Looking at NLY's numbers:

The annualized interest rate spread increased 18 basis points for Q3 vs Q2 (2.65-2.47). The increase in the spread was a result of the cost of funds declining 33 basis points but giving up only 15 basis points on the revenue end.

Q3-----Q4
4.89% 5.04% Annualized yield on avg earning assets during the qtr
2.24% 2.57% Annualized cost of funds on avg repurchase balance during the qtr
2.65% 2.47% Annualized interest rate spread during the quarter

Also the interest rate spread at the end of the 3Q continued to improve. From 2Q to 3Q the improvement was 27 basis points (2.40 – 2.13). Note, Q1 to Q2 the improvement was limited to 5 basis points. We are entering the Q4 with earnings spreads of 27 basis points better then we started Q3!

4.55% 4.67% 4.86% Weighted average yield on assets at period end
2.15% 2.54% 2.78% weighted average cost of funds at period end
2.40% 2.13% 2.08% Interest rate spread at period end

Based on the data below, can we assume the trend will continue and the spread at the end of the 4Q will approximate the spread at the end of the prior quarter? It has each of the prior two quarters.

2.65% 2.47% 2.11% Annualized interest rate spread during the quarter
2.40% 2.13% 2.08% Interest rate spread at period end

Leverage increased ever so slightly during the 3Q to 6 to 1. More importantly the portfolio mix changed in favor of fixed rate products. As we recall, fixed rate products tend to do better in a declining interest rate environments. Therefore NLY’s 4Q core earnings should continue to improve!!!

71% 69% Fixed rate
24% 25% Adj Rate
5% 6% Floating rate


Here is the part where I start to get really lost – Interest rate swaps.

0.28% 0.38% 0.55% Weighted avg receive rate on interest rate swaps at period end
3.98% 4.20% 4.55% Weighted avg pay rate on interest rate swaps at period end


So my question, is NLY a net buyer or seller of swaps when they are reducing their fixed rate portfolio via swaps? How do I asses this and what is the significance. What I can asses from the data is, the delta for the swaps is decreasing from quarter to quarter. 400 basis points in the 1Q, 382 in 2Q and 370 the third quarter. Am I correct to assume the result is less expensive “insurance” for NLY via the swaps?

Best regards,