 2013. During the three months ended March 31, 2013, our repurchase agreement balance was within the range of approximately $13.8 billion and $14.5 billion. Because we maintain a portion of our portfolio in the forward market, the amount of securities required to be financed in the repurchase agreement market may fluctuate. However, our overall leverage ratio did not fluctuate significantly, with a ratio of between 7.7 and 7.8 during the quarter.

During the three months ended March 31, 2012, our repurchase agreement balance remained stable. The rate on repurchase agreements was relatively unchanged during the three months ended March 31, 2012 with the weighted average rate during the period of 0.33% compared to 0.34% at period end.

Inflation

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Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors based in part on our REIT taxable income as calculated according to the requirements of the Internal Revenue Code. In each case, our activities and balance sheet are measured with reference to fair value without considering inflation.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As of March 31, 2013 and December 31, 2012, the primary component of our market risk was interest rate risk, as described below. While we do not seek to avoid risk completely, we do believe that risk can be quantified from historical experience and seek to actively manage risk, to earn sufficient compensation to justify taking risks and to maintain capital levels consistent with the risks we undertake. Our board of directors exercises oversight of risk management in many ways, including overseeing our senior management’s risk-related responsibilities and reviewing management and investment policies and performance against these policies and related benchmarks. See “Business—Risk Management” in our annual report on Form 10-K for the fiscal year ended December 31, 2012 for a further discussion of our risk mitigation practices.

Interest Rate Risk

We are subject to interest rate risk in connection with our investments in Agency RMBS collateralized by ARMs, hybrid ARMs and fixed rate mortgage loans and our related debt obligations, which are generally repurchase agreements of limited duration that are periodically refinanced at current market rates. We seek to mitigate this risk through utilization of derivative contracts, primarily interest rate swap and cap agreements.

Effect on Net Investment Income. We fund our investments in long term Agency RMBS collateralized by ARMs, hybrid ARMs and fixed rate mortgage loans with short term borrowings under repurchase agreements. During periods of rising interest rates, the borrowing costs associated with those Agency RMBS tend to increase while the income earned on such Agency RMBS (during the fixed rate component of such securities) may remain substantially unchanged. This results in a narrowing of the net interest spread between the related assets and borrowings and may even result in losses.

We are a party to the interest rate swap and contracts as of March 31, 2013 and December 31, 2012 described in detail under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” in this quarterly report on Form 10-Q.

Hedging techniques are partly based on assumed levels of prepayments of our Agency RMBS. If prepayments are slower or faster than assumed, the life of the Agency RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions.

Effect on Fair Value. Another component of interest rate risk is the effect changes in interest rates will have on the fair value of our assets. We face the risk that the fair value of our assets will increase or decrease at different rates than that of our liabilities, including our hedging instruments.

We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration essentially measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various third-party financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.

Extension Risk. We invest in Agency RMBS collateralized by hybrid ARMs, which have interest rates that are fixed for the first few years of the loan (typically three, five, seven or 10 years) and thereafter reset periodically on the same basis as Agency RMBS collateralized by ARMs. We compute the projected weighted average life of our Agency RMBS collateralized by hybrid ARMs based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when Agency RMBS collateralized by fixed rate or hybrid ARMs is acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated weighted average life of the fixed rate portion of the related Agency RMBS. This strategy is designed to protect us from rising interest rates by fixing our borrowing costs for the duration of the fixed rate period of the collateral underlying the related Agency RMBS.

We have structured our swaps to expire in conjunction with the estimated weighted average life of the fixed period of the mortgages underlying our Agency RMBS portfolio. However, in a rising interest rate environment, the weighted average life of the fixed rate mortgages underlying our Agency RMBS could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the term of the hedging instrument while the income earned on the remaining Agency RMBS would remain fixed for a period of time. This situation may also cause the market value of our Agency RMBS to decline with little or no offsetting gain from

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the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Interest Rate Cap Risk. Both the ARMs and hybrid ARMs that collateralize our Agency RMBS are typically subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the security’s interest yield may change during any given period. However, our borrowing costs will not be subject to similar restrictions. Therefore, in a period of increasing interest rates, the interest costs on our borrowings could increase without limitation by caps while the interest rate yields on our Agency RMBS would effectively be limited by caps. This problem will be magnified to the extent that we acquire Agency RMBS that are collateralized by hybrid ARMs that are not fully indexed. In addition, the underlying mortgages may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash income on our Agency RMBS than we need in order to pay the interest cost on our related borrowings. These factors could lower our net investment income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.

Interest Rate Mismatch Risk. We intend to fund a substantial portion of our acquisitions of Agency RMBS with borrowings that, after the effect of hedging, have interest rates based on indices and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and repricing terms of the Agency RMBS. Thus, we anticipate that in most cases the interest rate indices and repricing terms of our Agency RMBS and our funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. Therefore, our cost of funds would likely rise or fall more quickly than would our earnings rate on assets. During periods of changing interest rates, such interest rate mismatches could negatively impact our financial condition, cash flows and results of operations. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above.

Our analysis of risks is based on management’s experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results reflected herein.

Prepayment Risk

Prepayments are the full or partial repayment of principal prior to the original contractual maturity of a mortgage loan and typically occur due to refinancing of mortgage loans. Prepayment rates for existing Agency RMBS generally increase when prevailing mortgage interest rates fall. In addition, prepayment rates on Agency RMBS collateralized by ARMs and hybrid ARMs generally increase when the difference between long term and short term interest rates declines or becomes negative. Additionally, we currently own Agency RMBS that were purchased at a premium. The prepayment of such Agency RMBS at a rate faster than anticipated would result in a write-off of any remaining capitalized premium amount.

We seek to mitigate our prepayment risk by investing in Agency RMBS with (i) a variety of prepayment characteristics, (ii) prepayment prohibitions and penalties and (iii) prepayment protections, as well as by balancing Agency RMBS purchased at a premium with Agency RMBS purchased at a discount.

Effect on Fair Value and Net Income

Another component of interest rate risk is the effect changes in interest rates will have on the fair value of our assets and our net income exclusive of the effect on fair value. We face the risk that the fair value of our assets and net investment income will increase or decrease at different rates than that of our liabilities, including our hedging instruments.

We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration essentially measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.

The following sensitivity analysis table shows the estimated impact of our interest rate-sensitive investments and repurchase agreement liabilities on the fair value of our assets and our net income, exclusive of the effect of changes in fair value on our net income, at March 31, 2013 and December 31, 2012, assuming a static portfolio and that rates instantaneously fall 25, 50 and 75 basis points and rise 25, 50 and 75 basis points.

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March 31, 2013



Change in Interest Rates	Projected Change in the Fair Value of Our Assets (excluding hedging instruments)*		Projected Change in the Fair Value of Our Assets (including hedging instruments)*		Projected Change in Our Net Income
- 75 basis points	1.80	%	0.71	%	10.32	%
- 50 basis points	1.56	%	0.83	%	8.26	%
- 25 basis points	0.93	%	0.51	%	4.13	%
No Change	—	%	—	%	—	%
+ 25 basis points	(1.03	)%	(0.60	)%	(10.32	)%
+ 50 basis points	(2.16	)%	(1.29	)%	(20.65	)%
+ 75 basis points	(3.35	)%	(2.03	)%	(30.97	)%

December 31, 2012



Change in Interest Rates	Projected Change in the Fair Value of Our Assets (excluding hedging instruments)*		Projected Change in the Fair Value of Our Assets (including hedging instruments)*		Projected Change in Our Net Income
- 75 basis points	0.74	%	(0.08	)%	13.32	%
- 50 basis points	0.80	%	0.24	%	10.66	%
- 25 basis points	0.56	%	0.24	%	5.33	%
No Change	—	%	—	%	—	%
+ 25 basis points	(0.70	)%	(0.37	)%	(13.32	)%
+ 50 basis points	(1.53	)%	(0.86	)%	(26.64	)%
+ 75 basis points	(2.49	)%	(1.45	)%	(39.96	)%

_____________



*	Analytics provided by The Yield Book^® Software

While the charts above reflect the estimated immediate impact of interest rate increases and decreases on a static portfolio, we rebalance our portfolio from time to time either to take advantage or minimize the impact of changes in interest rates. Generally, our interest rate swaps reset in the quarter following changes in interest rates. It is important to note that the impact of changing interest rates on fair value and net income can change significantly when interest rates change beyond 75 basis points from current levels. Therefore, the volatility in the fair value of our assets could increase significantly when interest rates change beyond 75 basis points. In addition, other factors impact the fair value of and net income from our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets and our net income would likely differ from that shown above, and such difference might be material and adverse to our stockholders.

Risk Management

Our board of directors exercises its oversight of risk management in many ways, including overseeing our senior management’s risk-related responsibilities, including reviewing management policies and performance against these policies and related benchmarks.

As part of our risk management process, we actively manage the interest rate, liquidity, prepayment and counterparty risks associated with our Agency RMBS portfolio. We seek to mitigate our interest rate risk exposure by entering into various hedging instruments in order to minimize our exposure to potential interest rate mismatches between the interest we earn on our investments and our borrowing costs.

We seek to mitigate our liquidity risks by monitoring our liquidity position on a daily basis and maintaining a prudent level of leverage, which we currently consider to be between six and 10 times the amount of net assets in our overall portfolio, based on current market conditions and various other factors, including the health of the financial institutions that lend to us under our repurchase agreements and the presence of special liquidity programs provided by domestic and foreign central banks.

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We seek to mitigate our counterparty risk by (i) diversifying our exposure across a broad number of counterparties, (ii) limiting our exposure to any one counterparty and (iii) monitoring the financial stability of our counterparties.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

There have been no changes in our internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings

The Company is not currently subject to any material legal proceedings.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 15, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits


(a)	Exhibits.

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Exhibit Number		Description of Exhibit

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

32.1**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

Exhibit 101.INS XBRL		Instance Document (1)

Exhibit 101.SCH XBRL		Taxonomy Extension Schema Document (1)

Exhibit 101.CAL XBRL		Taxonomy Extension Calculation Linkbase Document (1)

Exhibit 101.DEF XBRL		Additional Taxonomy Extension Definition Linkbase Document Created (1)

Exhibit 101.LAB XBRL		Taxonomy Extension Label Linkbase Document (1)

Exhibit 101.PRE XBRL		Taxonomy Extension Presentation Linkbase Document (1)

_________________

* Filed herewith.

** Furnished herewith.

(1)

Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Statements of Assets and Liabilities at March 31, 2013(Unaudited) and December 31, 2012 (Derived from the audited balance sheet at December 31, 2012); (ii) Condensed Statements of Operations (Unaudited) for the three months ended March 31, 2013 and 2012; (iii) Condensed Statement of Changes in Net Assets (Unaudited) for the three months ended March 31, 2013; (iv) Condensed Statements of Cash Flows (Unaudited) for the three months ended March 31, 2013 and 2012; and (v) Condensed Notes to Financial Statements (Unaudited) for the three months ended March 31, 2013. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	CYS INVESTMENTS, INC.

Dated: April 19, 2013	BY:	/s/ FRANCES R. SPARK
		Frances R. Spark
		Chief Financial Officer and Treasurer
		(Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX



Exhibit Number		Description

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

32.1**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

Exhibit 101.INS XBRL		Instance Document (1)

Exhibit 101.SCH XBRL		Taxonomy Extension Schema Document (1)

Exhibit 101.CAL XBRL		Taxonomy Extension Calculation Linkbase Document (1)

Exhibit 101.DEF XBRL		Additional Taxonomy Extension Definition Linkbase Document Created (1)

Exhibit 101.LAB XBRL		Taxonomy Extension Label Linkbase Document (1)

Exhibit 101.PRE XBRL		Taxonomy Extension Presentation Linkbase Document (1)

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* Filed herewith.

** Furnished herewith.

(1)