Annaly's Q1 2026 Outlook on Housing Market and Returns

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

Based on Annaly’s Q1 2026 earnings call commentary, management’s outlook is that (1) the housing finance “backdrop” remains constructive, (2) market technicals are favorable, and (3) its diversified strategy mix (Agency + MSR + Residential Credit) is positioned to generate attractive risk-adjusted returns through the remainder of the year—with particular emphasis on more reasonable Agency spreads vs earlier in the year and ample market liquidity/technical support. ¹

1) Outlook for the housing finance market (macro/sector conditions)

A. Constructive “market and housing finance backdrop”

• Annaly states its investment strategies are “well positioned to deliver attractive risk-adjusted returns through the remainder of the year,” explicitly citing a “constructive market and housing finance backdrop.” ¹

B. Agency MBS technicals: most favorable since QE

• Management says “Agency spreads are at a more reasonable level today than earlier in the year,” supporting mid-teens new money returns. ¹
• They also describe “market technicals” as “the most favorable they’ve been since the end of QE.” ¹

C. Supply/demand conditions: expected ample supply in MSR-related markets

• For mortgage servicing rights (MSR), Annaly reports “bulk supply… was above Q1 ’25” and expects “supply levels to remain ample throughout the balance of the year.” ²

D. Residential Credit: healthy securitization market and strong origination activity

• Residential Credit spreads tightened early in the year and then widened again by late February/March, with “AAA non-QM spreads ending the quarter 10 to 15 basis points wider.” ³
• Despite that spread volatility, securitization fundamentals looked strong:
  • “Q1 Residential Credit gross issuance of $79 billion” which was “a 63% increase year-over-year.” ³
  • The OBX platform “settled 8 securitizations for $4.7 billion on the quarter,” generating “$570 million of high-quality proprietary assets.” ³
• Annaly also highlights robust activity in locking and warehousing:
  • Lock volume “$7.4 billion” (up “16% quarter-over-quarter and 41% year-over-year”). ³

E. Credit performance tone: low delinquency and stable realized-loss experience (MSR/Resi Credit context)

• For Annaly’s MSR underlying borrower credit profile, “serious delinquencies [are] just under 50 basis points.” ¹
• For non-QM / broader Residential Credit credit performance, Annaly says realized losses have remained minimal: “Realized losses… cumulative losses… are still a handful of basis points across various vintages.” ⁴
• They further characterize delinquency stability: serious delinquencies (D90+) are “140 basis points,” “in the range… 130 to 145 basis points” over the last year. ⁴

2) Outlook for risk-adjusted returns in (and coming out of) Q1 2026

Annaly’s return outlook is grounded in several management assertions and quantified Q1 results that they use as evidence their platform can operate through volatility.

A. Explicit guidance on risk-adjusted returns: “attractive… through the remainder of the year”

• Management states it believes “each of our investment strategies is well positioned to deliver attractive risk-adjusted returns through the remainder of the year.” ¹

B. Agency: “reasonable” spreads and mid-teens new money returns

• Management ties the favorable Agency outlook to “Agency spreads… at a more reasonable level” versus earlier in the year, and specifically says this offers “perspective new money returns in the mid-teens.” ¹

C. Portfolio differentiation: minimizing prepayment risk while generating carry (MSR)

• Management says its MSR portfolio composition is a differentiator that “minimiz[es] prepayment risk, while also generating strong carry.” ¹
• They describe MSR fundamentals as:
  • Prepay speeds “muted at 4.2 CPR in Q1.” ¹
  • Weighted average note rate “3.3%,” which is “the lowest note rate among the top 20 largest agency MSR holders,” and provides “significant prepayment protection.” ¹
  • MSR valuation multiple “increased modestly to a 5.94 multiple” primarily driven by “the increase in interest rates.” ¹

D. Demonstrated Q1 platform performance despite volatility

• Annaly reports an economic return of 1.5% in Q1 (on the quarter ended March 31, 2026). ⁵
• They attribute Q1 economic return to improved funding/roll income:
  • “30 basis point improvement in our average repo rate to 3.9%” and
  • “higher TBA dollar roll income driven by increased specialness.” ⁶
• They also report leverage stayed disciplined at “5.7 turns.” ⁵

E. Strategy-level relative performance in Q1

• Management states Q1 results favored Residential Credit and MSR over Agency:
  • “resi performed the best, followed by MSR and Agency obviously lagged.” ⁷
  • They characterize economic return ranges as “res i did the best, call it, low to mid-single digits and MSR low single digits in terms of economic return.” ⁷
  • They link Agency underperformance to spreads/costs of hedging (while being careful that hedging costs were a factor). ⁷

Bottom line (what Annaly is signaling about Q1 2026 outlook)

• Housing finance market: Annaly sees a backdrop that is constructive, with especially favorable Agency technicals and “more reasonable” spreads than earlier in the year, while Residential Credit markets show strong issuance/lock activity even with some spread volatility. ¹³
• Risk-adjusted returns: Management believes its diversified housing finance model is positioned to generate attractive risk-adjusted returns through the remainder of the year, supported by mid-teens Agency new money opportunities, MSR structures that mitigate prepayment risk, and strong Residential Credit momentum/credit quality. ¹³⁴