I wanted to make note of a development in the yield curve that should be a major positive for Annaly Capital (NYSE:NLY), which is why I am re-iterating my positive opinion of the stock and of its dividend.
Both the stock and the dividend have come under attack by the central theme of the yield curve spread, most notably between the 2 year Treasury Bond and the 10 year Treasury Bond, where Annaly has excelled.
Unlike the other top performing mREIT, American Capital Agency (NASDAQ:AGNC), which has gone further out on the curve and has "locked in" rates that might make it difficult to de-leverage if need be, Annaly has stuck to its conservative business model of taking what the market gives, so to speak, refusing to take on a riskier portfolio, and stay within the 2 and 10 year range.
It might mean that the next dividend announcement will be less than the last, again. Going forward we now find ourselves in an interesting situation.
We have been smothered with the notion that a flattening yield spread will crush the ability for mREITs to continue to earn money in an environment of intrusive government intervention.
Guess what? It has not flattened and actually this past week has seen the spread widen.
Take a look at this WSJ report. It notes;
In recent trade, the benchmark 10-year note recouped earlier losses to trade flat, yielding 2.274%. The 30-year bond was 2/32 higher to yield 3.399%. The two-year note was 1/32 higher to yield 0.378%. Bond prices move inversely to their yields.
Wow, the spread between the 2 year and the 10 year is 190 basis points!
The report continues,
Improving U.S. economic data was a key driver of the selloff. The data has been seen as damping prospects for a fresh bond-buying program from the Federal Reserve. The central bank's purchases since October on longer-dated Treasury bonds have been a main factor holding bond yields near historic lows.
Well isn't that a slap in the face to all of the mREIT naysaying doom and gloomers!
The 10-year yield has accelerated the rise after breaking a four-month range of 1.8%-2.1% earlier this week.
Looks like everything that the Fed and the Government has tried, has failed thus far. It might mean that mortgage rates will rise a bit, and refinancing could slow, and prepayments could drop.
How does all of this sound to owners of shares of Annaly? Well, in my own opinion, it supports everything I have stated in previous articles that point towards Annaly being able to continue earning profits from a conservative approach, and that although BV might not rise as quickly, it might be great news for future dividend yields.
Isn't that why we own shares anyway?
I am not sure if the share price of Annaly will move out of its current range, or if it will dip further or pop up prior to the ex dividend date. What I am becoming more comfortable with is the future of the dividend we receive.
The dividend might be cut this time around, but things look pretty darn good going forward in my opinion.
What is YOUR opinion?
Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.
Disclosure: I am long NLY.