ANNALY CAPITAL MANAGEMENT INC

U.S. real economic growth remained sound in the third quarter, as gross domestic product rose 2.8% on a seasonally adjusted annualized rate (“SAAR”), in line with average growth seen in the first half of this year. Measures of consumption indicate that rising real household incomes have led consumers to maintain spending power, with consumer spending rising 3.7% SAAR in the third quarter. However, consumers appear to be increasingly cautious as elevated short-term interest rates, low savings rates, a slowing labor market, and declining confidence appear to weigh on spending behavior going forward. Nonresidential investment activity appears to have been robust during the quarter, particularly in equipment and intangibles, though residential investment remains muted as the restrictive monetary policy and inclement weather have impacted housing construction.

The supply and demand for labor has continued to move into better balance. 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 186,000 workers added in the third quarter compared to 177,000 workers in the second quarter. The unemployment rate ended the quarter at 4.1% after reaching 4.3% in July, the highest monthly reading since the fourth quarter of 2021, as more people entered the labor force, but ultimately were unable to find employment. At the same time, wage growth, as measured by the year-over-year change in average hourly earnings, rose to 4.0% in September compared to 3.8% in June.

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 appears to have resumed following the firmer readings in the early part of the year. Total PCE prices over the 12 months ended in September fell to 2.1% compared to the 2.4% recorded by the same metric in June, while core PCE inflation, which excludes volatile food and energy prices, rose slightly from 2.6% in June to 2.7% year-over-year in September. Price pressures eased in several services, including transportation and recreation services, as airline fares and live event pricing pressures continue to ease. Shelter inflation, one of the largest expenses for households and therefore the largest weight in the Consumer Price Index , continues to ease at an uneven pace, with monthly readings during the quarter showing an elevated degree of volatility. A further slowdown in aggregate inflation is likely to continue, particularly if shelter inflation eases further, as is widely expected.

The Fed conducts monetary policy with a dual mandate: full employment and price stability. Given the significant progress in reducing inflation, participants of the FOMC judged that the risks to achieving their dual mandate were in balance and that it is appropriate to begin to ease the stance of policy. At the September FOMC meeting, the Committee reduced their target range for the federal funds rate to 4.75 – 5.0% and forecast a further 50 basis points in cuts through the end of the year. The FOMC concluded that recalibrating the stance of policy closer to their observed neutral rate would help sustain the strength of the economy while continuing to promote progress on inflation. Meanwhile, regarding the FOMC’s balance sheet policy, the decline in their securities portfolio, which started in 2022, continued throughout the third quarter at a pace of $25 billion per month in Treasury securities and $35 billion per month in MBS.

Interest rate levels fell during the third quarter as market participants priced a downward shift in the Fed’s policy rate path. The most pronounced shift occurred in short-term rates, leading the Treasury yield curve to steepen. Measures of interest rate volatility remained high as policy uncertainty in the near term rose notably. The 10-year U.S. Treasury rate declined from 4.40% on June 30 to 3.78% on September 30, 2024. At the same time, the mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, tightened from 147 basis points to 118 basis points over the same period.

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