They invest in what they believe to be the premier asset-backed securities in the world - U.S. residential mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. They enhance the return on their investment in these securities by using leverage. Similar to a bank, they seek to earn positive net interest income from the difference between the yield on their securities and the cost to finance them.
Mortgage-backed securities are ownership interests in mortgage loans made by financial institutions (savings and loans, commercial banks and mortgage bankers). When an institution has made enough loans it will "pool" or package them together and sell them to mortgage investors like Annaly. The institution will collect the principal and interest payments made by the homeowners and forward them to the mortgage investor. They structure their portfolio using the "Annaly MBS Barbell Strategy". This strategy utilizes a combination of adjustable, floating and fixed-rate mortgage backed securities so that it can perform well throughout a wide range of interest rate environments. At one end of the barbell are adjustable-rate and floating-rate securities. These securities tend to outperform when interest rates rise because their yields will increase as interest rates rise due to the adjustable nature of their coupons. On the other end of the barbell are fixed-rate securities. These securities generally experience capital gains when interest rates are falling, which help to offset the lower yields associated with falling interest rates.