Not really a fixed income idea – but close.

music selection:  “Always” — Bon Jovi

Annaly (NLY) has taken it on the chin recently.  The company is organized as a REIT and enjoys tax exempt status in exchange for distributing substantially all of its cash flow as distributions.  This particular REIT is invested primarily in agency backed securities.  That is, it is invested in home mortgages that are guaranteed against default by Fannie and Freddie.  The risk here is thus very low, giving the stock a bond like risk profile.  NLY has paid 10% or more returns to shareholder for decades and will likely continue to do so.

The recent flattening of the yield curve has hurt the company and resulted in a distribution cut.  Shares sold off sharply.  But there is a catalyst for the earnings to improve in the recent Fed rate cut.  The shares currently yield a little over 11% and that type of yield won’t last long.  ACTION TO TAKE: Annaly (NLY) is a BUY up to $10.00 a share.  Use a limit order.  Hold with a 25% trailing stop to protect yourself from further price declines.  Adjust your stop to reflect distributions received.

Devour your prey raptors!

Friday Fixed Income

Never miss another opportunity to devour prey!

2 thoughts on “Friday Fixed Income

  • August 16, 2019 at 9:20 pm
    Permalink

    I watch NLY as a potential “stink bid”. The idea is that maybe one could get executed on a protective put position or a far-ITM covered call that would lock in a total return in excess of prevailing bond yields. All you’d have to do is either get the option trade executed for a few cents off the center of the B-A spread OR leg into such a position over time (e.g. buy NLY, then buy the put or sell the call for a discount if it goes up the next day). It’s unlikely, but worth placing a margin limit order for.

    Currently, you’d earn a minimum of about 2.7% per year almost risk free buying the January 2021 protective put and collecting dividends.

    Reply
    • August 16, 2019 at 11:15 pm
      Permalink

      Or… better idea. Buy NLY and sell the $1 call. The TV is about 55 cents, which is all you’d pay for a position that pays 25 cents a quarter in dividends.

      Reply

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