Annaly Capital Management (NLY) is a real estate investment trust that invests primarily in agency-backed mortgage securities. The business model is based on the ownership and financing of a portfolio that invests in mortgage-backed securities. In its most simple form, Annaly borrows short-term funds that invest in long-term securities. The spread between the short-term interest rates and the long-term interest rates creates the backbone of Annaly's business model. Using an appropriate leverage level Annaly exploits this difference to boost its profits. As stated in the company's business strategy
Our net cash flows result primarily from the difference between the interest income on our investment securities and borrowing costs of our repurchase agreements and from dividends we receive from our subsidiaries.
One of the best parts of Annaly is its corporate tax-free status. As long as the company distributes at least 90% of its taxable income, it is not subject to federal corporate income tax. Dividends are taxed according to individual circumstances.
Recently, one of the readers claimed that higher interest rates will destroy Annaly's balance sheet. It is true that higher interest rates will lower the value of existing bonds. However, FED's operation twist is aimed at reducing the long-term interest rates -- not raising them. As I stated here, operation twist will have two policy actions:
1. Fed will buy long-term bonds, shifting the demand curve for the long-term bonds upward. If the demand for long-term bonds gets higher, the price of the long-term bonds will also get higher, driving down the long-term interests.
2. Fed will sell short-term securities, shifting the demand curve for the short-term securities downward. If the demand for short-term securities gets lower, the price of these securities will also get lower,driving up the short-term interest rates.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.