3 Historical Lenses for Annaly's 12% Yield

The bullish case for Annaly hinges on a familiar, powerful tailwind: declining volatility. The company's 11.5% economic return year-to-date through September 2025 is the key metric that mirrors the strong performance of mortgage REITs in 2019. That year was defined by a similar environment of stable rates and falling volatility, which compressed spreads and boosted returns. The current trajectory suggests a repeat of that structural advantage.

A critical component of this story is the growth of the Agency portfolio, which increased by 10% to $87.3 billion. This expansion is a double-edged sword. On one side, it shows the company is successfully deploying accretive capital into its core, highly liquid business. On the other, it exposes the portfolio to repricing risk if the Federal Reserve's policy stance shifts. The portfolio's growth is funded by a 92% hedge ratio, which leaves it vulnerable to curve steepening-a risk that materialized with a vengeance in 2022.

The bottom line is that Annaly is riding a 2019-style wave. The declining volatility environment is driving strong returns, and the company is scaling its Agency book to capture them. However, the high hedge ratio means this growth is not a passive tailwind. It is a leveraged bet on a stable yield curve. If the Fed's pivot to cuts is derailed or if volatility spikes again, the same conditions that fueled the 2019 rally could quickly reverse, turning the growth vector into a source of pressure.

The 2020 Analogy: Liquidity as a Lifeline

The stress test for any financial institution is a sudden, severe market shock. For Annaly, the $8.8 billion of assets available for financing is its modern-day lifeline-a buffer forged in the crucible of the 2020 pandemic. That crisis demanded liquidity above all else, and Annaly's structure was built to provide it. The core of this shield is a $5.9 billion of cash and unencumbered Agency MBS, a fortress of liquid assets that can be deployed instantly to meet obligations or seize opportunities when markets seize up.

This liquidity is not just a passive reserve; it is a strategic advantage amplified by scale. At 12x the size of the median mortgage REIT, Annaly operates with a capital base that provides diversified financing sources. This scale allows it to access multiple funding channels, from traditional repo to its own broker-dealer, creating a resilient capital structure. Yet this same scale introduces a concentrated risk. The company's total portfolio stands at a massive $97.8 billion, with the Agency segment alone at $87.3 billion. This concentration means its interest rate exposure is immense, and a prolonged shift in rates could pressure earnings across its entire book.

The company's recent performance underscores its capital-raising prowess. Record quarterly securitization volumes of $3.9 billion in Q3 2025 demonstrate a strong ability to raise funds and manage balance sheet complexity. This is a critical function, allowing Annaly to recycle capital and grow its portfolio. However, it also increases off-balance sheet risk and operational complexity, a trade-off inherent in its business model. The liquidity buffer exists partly because of this activity, as securitizations free up capital and collateral.

The bottom line is that Annaly's balance sheet resilience is a double-edged sword. Its massive liquidity buffer and scale provide a powerful defense against a liquidity crisis, a lesson learned from 2020. But the sheer size of its portfolio and its reliance on complex capital markets mean its fortunes are tightly coupled to the health of those markets. The $8.8 billion lifeline is real, but it is also a testament to a business model that is both highly capable and highly exposed.

The 2022 Analogy: The Leverage Trap

The math behind Annaly's high yield is straightforward, but the sustainability story is more complex. The company's common stock cash dividend of $0.70 per share supports a forward yield of 12.1%, a figure that looks compelling against a backdrop of elevated interest rates. On paper, the payout is covered. The company reported GAAP net income of $1.21 per average common share for the quarter, yielding a payout ratio of 58% on accounting earnings. That buffer suggests a stable income stream.

The real stress test, however, lies in the gap between accounting and economic returns. Annaly's economic return of 8.1% for the third quarter is the more relevant metric for a mortgage REIT, as it reflects the actual cash generation available for distribution after accounting for the cost of leverage. This economic return is only 1.4 times the quarterly dividend. That's a thin margin, especially when compared to the 2022 rate environment, which serves as a cautionary tale. In that period, high rates and a volatile market exposed the fragility of leverage-heavy models, where a small compression in spreads or a spike in funding costs could quickly erode economic returns.

This gap is partly structural. Annaly's economic leverage of 5.7x is lower than its GAAP leverage of 7.1x, indicating a more conservative capital structure that may limit earnings growth potential. The company is using its own capital to fund a portion of its portfolio, which reduces reliance on expensive debt but also caps the return on equity. This creates a tension: the conservative leverage protects against a sharp downturn but may also cap the upside in a stable or declining rate environment.

The bottom line is that Annaly's high yield is supported by a narrow cushion of economic return. The 2022 analogy warns that in a rising rate or volatile market, this cushion could compress further. For the dividend to be sustainable, the company must not only maintain its current economic return but also navigate a path where its more conservative leverage structure doesn't become a drag on growth. Investors are paying for yield, but they are also betting that the company's capital structure can withstand the next cycle of market stress.