Annaly's Outlook on Housing Finance and Risk-Adjusted Returns Q1 2026

Annaly’s outlook for the housing finance market and risk-adjusted returns in Q1 2026

1) Housing finance market backdrop Annaly expects to remain constructive

Annaly characterizes the near-term housing finance backdrop as “constructive” for each of its investment strategies through the remainder of the year, citing both sector positioning and market conditions that support returns. ¹

From a market-technical standpoint, management highlights that Agency spreads are “at a more reasonable level” than earlier in the year, and that market technicals are the most favorable since the end of QE—both of which underpin its view that the market environment is supportive for new investments. ¹

On Residential Credit and MSR specifically, Annaly points to continued issuance/supply conditions that are “healthy” and “ample”:

• Residential Credit: Q1 gross issuance was $79 billion (up 63% year-over-year) and management reports securitization markets remained healthy. ²
• MSR: Annaly says bulk supply in Q1 was roughly $80 billion UPB (above Q1’25) and expects supply levels to remain ample throughout the balance of the year. ³

Finally, Annaly argues macro/policy developments could be supportive to housing finance demand and capital deployment:

• The company notes proposed bank capital standards are “more market friendly” and that residential mortgage loan RWAs are estimated to decline by 30%, potentially encouraging banks to deploy more into housing finance. ⁴
• Management also says elimination of a capital deduction related to MSRs above a threshold could “at the margin” increase demand for MSRs from banks. ⁴

2) Annaly’s expected risk-adjusted returns: “attractive” through the remainder of the year

Annaly’s explicit outlook statement is that each investment strategy is “well positioned to deliver attractive risk-adjusted returns through the remainder of the year.” ¹

Management ties that outlook to specific drivers it believes will protect downside and support carry/earnings:

• MSR prepayment protection and valuation: Management reports muted MSR prepay speeds (4.2 CPR in Q1) and serious delinquencies just under 50 bps, while the weighted average note rate of 3.3% is described as providing significant prepayment protection. ¹
• Credit quality focus: For Residential Credit, Annaly describes tight underwriting with portfolio credit quality indicators (e.g., serious delinquency levels) and emphasizes continuing growth while maintaining asset selection/credit discipline. ¹
• Portfolio differentiation and dynamic allocation: Annaly says its portfolio composition minimizes prepayment risk while generating strong carry, and that dynamic capital allocation is critical in volatile periods; it also states that with Agency overweight reduced entering Q2, the opportunity set appears more balanced. ⁵

3) What Q1 results suggest about the plausibility of that outlook

While the question asks for outlook for Q1 2026, the best direct support in the excerpts is Annaly’s actual Q1 2026 performance, because management is reporting the earnings context from which it forms its outlook.

• Economic return and resilience: Annaly reports economic return of 1.5% in Q1 with leveraging at 5.7 turns and earnings available for distribution (EAD) of $0.76 per share. ⁴⁶
• Performance by strategy: Management states that Residential Credit performed best, followed by MSR, with Agency lagging somewhat due to spread widening and costs associated with dynamically hedging. ⁷
• Operational/market participation: Annaly emphasizes ongoing acquisition and issuance access:
  • It committed to purchase $24 billion principal balance (~$388 million market value) of MSR in Q1. ³
  • It acquired $6.7 billion in whole loans in Q1 (~80% via correspondent channel) and reports $7.4 billion lock volume (up 16% QoQ and 41% YoY). ²
  • It settled 8 OBX securitizations for $4.7 billion in Q1, generating $570 million of proprietary assets for Annaly’s balance sheet and its joint venture. ²

This matters for “risk-adjusted returns” because management’s narrative is that it can continue to generate earnings/carry while managing risk even when spreads and hedging costs move around intra-quarter. ⁶⁷

4) Implications for Q1 2026 specifically: not “one-way,” but supported by relative value and technicals

Even within Q1, Annaly highlights that conditions were volatile (including rate volatility around geopolitical developments), yet it still delivered positive economic return and maintained conservative leverage. ⁴⁶⁸

Management also frames Agency—an important part of the overall housing finance ecosystem—as more investable than earlier in the year, after a January tightening and later retracement:

• It describes the January tightening and redeployment away from Agency and into credit, then says later retracement left Q2 with a “more balanced view” across strategies. ⁹
• It asserts Agency spreads are supportive / investable, referencing that weekly flows into fixed income funds are strong and CMO issuance absorbs over 30% of gross supply as banks buy CMO floaters. ⁹
• It also links potential Agency support to bank capital rule changes encouraging banks to retain more loans, which could lower securitization rates and organic growth dynamics. ⁹

Bottom line

Annaly’s outlook for the housing finance market into Q1 2026 (and through the remainder of the year) is constructive, anchored by reasonable Agency spreads, favorable market technicals, healthy securitization/issuance conditions, ample MSR supply, and policy tailwinds that may support capital deployment into mortgages/MSRs. ¹³²⁴⁹ Management’s stated expectation is that its strategies are positioned to generate “attractive risk-adjusted returns”—and Q1 results (1.5% economic return, conservative leverage, and differentiated strategy performance with Residential Credit and MSR stronger than Agency) support that the company believes it can execute risk control and relative-value allocation in a volatile environment. ¹⁴⁶⁷