ANNALY CAPITAL MANAGEMENT INC

U.S. GDP growth in the first quarter of 2025 slowed with gross domestic product declining 0.3% SAAR, largely driven by a 4.8% drag of net trade to quarterly economic activity. Despite the decline in the headline GDP number, consumption and investment activity remained relatively healthy in the quarter, with final sales to private domestic purchasers coming in at 3.0% SAAR, a gain in line with the quarterly average in 2024.

The labor market remained resilient in the first quarter. Labor supply and demand stayed balanced, as evidenced by the first quarter’s stronger-than-expected employment data. According to the Bureau of Labor Statistics, seasonally adjusted total non-farm payroll employment rose at a monthly average pace of 133,000 workers added in the first quarter – a modest decline from the average of 167,667 workers added per month in all of 2024. The unemployment rate ended the quarter at 4.2%, only modestly higher than the 4.1% rate at the end of 2024. The increase was driven by more people entering the labor force, with not all of them being able to find work. At the same time, wage growth, as measured by the year-over-year change in Average Hourly Earnings, fell from 4.0% in the fourth quarter to 3.8% in the first quarter.

Inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Price Index (“PCE”), remain above the Fed’s 2% inflation target and progress on disinflationary measures has been slow. Total PCE prices over the 12 months ending in March rose 2.3% compared to the 2.6% recorded by the same metric at the end of December, while core PCE inflation, which excludes volatile food and energy prices, fell from 2.9% in December 2024 to 2.6% in March. Progress on inflation in the first quarter remained uneven, much like it had been over the past year. Moreover, the forecast has become increasingly uncertain due to the most significant increase in the effective tariff rate in decades.

The Fed conducts monetary policy with a dual mandate: full employment and price stability. Given the slow progress on inflation, the Federal Reserve Open Market Committee (“FOMC”) kept the target range for the Federal Funds rate unchanged at 4.25% - 4.50% at their March meeting, marking their second pause since cutting rates by 100 basis points at the end of last year. The Federal Reserve Chair Jerome Powell has emphasized that it is too soon to determine the appropriate monetary policy response to the tariffs, while acknowledging their inflationary impact. In addition, the FOMC has maintained its focus on the still positive growth outlook and reiterated their guidance that they are not in a hurry to act. Forecasts from the FOMC meeting in March show a median of two 25 basis point interest rate cuts for 2025. However, the recent deterioration of economic growth forecasts has raised the odds of additional rate cuts. Meanwhile, regarding the FOMC’s balance sheet policy, the Fed announced that it will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion, while maintaining the monthly redemption cap on Agency mortgage-backed securities at $35 billion. Considering these developments, we now expect the Fed to continue to attempt to reduce its balance sheet over a longer period than initially anticipated.

Given the FOMC maintaining its on-hold status and the market awaiting further information on the fiscal front, Treasury yields were relatively rangebound in the first quarter. Interest rate volatility moved lower across the curve, and swap spreads – the difference between swap rates and Treasury rates of the same maturities – widened. The 10-year U.S. Treasury yield fell from 4.57% on December 31, 2024 to 4.21% on March 31, 2025. Despite lower rates and reduced volatility, the mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, widened slightly from 126 basis points at the end of 2024 to 130 basis points at the end of the first quarter.

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