Annaly Capital Management (NYSE:NLY) reported a negative economic return of 7.6% for the third quarter of 2026 as higher interest rates, elevated volatility and wider Agency mortgage-backed securities spreads pressured book value. The mortgage real estate investment trust said earnings available for distribution nevertheless exceeded its quarterly dividend.
Book value per share declined 11.4% from the prior quarter to $17.86 as of Sept. 30. Including the $0.75-per-share dividend, Annaly’s economic return was negative 7.6%. Earnings available for distribution rose by 1 cent from the prior quarter to $0.80 per share, exceeding the dividend.
Chief Executive Officer and Co-Chief Investment Officer David Finkelstein said the fixed-income market faced a difficult quarter, with the 10-year Treasury yield rising 82 basis points to multidecade highs. Mortgage rates reached 7.5%, while rate volatility rose significantly in September, contributing to wider MBS spreads and Agency MBS underperformance.
“Earnings remained durable,” Finkelstein said, citing the company’s $0.80 per-share earnings available for distribution. He also said Annaly expects to out-earn its dividend in the fourth quarter based on the current portfolio and projected returns on new investments.
Capital Actions and Liquidity
During the quarter, Annaly redeemed $443 million of its Series I floating-rate preferred stock and issued $757 million of common equity through its at-the-market program. The company used the proceeds to fund the preferred-stock redemption and make investments across its portfolios.
Economic leverage increased to 5.9 times from 5.6 times, primarily because of the decline in equity, according to Chief Financial Officer Serena Wolfe. The hedge ratio increased to 100% from 97% as Annaly maintained what Wolfe called a defensive position amid market volatility.
Annaly ended the quarter with $6.9 billion in unencumbered assets, including $4.2 billion in cash and unencumbered Agency MBS. It also had approximately $8.5 billion of assets available for financing, representing about 54% of total equity. Total warehouse capacity for the residential credit and mortgage servicing rights businesses was $8.3 billion, including $2.8 billion of committed capacity.
Wolfe said net interest margin declined 7 basis points sequentially to 1.69%, while net interest spread declined 8 basis points to 1.42%. Average asset yields were stable at 5.45%, while the average economic cost of funds rose 7 basis points to 4.03%.
Agency Portfolio Faces Spread Pressure
Annaly’s Agency portfolio declined modestly to $92 billion in market value and represented 55% of company capital. The company added about $2 billion of MBS notional during the quarter, concentrating purchases in higher-coupon specified pools, particularly 5.5% and 6% securities.
Finkelstein said the company entered the quarter with conservative duration exposure and historically low leverage. As rates rose, Annaly added hedges, primarily through Treasury futures, to limit interest-rate exposure. The company entered the fourth quarter with somewhat more rate exposure because management views current higher yields as attractive.
Early in the fourth quarter, Annaly rotated more than $2 billion of primarily seasoned specified pools into higher-coupon to-be-announced securities. V.S. Srinivasan, head of Agency, said the company’s preferred 5.5% and 6% coupons were trading at discounts, while the 6.5% coupon was the only segment trading at a premium dollar price.
Management said current Agency MBS spreads offer new-money returns in the mid- to high-teens. Finkelstein said the company’s capital-allocation priority remains residential credit first, followed closely by Agency investments and then mortgage servicing rights.
Residential Credit Volume and Securitization Activity
Annaly’s residential credit portfolio ended the quarter at $10.4 billion in market value, or 23% of capital. The company’s Onslow Bay correspondent channel generated $7 billion of lock volume and $5.8 billion of fundings, its highest quarterly funding volume since the channel began more than five years ago.
The locked pipeline had an average FICO score of 766 and an average loan-to-value ratio of 67%, Finkelstein said. Annaly settled $7.4 billion of securitizations during the third quarter and priced an additional $2.2 billion in October. The company said it had priced more than $21 billion of securitizations across 37 deals in 2026.
Mike Fania, co-chief investment officer and head of residential credit, said triple-A non-QM spreads widened from about 130 basis points over the Treasury curve at the end of the second quarter to about 140 basis points at the end of the third quarter. Annaly’s most recent post-quarter-end non-QM transaction priced at 150 basis points over the curve, he said.
Fania said the non-QM securitization market remained healthy despite modest structural adjustments. In some transactions, the triple-A bond has shifted from a pro-rata structure to a sequential-pay structure, a change he characterized as modest.
On housing, Fania said Annaly believes national home prices could decline by several percentage points if mortgage rates remain near 7.375% to 7.5% for an extended period. However, he said the company views that scenario as manageable given its portfolio’s approximately 64% mark-to-market loan-to-value ratio, significant borrower equity and limited layered risk.
MSR Portfolio Expands
Annaly’s mortgage servicing rights portfolio grew to $4.3 billion in market value, representing 22% of company capital. The company acquired one bulk package with about $140 million of market value during the quarter, while its flow channel generated more than $50 million of volume, a quarterly high.
MSR valuations increased modestly, with the company’s valuation multiple ending the quarter at 6.15 times. Prepayment speeds fell to 4.8 CPR, while serious delinquencies remained below 60 basis points.
Ken Adler, head of mortgage servicing rights, said MSRs continue to serve as both a standalone return opportunity and a diversifier for Annaly’s Agency MBS exposure. He said the assets can help offset model risk related to prepayments and have historically traded well when rates rise and Agency MBS spreads come under pressure.
Finkelstein said Annaly expects continued MSR supply as mortgage originators face low profitability, consolidation and technology-driven operating changes. He said the company remains positioned to selectively add assets while also selling MSRs when market bids are attractive.
About Annaly Capital Management (NYSE:NLY)
Annaly Capital Management, Inc is a diversified capital manager and mortgage real estate investment trust listed on the New York Stock Exchange under the symbol NLY. The company primarily invests in and manages residential mortgage-related assets, seeking to generate income through interest-rate spreads, financing, and portfolio management.
Annaly’s investment activities have historically focused on agency mortgage-backed securities, which are backed by federally sponsored entities or government agencies.
