ANNALY CAPITAL MANAGEMENT INC

U.S. real economic growth remained firm in the first quarter, although it slowed from the robust pace seen in the second half of 2023, as gross domestic product rose 1.6% on a seasonally adjusted annualized rate. Consumer spending remains strong due to solid spending in services to start the year. However, goods consumption is modestly weaker as surveys of consumer sentiment appear less optimistic. Savings as a share of personal income declined to 3.6% in February, suggesting current consumer spending cannot be sustained with income growth and may weaken going forward. Investment activity appears more mixed with the increase in non-residential structure spending coming to an end, while residential investment currently tracks stronger than in the second half of 2023, due in part to strong housing starts and new home sales.

Meanwhile, the supply and demand for labor has continued to move into better balance, leading to stronger-than-expected employment data in the first quarter. According to the Bureau of Labor Statistics, seasonally adjusted total non-farm payroll employment rose at a stronger rate than the prior quarter, with a monthly average 276,000 workers added in the first quarter compared to an average 212,000 workers in the fourth quarter of 2023. The unemployment rate ended the quarter at 3.8%, only modestly higher than 3.7% for the fourth quarter. This is due to the increase in individuals seeking employment, likely driven in part by higher immigration rates, as seen in the rising labor force participation rate from 62.5% in December to 62.7% in March. At the same time, wage growth, as measured by the year-over-year change in Average Hourly Earnings, fell from 4.3% in the fourth quarter to 4.1% in the first quarter. This marks the slowest year-over-year wage gain since June 2021.

Inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”), remain above the Fed’s 2% inflation target and progress on disinflationary measures has been mixed. Total PCE prices over the 12 months ended in March rose to 2.7% compared to the 2.6% recorded by the same metric in January, while core PCE inflation, which excludes volatile food and energy prices, fell from 2.9% in January to 2.8% in March. Price pressures continued to be driven by the service sector, with an increase in car and medical care services, as well as little change in the still-elevated shelter sector. The lack of progress on inflation in the first quarter has raised concerns about a persistent stickiness of inflation above 2%. While forecasts continue to see further moderation in coming months, the strong labor market and healthy state of the economy suggest risks of reacceleration remain.

The Fed conducts monetary policy with a dual mandate: full employment and price stability. Given the progress on inflation at the end of 2023, the Federal Reserve Open Market Committee (“FOMC”) has kept the target range for the Federal Funds rate unchanged at the restrictive level of 5.25% - 5.50% since July 2023. The Federal Reserve Chair Jerome Powell has stated that the policy rate is at or near its peak in the Fed’s tightening cycle and signaled easier monetary policy over the course of 2024. Forecasts from the FOMC meeting in March show the median forecast of the FOMC expects three 25 basis point interest rate cuts this year. However, the recent lack of inflation progress has raised meaningful doubt over when and how much easing can be expected. The FOMC has committed to a data-dependent policy approach and recent data has confirmed that it may take longer than expected for the FOMC to confirm easing is appropriate. Meanwhile, regarding the FOMC’s balance sheet policy, the decline in their securities portfolio, which started in 2022, continued uninterrupted throughout the first quarter. The FOMC has signaled a willingness to slow this decline fairly soon in order to reduce the risk of financial market stress, particularly in front-end money markets.

The stronger-than-expected economic data, increase in market-based inflation expectations, and repricing of the Fed rate policy path drove interest rates across the U.S Treasury yield curve higher during the first quarter. However, the move was gradual and interest rate volatility moved lower relative to the second half of last year. The 10-year U.S. Treasury rate increased from 3.88% on December 29, 2023 to 4.20% on March 31, 2024. Higher rates but lower volatility allowed the mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, to widen only slightly from 137 basis points at the end of 2023 to 140 basis points at the end of the first quarter.

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