ANNALY CAPITAL MANAGEMENT INC

The U.S. economy expanded in 2025 with real GDP growth coming in at 2.1% yoy, slightly above annual trend growth. The economic expansion continued to be predicated on strong consumer spending and private sector business investments, with the former advancing 2.6% yoy while the latter grew 1.9% yoy. Nevertheless, 2025 represented a downshift from the growth pace achieved in the prior four years as the growth momentum decelerated to end the year with GDP rising a more muted 0.5% SAAR in Q4 2025. Despite the Q4 2025 headline miss, the underlying details remained relatively positive. Real final sales to private domestic purchasers expanded 1.8% SAAR – a level consistent with the growth pace seen in the post pandemic period. Meanwhile, government spending declined meaningfully as the combination of the October/November 2025 government shutdown and a material reduction in the federal workforce resulted in a one percentage point drag on Q4 2025 GDP growth. Lastly, net trade normalized and had a limited impact on growth, subtracting 22 bps from Q4 2025 GDP. Looking ahead, the conflict in the Middle East has brought a significant energy price shock that may challenge the thus far solid performance of the U.S. economy, with Q1 2026 GDP still expected to rebound from the Q4 2025 level, albeit to a lesser extent than forecasted ahead of the conflict in Iran.

After weakening gradually throughout 2025, the labor market saw three consecutive employment reports with material surprises in either direction in Q1 2026. Looking through the volatility, it appears that payrolls are stabilizing near, or slightly above, their breakeven level with labor supply and demand in rough balance. According to the Bureau of Labor Statistics, employers added 178,000 jobs in March and a net 205,000 jobs in the quarter. However, the breadth of hiring remains limited, with the healthcare sector still accounting for most job growth. The unemployment rate ended the quarter at 4.3%, a modest decline from the 4.4% rate at the end of 2025. The labor force participation rate declined to 61.9%, its lowest level since late 2021. Wage growth, as measured by the year-over-year change in Average Hourly Earnings, fell from 3.7% in the fourth quarter of 2025 to 3.5% in the first quarter of 2026.

Inflation was little changed on a yoy rate in Q1 2026, and progress towards the Fed’s 2% target remained slow. The headline Personal Consumption Expenditure Chain Price Index, the Fed’s preferred inflation gauge, measured 2.8% yoy in February 2026, in line with the December 2025 reading. The core measure, which does not include price changes in food and energy sectors, measured 3.0 % yoy as of February, unchanged from December 2025. In the meantime, the March core consumer price index was better-than-expected, while the headline index featured a significant acceleration driven by the ongoing energy price shock from the conflict in the Middle East. Overall, core commodity prices remained soft while core services remained firm. Looking ahead, we expect that inflation prints will be volatile given the higher commodity prices, with core inflation continuing to make only slow progress towards 2%.

U.S. interest rates repriced sharply in Q1 2026 as deteriorating risk sentiment tied to the conflict in Iran reignited inflation concerns and prompted a reassessment of monetary policy. Treasury yields rose across the yield curve, led by the front end, as expectations for Fed easing were pared back, resulting in a flatter yield curve. Market-based measures of short‑term inflation expectations increased meaningfully alongside higher energy prices, though longer‑term inflation measures declined, suggesting the inflation shock was viewed as near‑term rather than structural. Against this backdrop, interest rate volatility rebounded from the subdued levels seen earlier in the year. Amid higher volatility and rising yields, mortgage spreads widened over the quarter, with the spread between the 30‑year Agency MBS coupon and the 10‑year U.S. Treasury rate widening to 106 bps.

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