For some reason whenever Annaly (NLY) reaches a certain price, or a much greater level of investor interest, articles begin to pop up that are almost absurdly negative.
Yesterday I read one that said to avoid Annaly like the plague. Really? I mean REALLY? I could hardly believe my eyes. To be fair, the article was not nearly as bad as the headline but it was clear that the author simply had his head in the sand. Ignoring facts and developments can be harmful to ones financial health, and that author did not do any service to Seeking Alpha readership.
It is always prudent to know and monitor of all of the risks associated with mREITs, including Annaly as well as American Capital Agency (AGNC), but ignoring the rewards, especially right now, is probably worse.
The Situation, As It Is Now, In Reality
- The Fed is keeping ZIRP (zero interest rate policy) in place until at least through late 2014
Simply put, the short term rates stay at just about zero for nearly 2 more years. That means borrowing short and lending out longer is profitable. It is just that simple folks. (Well not really simple, but easier to understand)
- The yield curve between the 2 year, and 10 year Treasury is still wide
With 140 to 150 basis points to work with right now, Annaly can make more money with less risk than in most previous years. When that spread tightens then less profits can be made and more leverage might be required and/or a cut in dividends occur. If the yield curve INVERTS (the longer end rates are lower than the shorter end rates) then we have a problem.
Call me crazy, but I just cannot see the 10 year or the 30 year Treasury rates being lower than zero (or .25%), can you?
- A steady and stable interest rate environment is very positive
While the Fed has attempted to manipulate the longer end rates by employing HAMP, HARP, and Operation Twist, to drive longer term rates down, which would normally squeeze Annaly's ability to grow their profits, it actually has created an environment that is keeping rates stable. Stability is a good thing for Annaly as it takes a conservative approach. By having a relatively stable interest rate environment to work with, Annaly has a far more "comfortable" arena to work within.
- Yes, a rapid rise in interest rates WILL be a problem
I think anyone invested in the mREITs is aware of the potentially negative affects of a rapidly rising interest rate environment. Let's be real though. Does anyone think for more than a nano second, that in the current economic climate that rates will rise faster than yeast??
Just take a look around the world and see how the global economy is. Can anyone honestly tell me that there will be a rapid rise in interest rates anytime soon if ever?
Yes, as things get better, the Fed will take their foot off the break slowly, and I believe we will have time to re-evaluate our positions in any mREIT, including Annaly.
That being said, avoiding Annaly like "the plague" is flat out wrong.
Disclosure: I am long NLY.