I put the following on the Economy & Markets Board by mistake. I think here is more appropirate:We have for us a substantial amount of money in what is now the American Century Ginnie Mae Fund, I turns out that our income from this fund, which we use for expenses, will be the smallest since 1993, and we have nearly 25% more units now than then! Well, you might think in that case that at least the units are selling well into all-time highs? Wrong! In fact, they are roughtly at the average January price over the last 10 years and about 3% lower than the all-time high of $10.91/unit tied earlier this year. So even though GNMA funds are bond like, they don't exactly play by the same rules.After 11 years of tracking this mutual fund, I think I can tell you it is a buy at $10.20/unit or lower and a screaming buy at $10.00/unit and lower. By this I mean the fund spends relatively little time below $10.20/unit and very little time below $10.00/unit (though it was below this during much of 1994, the worst bond year in my lifetime).That said, I think that the Vanguard GNMA Fund is better. We own some of that, but not much.brucedoe
Thanks for sharing, bruce. I have always been told that GNMA funds are a bit funny in that the portfolio of mortgages you own shifts as people refinance or early pay their mortgages. That makes them sensitive to changes in the mortgage loan industry--as you say not exactly like bonds.Still they are relatively safe. Its just that yield is not always what you expect.
Thanks for the info. I noticed that the current yield on the Vanguard GNMA is 4.84% which is pretty good. They do caution on the current yield about the risk of current refinancing to get the lower rates though. Does the opposite of this hold true? That is if we get rising rates, can we expect total returns to rise?If total returns will rise with rising rates, isn't this the perfect investment for a rising interest rate environment? I have never heard this mentioned before so I must be getting something wrong.Thanks,JG
They tell you that the average mortgage runs about 7 years. That means of course that plenty of people use the equity in their homes to move to bigger ones. Or people with growing families move into large homes. Or they get transferred as they move of the career ladder. Or they sell their large house after the kids are gone and move into something smaller.All of these things tend to happen at regular intervals, but low interest rates also cause people to refinance (paying off the new mortgage with a new one) and move sooner.So sure, the rates should rise, but more slowly than they fall.
So sure, the rates should rise, but more slowly than they fall. Thanks for the reply. Sounds reasonable. Still even in this low interest rate environment, a current yield of 4.84% is not bad with the prospect of rising returns as rates rise. It seems that this would be a good component to add for the FI protion of the portfolio.JG
http://finance.yahoo.com/q/bc?s=VFIIX&t=my&l=on&z=m&q=l&c=Here's a long term chart for Vanguard's GNMA Fund. If you look at the most recent interest rate cycles (i.e., not back as far as the mid-'80s when we got our 11% mortgage—gee, I wonder why we paid off early?—there's about a 10% swing in the fund NAV. Figuring out durations on this fund is complicated, but my sense is they are something less than an intermediate bond fund, and this swing in NAV would be consistent with mortgage rate swings in the 200-300 basis point range. If interest rates are up about 200 basis points in 5 years, I think your effective return over that period would be around 3-3.5%.
If you do a compare with VBMFX, Vanguard's total bond fund, the overlay is an uncanny match.db
Lokicious:If interest rates are up about 200 basis points in 5 years, I think your effective return over that period would be around 3-3.5%. Can you shed some light on how you arrived at these figures?Thanks,JG
"If interest rates are up about 200 basis points in 5 years, I think your effective return over that period would be around 3-3.5%. Can you shed some light on how you arrived at these figures?Thanks,"JG,Guesstimate. But the basic issue with the GNMA fund is the same as with other bond funds, if interest rates go up, the NAV will decline by an amount of change in basis points times average duration.The problem with the GNMA fund is they don't tell you average duration, hence the need to make an educated guess. (Apparently, average duration is unreliable with GNMA.) But, as you say, the fund tracks the Total Bond fund pretty closely, so we can base an estimate on that. I haven't checked lately, but I think the durations are about 4, so the NAV would decline 8% if interest rates go up 2000 basis points. Divide by 5, you get 1.5% annualized decline in NAV. Subtract from current yield, add a smidgen for increased yield averaged over the 5 years, and 3-3.5% is ballpark. Maybe a little on the high side.
Bruce, I don't pick on you! It just might seem so.One day the bond bear mkt That I think started last spring,\will ressert. The secular bull lasted 22 years or so.A bear would do damage all but afew % could imagine.I think thereis great risk in owning GNMA funds.If rates ever jack up 3% ? duration will zoom out.An avg GNMa might be down ? 25% in value.Just my idea.I can be wrong.
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