Annaly Capital Management, Inc.’s NLY investment strategy is driven by the prudent selection of assets and the effective allocation of capital to achieve stable returns.Yet, in the near term, Agency mortgage-backed securities (MBS) are likely to be affected by the Fed’s tapering efforts, an uptick in interest rate volatility, and the yield curve flattening.
The company’s investment strategy involves traditional Agency MBSs, which provide downside protection, as well as investments in more non-Agency and credit-focused asset classes that aid in enhancing returns. Also, investments in mortgage servicing rights (MSRs) are strategic fits as it offers a hedge to interest rate risk.
The investment outlook for the company’s existing and new Agency MBS investments remains positive despite the near-term underperformance. Hence, with $76.1 billion of its investment portfolio comprising highly-liquid Agency MBSs, Annaly is expected to enjoy attractive risk-adjusted returns in the fixed-income markets.
Further, NLY is focusing on improving its liquidity and reducing leverage. The company maintains an unencumbered asset portfolio aggregating $7.2 billion, which can readily provide liquidity in times of adverse market conditions. Hence, with a decent balance sheet, the company is well-equipped to support its business, even during economic stress and market volatility.
Annaly enjoys a diverse funding profile in the industry, with repurchase agreements and various forms of equity being its main sources of financing.The company maintains a strong presence in the residential securitization market through its residential credit business. This will enable it to capitalize on the improving outlook for residential mortgage finance.
However, in first-quarter 2022, the investment environment was challenging due to elevated geopolitical risk, inflation concerns, and the expectation of a tighter monetary policy. This resulted in yield curve flattening, spread widenings and Agency MBS valuation declining.
Any volatility in the mortgage market, unfavorable change in the shape of the yield curve, interest-rate volatility and deterioration in the generic financial conditions might affect the performance of the company’s investments, hindering its book value.
Recognizing the growing concerns in the financial markets, Annaly resorts to adjustment in its investment portfolio. Given the uncertainty in the current market, the company has increased its hedge portfolio. It expects to remain fully hedged in the near term. Hence, as risk and liquidity management are prioritized, at least in the short term, robust returns are expected to remain elusive and affect book value.
Any unfavorable change in mortgage rates will be concerning for Annaly, as it exposes the company to reinvestment risk. Moreover, higher prepayments are likely to adversely impact its net interest income (NII) and asset yield as the net purchase premium balance will be amortized over a shorter period.
Shares of NLY have declined 6.9% compared with the industry’s fall of 11.7% in the past month. NLY currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Image Source: Zacks Investment Research
Stocks to Consider
ARMOUR Residential REIT ARR and Arbor Realty Trust ABR are a few better-ranked stocks to bet on.
ABR carries a Zacks Rank of 2 (Buy) at present. Arbor Realty’s 2022 earnings estimates have been unchanged at $1.86 per share in the past month.
ARR currently carries a Zacks Rank of 2. ARMOUR Residential’s 2022 earnings estimates have been unchanged at $1.08 per share in the past month.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Zacks Investment Research