ANNALY CAPITAL MANAGEMENT INC

The U.S. economy faced considerable uncertainty in the second quarter of 2025 (“Q2 2025”), but the Trump Administration’s policy changes and related market volatility – primarily following the tariff announcements in April – have had a smaller impact on labor markets and economic growth than many market observers had anticipated. While hiring has slowed relative to the pace of recent years, employers hired enough workers to lower the unemployment rate marginally to 4.1%. Conditions point to balanced labor supply and demand, while layoffs remain muted.

Meanwhile, economic growth rebounded from the modest contraction in the first quarter (“Q1 2025”), as global trade flows presented less of a drag on domestic economic activity in Q2 2025. Looking at the first half of the year, the U.S. economy is likely expanding at roughly a 1.0% annualized rate, one-third of the real growth pace seen in 2023 and 2024, though far from an outright economic contraction. Inflation moderated in Q2 2025, running 2.5% on a seasonally adjusted annualized rate (“SAAR”) in the quarter, well below the 3.5% SAAR seen in Q1 2025. The slowdown was driven by continued moderation in services sector inflation, with shelter inflation decelerating and most other service categories also softening. Goods inflation, meanwhile, continued to moderately accelerate, though the data has yet to show broad-based passthrough from higher tariff rates.

The improved market conditions facilitated a rebound in most asset classes to recover from their sharp underperformance in April, leading financial conditions – a gauge of money and credit flow in support of the economy – to reach some of the most accommodative levels seen since the onset of the Federal Reserve (“the Fed”) monetary policy tightening in 2022. Despite the improvement in market sentiment, some challenges persist. For example, long-term Treasury yields remain elevated, with the 30-year Treasury bond yielding 4.77% at the end of June 2025, compared to 4.57% at the end of March 2025. The higher long-term bond yields – which briefly exceeded the 5% yield level during the quarter – have been driven by increased term premia, the extra compensation investors demand to hold long-term bonds. Investor concerns over rising government budget deficits following the passage of the recent tax and spending bill and potential longer-term changes to global capital flows could lead to more supply and less broad-based demand for U.S. Treasury securities. The sharp tightening in swap spreads – the difference between interest rate swap yields and Treasury yields of similar maturities – are another indicator of the same dynamic.

Against this backdrop, Annaly generated earnings available for distribution of $0.73 and delivered an economic return of 0.7% for Q2 2025 and 3.7% for the first half of 2025. Incremental investment was allocated toward the Agency mortgage-backed securities (“Agency MBS”) business, with its capital allocation increasing slightly to 62%. This resulted in economic leverage rising from 5.7x in Q1 2025 to 5.8x at quarter end. While relative value led us to underweight our non-Agency strategies during the quarter, diversification continues to be a strategic priority, as we believe it enhances the stability of risk-adjusted returns for our shareholders.

Market conditions for our Agency MBS business improved throughout the quarter as interest rates stabilized, the yield curve steepened, and implied volatility declined. Of note, comparable fixed income asset spreads – such as investment grade rated corporate credit securities – benefited from the same developments but ultimately saw additional tightening given the robust risk sentiment in markets. Agency MBS performance lagged behind these products, as demand from the overseas and bank communities has remained muted, but we believe these participants may become more involved should the Fed resume cutting interest rates in the second half of the year or should favorable regulatory reforms take place.

Shifting to the Agency MBS activity, early in the quarter we managed our duration through the tariff driven volatility without meaningfully reducing our Agency portfolio. And as markets normalized, we steadily added Agency MBS at attractive spreads in line with our accretive capital raising, growing our Agency portfolio by nearly $5 billion during the quarter. Purchases were fairly evenly split across 4.5%, 5.5% and 6% coupons, and on balance we marginally preferred pools over To-be-Announced securities (“TBA”) as repo market financing was slightly more attractive.

Meanwhile, we operated within a narrow interest rate risk band given the elevated volatility experienced so far this year. Within our hedge portfolio, we continue to favor holding interest rate swaps against shorter-term risk due to the positive carry profile, while maintaining a more balanced mix of Treasury and swap exposure in the intermediate and long-end of the yield curve. Swap spreads tightened significantly during the quarter, and forward markets are signaling further tightening in the months ahead. In light of the environment, maintaining a 60/40 risk allocation between swaps and Treasuries appears more favorable at this time.

Our Residential Credit business saw its portfolio relatively unchanged at $6.6 billion in market value of assets during the quarter. The broader market tracked corporate credit performance through the quarter, widening in April in sympathy with other risk assets, before ending the quarter roughly unchanged. Our Onslow Bay platform had its highest quarterly securitization activity to date, closing $3.6 billion across seven transactions. Including two additional securitizations in July, cumulative 2025 securitization issuance totals $7.6 billion, in turn generating $913 million of high yielding, proprietary assets for Annaly and our joint venture. Onslow Bay’s expanded credit correspondent channel remained an industry leader, generating $5.3 billion of locks and funding $3.7 billion loans over the quarter, despite us tightening our credit standards once again given some of the headwinds in the housing market.

Available for sale inventories continue to increase as housing affordability remains challenged given elevated mortgage rates, high home prices and increased property taxes and insurance premiums. While affordability has been challenged for the past three years given the same factors, the housing market equilibrium has shifted as sellers now materially outweigh prospective homeowners. Higher supply has now led to four consecutive months of negative month-over-month home price appreciation according to Zillow indices. We expect home prices to potentially soften further, with home prices turning modestly negative on a year-over-year basis in the next couple of months. Balancing the deceleration of the housing market is a stable labor market, low consumer delinquencies, expansionary fiscal policy and elevated asset prices, including the equity markets. We believe we should remain well positioned into a modestly decelerating housing market as we control all aspects of our loan manufacturing strategy.

Our mortgage servicing rights (“MSR”) business saw its portfolio relatively unchanged for a second consecutive quarter as we added just $2 billion in unpaid principal balance during the quarter, which largely offset portfolio declines from prepayments. Bulk MSR supply in recent quarters has been met by robust demand, attracting strong bids from many market participants. In light of this environment, we have focused on building out flow MSR, subservicing and recapture partnerships and expect to participate more meaningfully in the bulk market as relative value improves. Annaly’s MSR valuation improved modestly quarter-over-quarter to a 5.9 multiple as interest rate volatility declined and the yield curve steepened. Although prepayment speeds on the portfolio increased marginally in line with seasonal expectations, the underlying note rate of the portfolio remained very low relative to current mortgage rates at 3.24% as of Q2 2025, which we believe should help insulate us from a more material increase in prepayments. The credit characteristics of the portfolio remained strong and serious delinquencies on the portfolio were relatively unchanged at 50 basis points.

Economic return, earnings available for distribution, and economic leverage are non-GAAP financial measures. Refer to “Non-GAAP Financial Measures” for additional information, including a reconciliation to their most directly comparable GAAP results.