Annaly Capital (NLY) share performance is likely to be sensitive to intensifying concern about the debt ceiling over the next few weeks. As the debt ceiling issue is used and abused for political ploy and purpose, I expect the stock market and most other asset classes, save gold, should see downside pressure. Among stocks, some are at higher risk than others, and Annaly is among those most sensitive because of its sensitivity to interest rates. So, despite the shares' softness since summer, they face further pressure near-term. However, if the debt ceiling issue is not blown by legislators in the end, then I would use the weakness as opportunity to acquire NLY on the cheap, because I favor the shares otherwise.
Treasury Secretary Lew said last week that if legislators do not raise the debt ceiling by mid-October, the nation will not be able to meet its obligations. If that happens, the United States will default (technically) on its obligations, and that could be disastrous. The reason for this is because it would place the full faith in the credit of the United States into question. For more on the debt ceiling, readers are invited to review the recently authored, Debt Ceiling Ignorance & the Horrific Economic Consequences. This article is focused on the effects that may strike NLY shares.
As investors in Annaly Capital shares already know, quickly rising interest rates are a very bad thing for mortgage REITS like Annaly and peers like American Capital Agency (AGNC) and Two Harbors Investment (TWO). Interest rate concern is the key reason the share prices of names in this group have declined so deeply this year already, though the catalyst was intensifying expectations for Fed tapering of asset purchases up until now.
As the SPDR S&P 500 (SPY) has gained 18.1% this year, Annaly Capital shares sank approximately 17.6%; American Capital Agency and Two Harbors are down 22% and 12%, respectively. The whole real estate stock sector has been under pressure, as evidenced by the iShares US Real Estate (IYR) drop of 1.3% year-to-date. Despite a steadily improving actual real estate market, the mREIT group has faced criticism about what damage could ensue to held asset portfolio values in a rapidly rising rate environment. Also, the mortgage REITs' abilities to manage their businesses would become complicated by a rising cost of borrowing matched against longer duration income streams at low relative yields. Reduced dividends result from less income, and lower security values are priced in.
In conclusion, over the next two weeks, Congress' inability to quickly resolve the debt ceiling issue threatens to raise alarm about interest rates, and that puts NLY and its peers at especially high risk. So despite my expectation that the risk will eventually be mitigated (it had better be), and against my otherwise favorable view for NLY, I must warn shareholders and prospective investors of that near-term danger. For those who have already taken capital off the table, there may soon be opportunity to reenter at a lower cost basis.