NEW YORK (TheStreet) -- The cracks which appeared in overseas equities markets and a multitude of peripheral carry-trade currencies blow-ups presages trouble and a reversion back to the so-called 'risk-off' trade. Therefore, and as per my model, Annaly Capital Management (NLY) is poised to benefit from the anticipated drop in yield of the bellwether 10-year Treasury note.
Though there are several facets to Annaly's fundamental analysis, such as the steepness (and rate of change) of the yield curve, and management's ability to negotiate the curve, et cetera, none is more important to the outlook for the price of Annaly than the yield of the 10-year Treasury note.
We must assume, unless shown otherwise, management is competent in their function to execute their model. There is nothing esoteric to the Annaly model; it becomes a matter of execution and a 'bet' by investors on a continued Fed's interest rate policy of a low-yield environment.
In my article of Jan. 8, I outlined my thesis for a bullish case in the share price of Annaly, which included a retreat from the 3% to 3.125% Maginot Line stamped as the Fed's demarcation in the rate of the 10-year Treasury note.A rebound in prices (lower yields) from the line indicates a Fed still in control of interest rates; and a sustained move above the line indicates a Fed that's lost control of rates, with the latter instance leaving investors of Annaly vulnerable to a loss of asset value and/or dividend payout. Moreover, I inferred that the Fed and the Bank of Japan would coordinate swaps activity between the two central banks during the $10-billion-per-month 'taper' period. Though I've received email from readers refuting the notion of Japan's ability to cooperate with the Fed, below, we can see the chart showing the Bank of Japan's rapid increase in holdings of Treasuries as the yield on the 10-year moved back up to 2.5% from record lows reached in March/April. From the graph, we can see the Bank of Japan trying to keep pace with the decline in the U.S. dollar by selling yen and buying dollars. At the close of June, Bank of Japan holdings of Treasuries amounted to $1.083 billion. By the end of November, BOJ holdings of Treasuries totaled $1.186 billion, an increase of 9.5%, or a CAGR of 19.9%. Not only did the Bank of Japan demonstrate its willingness to buy Treasuries during the 10-year note sell-off, it bought at a rate of $20.6 billion each month throughout the five months of the shopping spree, more than double the $10-billion-per-month Fed 'taper'. Though NLY had bottomed out in anticipation of the December FOMC meeting, shareholders suffered during the rise in interest rates that began in May; but central bank ammunition is on the way to reverse the damage, enough to lift share prices higher from today's $10.42.
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