The problem I have with NLY is that it borrows short term and lends long term. So, if the FED raises short term rates by another 100 basis points over the next six months, as it may well do it the economy remains strong, you need to wonder what will happen to the long side of the yield curve? If the 3,5 and 10 year rates go up proportionally, I think that NLY would still be hurt in the short term because of the lag in the adjustment period for the NLY ARMS. However, in this situation, in the long run, the yield will return and even increase.
However, if the FED raises short term rates by 100 basis points, at some time, the yield curve WILL flatten. Why am I so certain of this? Well, recall that the reason that the FED manipulates interest rates is to snuff out inflation. Also recall that the long end of the yield curve (3,5,10yr treasuries) is determined by an open bidding process and the primary driver is the perception that investors have of the future potential for inflation. If investors think that the potential for inflation is decreasing, then the yield on the long side will come down. And, this must always eventually happen because the FED will continue raising short term rates and tightening the money supply UNTIL inflation is reigned in. So, when the short term rates are high and the long term rates are low, that is a terrible environment for a REIT like NLY that makes is living off of the difference between the two rates.
In summary, be careful buying NLY on the next dip, because the next dip could really be the start of a real multi year bear market for NLY.