Annaly Capital manages rate volatility effectively
The guest argued that mortgage REIT Annaly Capital remains a viable holding because its sophisticated hedging strategies protect it against yield curve inversion and rate volatility.
The argument
Despite concerns that rising long-term rates depress mortgage portfolio values and higher short-term rates increase funding costs, the guest pointed out that Annaly successfully navigated the recent yield curve inversion. The company balances its book by buying high-coupon mortgage-backed securities and holding negative-duration mortgage servicing assets.
The thesis, stress-tested
✓ What validates it
- ✓Annaly maintaining its book value and dividend payouts in upcoming quarterly reports
- ✓Stabilization of mortgage spreads
▸ Risks discussed
- ▸Severe and prolonged yield curve inversion
- ▸Rapid prepayments or sharp drops in housing transaction volumes
Hear it yourself
"So Annaly always has to be hedging their book. They own some mortgage backed securities that have very low coupons, and they own mortgage backed securities that have high coupons. They also own mortgage servicing assets that are the opposite of a mortgage backed security that has cash flow, but it has negative duration."
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