Company: NLY-PF
Filing Date: 2025-10-30
Form Type: 10-Q
Source: 0001043219-25-000012
Chunk: 4

Company: ANNALY CAPITAL MANAGEMENT INC
Filing Date: 2025-10-30
Form: 10-Q
Item: Part I, Item 2
Chunk 4
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5% coupon specified pool holdings have medium-to-high quality characteristics that provide call protection as rates rally.

Supply and demand technical factors continued to improve in the Agency MBS sector as fixed income flows were an estimated 50% higher than the same quarter a year ago. In addition, CMO creation has been running at over $30 billion per month, which has helped distribute MBS supply to a wider range of investors. Mortgage spreads tightened by 8 to 12 basis points (“bps”) relative to Treasury hedges over the course of the quarter, with lower and intermediate coupons showing the strongest performance. As mortgage rates declined to the lowest levels in nearly a year, investors increased their prepayment expectations on recently issued higher coupon mortgages, in turn shortening the duration of the securities and negatively impacting their return potential. This quickly shifted investor demand from production coupons to lower and intermediate coupons, with little recent production driving them to outperform. 

Within our hedge portfolio, we added hedges alongside new asset purchases, with a bias toward swap hedges in the front end of the yield curve. The additional interest income from hedging with swaps provides adequate compensation for assuming the risk 

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIESItem 2. Management’s Discussion and Analysis 

of swap spread tightening. Further out the curve our hedge allocation is more balanced between swap and Treasury-based hedges, though our hedge allocation increased modestly in Q3 2025.

Overall, we remain optimistic with respect to the Agency MBS sector. While spreads have tightened meaningfully in Q3 2025, it was achieved with minimal support from banks or overseas investors. The continuation of the Fed cutting cycle should make MBS more attractive for the overseas community and potential regulatory reform is anticipated to help spur bank demand. Interest rate volatility should remain subdued as the Fed continues their path towards a neutral policy setting, while a steeper curve is likely to reduce option costs for our MBS portfolio.

Our Residential Credit business saw its portfolio increase by $265 million to $6.9 billion in economic market value of assets during the quarter. Investment grade assets in the residential credit market tightened during the quarter with Non-QM “AAA”-rated securities roughly 15 bps tighter, providing a supportive backdrop for securitization issuance, which is running at the second largest gross issuance since 2008 at $160 billion year-to-date. Within this environment, we believe Onslow Bay’s securitization platform continues to be well positioned to benefit from