ANNALY CAPITAL MANAGEMENT INC

Delays in official economic data releases due to the ongoing government shutdown have limited our ability to gauge the current state of the U.S. economy. Nonetheless, real economic growth appears to have remained strong in Q3 2025 with the Bloomberg median economists’ forecast indicating that gross domestic product rose 2.7% on a seasonally adjusted annualized rate

(“SAAR”), above the 1.6% SAAR average growth seen in the first half of 2025. Measures of consumption through the month of August show healthy consumer spending with consumption growth tracking 2.8% SAAR in the third quarter – a growth rate consistent with the 2.9% SAAR expansion in 2024 and a rebound from the 1.5% SAAR gain in the first six months of the year. However, consumers – especially lower income consumers – seem cautious as low savings rates, a slowing labor market, and declining confidence appear to weigh on spending behavior going forward. Of note, nonresidential investment activity – particularly related to AI – rebounded in the third quarter while residential investment activity remained muted.

The labor market continued to slow in Q3 2025. According to the Bureau of Labor Statistics, seasonally adjusted total non-farm payroll employment rose an average of 55,500 workers per month in the first two months of the third quarter, below the nearly 83,000 workers per month gained in the first half of 2025 or the nearly 168,000 workers per month gained in 2024. The unemployment rate has gradually ticked up, reaching 4.3% as of August – the highest reading since October 2021. Yet, the supply and demand for workers remained in balance with the ratio of job openings per unemployed at 0.98 in August, compared to 1.42 in December 2023. At the same time, wage growth, as measured by the year-over-year change in Average Hourly Earnings, dropped moderately to 3.7% in August from 3.9% at the beginning of the year.

Inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditures (“PCE”) Price Index, remain above the Fed’s 2% inflation target, and disinflationary progress has stalled. Total PCE prices over the 12 months ended in August increased marginally to 2.7% compared to the 2.6% recorded by the same metric in June. Core PCE inflation, which excludes volatile food and energy prices, also ticked up to 2.9% in August from 2.8% in June. While tariff-related inflation pressures have been uneven and overall lower-than-expected, the inflation trend has leveled off, driven by rising goods prices and sticky services prices. Moreover, the forecast for inflation remains uncertain due to the most significant increase in the effective tariff rate in decades, whose full impact has yet to materialize.

The Fed conducts monetary policy with a dual mandate: full employment and price stability. Despite the slow progress on inflation, the FOMC cut the target range for the Federal Funds rate by 25 bps to 4.00% - 4.25% at their September meeting given the weakness in the labor market. Updated forecasts from the FOMC showed a median of two additional 25 bps cuts for the remainder of 2025, and one 25 bp per year in 2026 and 2027. Fed Chair Jerome Powell highlighted that the risk of weak employment growth had risen, which justified a lower rate path under their risk management framework but also argued for maintaining a restrictive stance while the FOMC assesses the appropriate monetary policy response. The updated economic forecast now expects higher growth and gradual improvement in the unemployment rate across the projection horizon while inflation projections for 2026 rose. Meanwhile, regarding the FOMC’s balance sheet policy, the Fed did not make any additional announcements and maintained its monthly redemption cap of Treasury and Agency MBS holdings at $5 billion and $35 billion, respectively.

The continued resilience of the U.S. economy supported strong financial market performance in the third quarter, with both equities and bonds rebounding from tariff-related concerns in Q2 2025. Equity market strength was driven by the ongoing AI boom, solid corporate earnings, and the Fed’s rate cut. Meanwhile, the Fed’s easing bias pushed interest rate expectations lower, particularly at the front end of the Treasury curve, while longer-dated Treasuries continued to reflect caution around fiscal risks and persistent inflation. The 10-year Treasury yield ended the quarter at 4.15%, down 8 bps from the prior quarter, and interest rate volatility fell to its lowest levels in many years. In this low volatility environment the mortgage basis, defined as the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, tightened by 20 bps over the quarter.

The following table presents interest rates and spreads at each date presented: