Charlie Bottle

Annaly Capital Management: Epitome of Low Risk, High Reward

10% increase in the value strikes me as too agressive; if they had gone down by that much NLY would have been obliterated.

Basic bond math tells you that change in value of portfolio approximates change in yield times duration of the portfolio.

It seems that you are overestimating the upside and underestimating the downside, given that (i) the entire agrument for the upside rests on this and you do not have enough information (and perhaps knowledge) to ascertain it with any precision, and (ii) you incorrectly stated that the government has provided an explicit guarantee on the agency debt.

The artcile subtracts from the sum of human knowledge, I suggest you do the right thing and ask to remove it as itis technically incorrect on key aspects.

Annaly Capital Management: Epitome of Low Risk, High Reward

JAZ, what about my question on the relationship between the yield and the mark to market of the assets? What are your assumptions on the duration or the portfolio?

Annaly Capital Management: Epitome of Low Risk, High Reward

JAZ, With regards to the relationship on the change in yield and markup of the assets, that would depend on the net duration of of the NLY portfolio taking into account swaps etc. are you assuming that duration is 1 year? I would think it would be substancially longer.

Annaly Capital Management: Epitome of Low Risk, High Reward

Thank you for the analisys. I agree NLY prsents a pretty unique arbitrage opportunitty. However I do not believe it is technically correct to say that the goverment has provided an explicit guarantee. Its support for the GSEs consists on an increase of the credit line from the treasury, access to the fed discount window and authorization by the tresury to buy shares of the agencies to shore up its balance sheet. Also it would be helpful if the author explain the assumptions behind the logic for the the logic for the 10% Markup, I presume it means that the yield on agency MBS falls by 10% (say from 5.5% to 5%, i.e. from a 150 bps spread over threasuries to 100 bps)?