Mortgage Rate Decline and Federal Reserve Cuts Shape Outlook for Annaly Capital Management
## Federal Reserve Eases Policy Amidst Declining Mortgage Rates
On September 17, 2025, the **Federal Open Market Committee (FOMC)** implemented a 25-basis-point reduction in the federal funds rate, lowering the benchmark to a range of **4.00% to 4.25%**. This decision, the first rate cut in nine months, was primarily driven by concerns over a weakening labor market and slowing job growth. The **FOMC** further signaled the possibility of two additional rate reductions before the close of the year.
In tandem with the **Federal Reserve**'s policy shift, U.S. mortgage rates continued their downward trajectory, reaching their lowest point in nearly a year. The average rate for a 30-year fixed loan declined to **6.26%** as of September 17, 2025, according to **Freddie Mac**, down from **6.91%** at the beginning of the year. This decrease has spurred a notable uptick in refinancing activity, with the **Mortgage Bankers Association (MBA)** reporting a significant jump in related applications.
## Annaly Capital Management's Performance and Strategic Positioning
**Annaly Capital Management (NLY)** has demonstrated robust performance amidst these market dynamics. The company's stock has advanced **18.6%** year-to-date, considerably outperforming the broader industry's **5.9%** growth. This strong showing is largely attributable to the favorable interest rate environment, which has bolstered **Annaly**'s net interest income (NII). The firm reported **$493.2 million** in NII for the first half of 2025, a substantial increase from **$47.1 million** in the same period last year. In the first quarter of 2025, **Annaly**'s NII reached **$220 million**, marking its highest quarterly NII since the third quarter of 2022.
The company's net interest margin also expanded to **0.87%** in the first quarter of 2025, reflecting a 12-basis-point quarter-over-quarter improvement. This expansion is a direct benefit of lower funding costs on the liability side of its balance sheet. Further signaling financial strength, **Annaly** recently increased its dividend by **8%**, offering a current yield of **14.5%** while maintaining a dividend payout ratio below 100%.
**Annaly**'s diversified investment strategy, encompassing Agency mortgage-backed securities (**MBS**), residential credit, and mortgage servicing rights (**MSR**), is central to its resilience. As of June 30, 2025, its portfolio aggregated **$89.5 billion**, with **$79.5 billion** allocated to highly liquid Agency MBS. This multi-asset approach, combined with a **60-40 hedging mix** of treasury and swap exposure, is designed to mitigate interest rate risk and navigate a normalizing yield curve environment.
## Market Reaction and Broader Sector Implications
The prevailing market sentiment for mortgage real estate investment trusts (**mREITs**) is bullish, driven by the declining mortgage rates and **Federal Reserve** rate cuts. The substantial increase in loan demand, mortgage originations, and refinancing activities creates a constructive backdrop for the sector. The **MBA** reported a **43%** surge in mortgage loan application volume and a **58%** jump in the refinancing index last week, indicating significant market responsiveness to lower rates.
Companies such as **Ellington Financial (EFC)**, **Annaly Capital Management (NLY)**, and **Orchid Island Capital (ORC)** are identified as potential beneficiaries of these trends. The expectation is that lower rates will ease operational and funding pressures for **mREITs**, enhance gain-on-sale margins, and stimulate new investment activity. In comparison to **Annaly**'s year-to-date gain, peers like **AGNC Investment (AGNC)** and **Starwood Property Trust (STWD)** returned **9.7%** and **7.1%**, respectively, over the same period.
From a valuation perspective, **Annaly** currently trades at a forward 12-month price-to-tangible book (**P/TB**) multiple of **1.13X**, which is above the industry average of **1.08X**. **AGNC** and **STWD** trade at **1.26X** and **1.07X**, respectively. Analysts, however, rate **Annaly** as a "Moderate Buy," with an average 12-month price target of **$20.83**, despite implying a potential downside of **-5.96%** from current levels, recognizing the company's recent operational outperformance.
## Expert Commentary and Future Outlook
The future trajectory of interest rates and their impact on the housing market remain subjects of varied expert opinion. The **Federal Reserve**'s latest **Summary of Economic Projections** revealed a broad range of views among committee members, with the median projection for 2026 implying only one additional rate cut, bringing the rate to **3.25% to 3.5%**, which is higher than the sub-3% implied by the fed funds futures market. Inflation is not expected to reach the Fed's **2%** target until 2028.
**Morgan Stanley Research**, in contrast, anticipates a more aggressive easing cycle, forecasting five additional 25-basis-point cuts by July, culminating in a terminal rate of **2.75% to 3%**. However, **Jay Bacow**, Co-Head of Securitized Product Research at **Morgan Stanley**, cautions that **Fed** rate cuts do not always directly translate to lower 30-year fixed mortgage rates, citing the stronger correlation with Treasury bond yields and the forward-looking nature of financial markets.
For sustainable growth in home sales, **Morgan Stanley Research** estimates that mortgage rates would need to decline approximately 100 basis points, to around **5.5%**. The persistent gap between the average rate on existing 30-year mortgages (**4.1%**) and new loans (**6.5%**) continues to discourage homeowners with lower rates from selling, thereby limiting supply and contributing to elevated prices. **Orphe Divounguy**, Senior Economist at **Zillow**, suggests that if current "somewhat lower rates stick," it could motivate some marginal buyers but may not significantly impact sellers. **Realtor.com** data indicates that over **80%** of borrowers still hold mortgages below **6%**, reducing their incentive to relocate or sell.
Looking ahead, **Annaly**'s strategic balance sheet management, diversified asset allocation, and proactive capital deployment are expected to position it favorably to outperform peers in the **mREIT** sector. Key factors to monitor include the **Federal Reserve**'s subsequent rate decisions, movements in Treasury yields, evolving labor market data, and the broader housing market's response to continued adjustments in interest rates.
