Home Featured Annaly Capital Management Talks Asset Correlation Increase

Annaly Capital Management Talks Asset Correlation Increase


“The environment is characterized by a flattening curve, the hunt for yield has compressed credit spreads with little differentiation of risk.” So said CEO Kevin Keyes on Annaly Capital Management Inc.’s on the firm’s Q1 earnings call.

“Hypnotizing low volatility has resurfaced and trended 70% lower than the Christmas Eve high,” he said. “The correlation between the S&P 500 and Treasury market has risen over 20% in the past two months. The last time across asset correlations increased this much was in advance of the spike in volatility and the Southern market correction that followed in the fourth quarter of last year.”

And IPO volume, always a leading indicator of a high-priced equity market already stands at approximately $30 billion for the year, a dangerously high level not seen since 2007, he said. “Within this challenging marketplace, there are three significant and expanding macro realities which substantiate Annaly’s important position in any market environment: GSE mandatory shrinkage and potential reform, the Fed’s exit from MBS purchases and banks reducing their footprint in the mortgage market.”

Going forward, he said, and over the long-term, “Annaly’s model, size, diversity and scalability provide the market a permanent capital solution for the REIT distribution of these assets and provide our shareholders a unique opportunity to participate in the growth of our relevance, not only in the mortgage markets, but also in the financial sector and the economy overall.”

One long term opportunity for the company, he said, is the result of banks shrinking their mortgage businesses. “Back in 2016, I stated on an earnings call that the impact of regulation was more obvious than ever and all four of our businesses were designed to fill the emerging voids in investment and financing markets caused by the evolving regulatory playbook. Although banks remain the single largest holder of U.S. mortgage debt, their mortgage-related exposure has trended lower as a result of the regulatory regime. And non-banks have stepped in accordingly.”