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Recap: Earnings Call for Annaly Capital Management
Annaly's stock is down today because of the narrowing of its interest rate spread.
Michael Sedacca    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

This morning, I listened to the Annaly Capital Management (NYSE:NLY) earnings call. The mortgage real-estate investment trust (REIT) is down about 4% today, mostly because of the massive narrowing in its interest rate spread. The company saw its interest rate spread decline to 0.90% from 1.43% last quarter, which was partially due to increased costs of capital at 23 basis points and a decline of 30 basis points in its average interest yield on assets due to increased amortization. The latter is simply because the portfolio rallied, and I can't determine the amortization cost as realized pay-up speeds are still very low.

According to management comments on the call, the increased cost of capital is due to an extension in the duration of Annaly's interest rate swap positions. It views the Treasury market as too optimistic -- or, in the case of the economy, pessimistic. With the 10-year US Treasury note one-year forward now at approximately 2.9%, that offers Annaly the ability to extend the duration of its swaps to benefit from any rise in interest rates.

The takeaway is that the contraction in Annaly's interest rate spread isn't all bad. If long rates were to rise during the rest of the year, the REIT will stand to benefit substantially. Judging by the pay rate on Annaly's swaps, it appears that it added $4.5 billion notional in 30-year ($2.8 billion) and 10-year ($1.4 billion) swaps against small reductions in its shorter-dated swap holdings (source: company filing). This would be very accretive for Annaly's book value in the coming quarters should rates rise, but equally negative if rates do not.

The decrease in its earnings yield appeared at first to be from drawing down a position in the portfolio, but new positions were added at 30-year maturities with higher coupons (which fall slower in value as rates rise), and the selling of $5 billion in assets was low relative to the size of the portfolio (which grew) versus the prior quarter.

Twitter: @MichaelSedacca

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

More From Michael Sedacca
Recap: Earnings Call for Annaly Capital Management
Annaly's stock is down today because of the narrowing of its interest rate spread.
Michael Sedacca    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

This morning, I listened to the Annaly Capital Management (NYSE:NLY) earnings call. The mortgage real-estate investment trust (REIT) is down about 4% today, mostly because of the massive narrowing in its interest rate spread. The company saw its interest rate spread decline to 0.90% from 1.43% last quarter, which was partially due to increased costs of capital at 23 basis points and a decline of 30 basis points in its average interest yield on assets due to increased amortization. The latter is simply because the portfolio rallied, and I can't determine the amortization cost as realized pay-up speeds are still very low.

According to management comments on the call, the increased cost of capital is due to an extension in the duration of Annaly's interest rate swap positions. It views the Treasury market as too optimistic -- or, in the case of the economy, pessimistic. With the 10-year US Treasury note one-year forward now at approximately 2.9%, that offers Annaly the ability to extend the duration of its swaps to benefit from any rise in interest rates.

The takeaway is that the contraction in Annaly's interest rate spread isn't all bad. If long rates were to rise during the rest of the year, the REIT will stand to benefit substantially. Judging by the pay rate on Annaly's swaps, it appears that it added $4.5 billion notional in 30-year ($2.8 billion) and 10-year ($1.4 billion) swaps against small reductions in its shorter-dated swap holdings (source: company filing). This would be very accretive for Annaly's book value in the coming quarters should rates rise, but equally negative if rates do not.

The decrease in its earnings yield appeared at first to be from drawing down a position in the portfolio, but new positions were added at 30-year maturities with higher coupons (which fall slower in value as rates rise), and the selling of $5 billion in assets was low relative to the size of the portfolio (which grew) versus the prior quarter.

Twitter: @MichaelSedacca

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

More From Michael Sedacca
Daily Recap
Recap: Earnings Call for Annaly Capital Management
Annaly's stock is down today because of the narrowing of its interest rate spread.
Michael Sedacca    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

This morning, I listened to the Annaly Capital Management (NYSE:NLY) earnings call. The mortgage real-estate investment trust (REIT) is down about 4% today, mostly because of the massive narrowing in its interest rate spread. The company saw its interest rate spread decline to 0.90% from 1.43% last quarter, which was partially due to increased costs of capital at 23 basis points and a decline of 30 basis points in its average interest yield on assets due to increased amortization. The latter is simply because the portfolio rallied, and I can't determine the amortization cost as realized pay-up speeds are still very low.

According to management comments on the call, the increased cost of capital is due to an extension in the duration of Annaly's interest rate swap positions. It views the Treasury market as too optimistic -- or, in the case of the economy, pessimistic. With the 10-year US Treasury note one-year forward now at approximately 2.9%, that offers Annaly the ability to extend the duration of its swaps to benefit from any rise in interest rates.

The takeaway is that the contraction in Annaly's interest rate spread isn't all bad. If long rates were to rise during the rest of the year, the REIT will stand to benefit substantially. Judging by the pay rate on Annaly's swaps, it appears that it added $4.5 billion notional in 30-year ($2.8 billion) and 10-year ($1.4 billion) swaps against small reductions in its shorter-dated swap holdings (source: company filing). This would be very accretive for Annaly's book value in the coming quarters should rates rise, but equally negative if rates do not.

The decrease in its earnings yield appeared at first to be from drawing down a position in the portfolio, but new positions were added at 30-year maturities with higher coupons (which fall slower in value as rates rise), and the selling of $5 billion in assets was low relative to the size of the portfolio (which grew) versus the prior quarter.

Twitter: @MichaelSedacca

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

More From Michael Sedacca
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