I understand how a declining NAV makes NLY stock price to appear to be more expensive, but could someone explain how it would impact NLY's ability to conduct their business? Given they have been anticipating increasing interest rates for the past 2 years or more, and given that in response to that belief they have maintained relatively low leverage historically, how would a declining NAV have anywhere near the impact that the marketplace has given it recently? I'm confused and would love to hear someone's informed theory. Right now, it appears as though the market assumes at least a 10 cent decline in NLYs next dividend at the same time that the yield curve has been increasing. It all seems so overdone to me...
I dont think anyone expected long rates to increase drastically. While everyone in the world knew interest rates had to go up no one expect interest rates to go up so fast in such a short period of time. As such the increase volatility one can expect NLY to lower their leverage. As such while spread is increasing the lower leverage will knock earnings down.
The decline in the BV has no direct impact on the business model. The big risk is in the contracts that back the repos....If they need to put up more collateral for them, then they could be forced to sell mbs in to a weak market. NLY has addressed this by decreasing their leverage and increasing the period of the repos. I don't think they have any thing to worry about at this level.
The huge benefit that nearly all followers of this stock are missing is the collapse of refis....Premium amortization consumed 420+ million of the first quarter's 1.1 billion in gross interest payments. Combine a big drop in disposal of MBS with a drop in refis and I would expect the premium amortization to drop at least in half. All of that cash goes right to the bottom line.
And, interest payments will rise in Q2 as well as income from CreXus will kick in. Add to this, share buybacks at 80% of bv and hedging way in the money relative to Qi and Q2 will show huge increases in cash. If Goldman is right, small increases in the 10 year by year end and then a steady rise through 2015 - all easily manageable through hedging - and the interest income balloons.