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

Annaly’s outlook for the housing finance market and for risk-adjusted returns in Q1 2026 (as reflected in its Q1 2026 earnings call)

1) Management’s market outlook: “constructive” housing finance backdrop, with better relative-value conditions than earlier in the year

Annaly’s management characterized the environment for housing finance as constructive and expected its strategies to remain positioned to generate attractive risk-adjusted returns through the remainder of the year. ¹

More specifically, Annaly cited:

• Agency spreads at more reasonable levels than earlier in the year, which they linked to mid-teens “new money” returns for Agency strategies. ¹
• Market technicals described as the most favorable since the end of QE, supporting Annaly’s view of the capital markets backdrop for housing finance. ¹

On the credit side, Annaly’s Residential Credit outlook also appeared constructive but with emphasis on dispersion and volatility:

• Residential Credit spreads tightened at the outset of the year but later widened again in late February and March, with AAA non-QM spreads ending the quarter 10 to 15 basis points wider. ²
• Even with that spread volatility, management emphasized that securitization markets remained healthy (e.g., Q1 Residential Credit gross issuance of $79 billion, up 63% year-over-year). ²
• Annaly also described the non-agency/credit pipeline as still “operating at a high level,” noting growth and pricing/settlement activity despite volatility. ³

2) What Annaly expects about risk-adjusted returns: each strategy “well positioned,” supported by balance-sheet/portfolio design and market conditions

Annaly stated explicitly that it believes each of its investment strategies is well positioned to deliver attractive risk-adjusted returns through the remainder of the year. ¹

Management linked this outlook to two main supports:

A. Carry and prepayment protection within MSR

• Prepay speeds were muted at 4.2 CPR in Q1, supporting cash-flow stability in its MSR portfolio. ¹
• Weighted average note rate of 3.3% was described as providing significant prepayment protection and as the lowest note rate among the top 20 largest agency MSR holders. ¹
• Annaly added that its MSR valuation multiple increased modestly to 5.94, which management attributed primarily to increased interest rates (i.e., not a collapse in MSR fundamentals). ¹

B. Relative-value execution and technical support (including timing/portfolio composition)

• Annaly emphasized that Agency spreads became more reasonable versus earlier in the year and that market technicals were favorable, both of which they presented as drivers of better risk-adjusted new-money outcomes. ¹
• They also framed portfolio composition as a differentiator—minimizing prepayment risk while generating strong carry. ¹

3) How the Q1 2026 results “inform” the outlook for risk-adjusted returns

While the question asks for outlook, the company’s own Q1 performance provides evidence about what it expects to repeat.

Overall performance and earnings generation

• Annaly reported Q1 economic return of 1.5%, alongside conservative leverage of 5.7 turns, and $0.76 earnings available for distribution per share. ⁴
• Management said this performance reflected resilience across its diversified housing finance platform and that proactive hedging protected against interest rate volatility. ⁵

Return differentiation across the three strategies

• Management indicated Residential Credit performed best, followed by MSR, with Agency lagging in Q1 (attributing some Agency book value deterioration to hedging costs and spread widening). ⁶
• They characterized returns as residential credit low to mid-single digits, and MSR low single digits in Q1 economic return terms. ⁶

This matters for “risk-adjusted” outlook: Annaly’s emphasis is not only on absolute returns, but on hedging discipline plus diversified allocation across Agency, MSR, and Residential Credit. ¹⁵⁶

4) Housing finance market conditions management points to (what could matter in Q1 2026)

Although these are described in the Q1 call, they are the same market elements management used to set expectations for near-term risk-adjusted opportunities.

A. Capital markets and supply/demand dynamics

• For Residential Credit, Annaly reported healthy securitization markets with Q1 gross issuance $79 billion (+63% YoY). ²
• For MSR specifically, management said it expects bulk supply to remain ample through the rest of the year. ⁷
• MSR acquisition activity in Q1 included $24 billion of MSR principal balance purchased (about $388 million market value) at a weighted average note rate of 3.4%. ⁷

B. Spread volatility and how Annaly is managing it

• Annaly noted credit spreads widened again in late February/March, and that Agency spreads and hedging costs moved dynamically during rate volatility episodes. ²⁴
• Even so, management argued it remained comfortable with its hedging approach and that net hedge changes were modest by quarter end. ²

C. Regulatory/capital backdrop that supports the housing finance ecosystem

• Annaly discussed proposed bank capital standards as more market friendly than earlier versions, including an estimate that residential mortgage loan RWAs could decline by 30%, potentially improving bank deployment into fixed income/housing finance. ⁴
• They also noted the reproposal targeted mortgage markets and that elimination of a regulatory capital deduction related to MSRs could marginally increase bank demand to hold MSRs. ⁴

These regulatory points feed directly into Annaly’s “constructive backdrop” framing for housing finance over time. ¹⁴

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Bottom line

In Annaly’s Q1 2026 earnings call, management’s outlook for the housing finance market is constructive, supported by more reasonable Agency spread levels than earlier in the year, favorable market technicals since QE, and healthy Residential Credit securitization issuance. ¹²

On risk-adjusted returns specifically, Annaly said it believes all its strategies are positioned to deliver attractive risk-adjusted returns through the remainder of the year, emphasizing MSR stability (muted prepay speeds and low note rate) and portfolio/relative-value execution supported by the market backdrop. ¹

The company’s Q1 results—1.5% economic return, 5.7x leverage, and strategy-level differentiation with Residential Credit and MSR outperforming Agency—serve as the most immediate evidence of how management expects to navigate volatility while sustaining risk-adjusted outcomes. ⁴⁶