GNMA downward spiral

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hoops777
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GNMA downward spiral

Post by hoops777 »

Any thoughts on the GNMA fund now down to 10.60 from well over 11 not too long ago?Am I suppose to watch this continue down to 10 or so and hope in 5 years to be even again?
K.I.S.S........so easy to say so difficult to do.
technovelist
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Re: GNMA downward spiral

Post by technovelist »

I have never been able to figure out why anyone would buy GNMAs, either directly or through a fund. If it is for the "extra yield", why not just buy Treasurys and sell call options on them?
In theory, theory and practice are identical. In practice, they often differ.
garlandwhizzer
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Re: GNMA downward spiral

Post by garlandwhizzer »

TIPS fund is down more than GNMA. All intermediate term and long term bond funds are coming under selling pressure now. GNMA might be suffering a bit more because of its duration characteristics. Those who hold very low interest rate mortgages keep them as rates go up, which means that the average duration of the GNMA portfolio increases with increasing interest rates, the opposite of what investors want in a rising rate environment.

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richard
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Re: GNMA downward spiral

Post by richard »

hoops777 wrote:Any thoughts on the GNMA fund now down to 10.60 from well over 11 not too long ago?Am I suppose to watch this continue down to 10 or so and hope in 5 years to be even again?
Prices of all securities fluctuate. Dropping a bit does not necessarily lead to continual decreases.

Many people prefer to buy things that are on sale, or at least things that are less expensive than they used to be.

Why did you buy it in the first place? Does that reason continue to hold?
gerrym51
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Re: GNMA downward spiral

Post by gerrym51 »

I sold 2/3 of mine last week. i put the money into brokered cds. I think it will come back so i i kept some.
Call_Me_Op
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Re: GNMA downward spiral

Post by Call_Me_Op »

hoops777 wrote:Any thoughts on the GNMA fund now down to 10.60 from well over 11 not too long ago?Am I suppose to watch this continue down to 10 or so and hope in 5 years to be even again?
Not sure why you thought GNMA's would be immune to interest rate increases. They affect all bonds.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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hoops777
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Re: GNMA downward spiral

Post by hoops777 »

I bought it because the yields were a little better,they are guaranteed by the govt and because they have a decent duration.Bad decision in terms of timing.Don't time the market....don't time the market...well I said ok I will not time the market and plunk it down against my better instincts.Horrible decision.Utter stupidity.Lost a good amount of money since oct and have a feeling this is going to continue straight down.That Pen fed CD looks real good right now.The decision now of course is to sell it and take my lumps or hold it forever and take how many years to get back to even.Ridiculous situation to be in.I knew better and did it anyway.I put all of my bond allocation into short term corp,GNMA and limited duration muni.I wanted out of the bond market entirely and was going to go the CD route and even opened an acct at PenFed.Full protect mode but did not pull the trigger.CD's to go with my 100K or so in Ibonds.Oh Well.
K.I.S.S........so easy to say so difficult to do.
Call_Me_Op
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Re: GNMA downward spiral

Post by Call_Me_Op »

hoops777 wrote:I bought it because the yields were a little better,they are guaranteed by the govt and because they have a decent duration.
Apparently, you are not familiar with the issue of negative convexity. You cannot compare the duration of GNMA's to that of conventional bonds.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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hoops777
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Re: GNMA downward spiral

Post by hoops777 »

I simply bought the fund based on reasons stated and ignored the differences.Where is the opportunity here in the middle of this difficulty Mr.Einstein? :D
K.I.S.S........so easy to say so difficult to do.
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stilts1007
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Re: GNMA downward spiral

Post by stilts1007 »

Larry Swedroe's book "The Only Guide to a Winning Bond Strategy" had an insightful chapter on the unique risks associated with mortgage-backed securities and how in most cases they outweigh the small return premium. Definitely a recommendation for beginners/intermediates who are interested in learning the ins and outs of bonds, how they work, and why they do what they do. That said, after reading it I am still sticking with Total Bond Index for my 20% bond allocation, for simplicity's sake.
gerrym51
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Re: GNMA downward spiral

Post by gerrym51 »

hoops777 wrote:I simply bought the fund based on reasons stated and ignored the differences.Where is the opportunity here in the middle of this difficulty Mr.Einstein? :D

in an earlier thread we were told by someone( i can't remember who) because GNMA contained in effect both a put and a call. although in general know what puts and calls are the combination give me a headache. :mrgreen:
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FNK
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Re: GNMA downward spiral

Post by FNK »

hoops777 wrote:well I said ok I will not time the market and plunk it down against my better instincts.Horrible decision.
You're timing the market RIGHT NOW. And in the wrong direction, too.
Scooter57
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Re: GNMA downward spiral

Post by Scooter57 »

You may be overstating the negatives with GNMAs. Many people couldn't refinance because their homes we below the value of their old, high rate mortgages, do the fund has a mix of maturities and rates.. And people end mortgages prematurely when rates rise because the are transferred or move for a job, or retirement, or to get a nicer home. So the value of the mortgages in the fund will rise over time.

Plus, this is an actively managed fund, and the managers are aware of the rate situation and purchasing mortgages with that in mind. My guess is that the duration number reflects how many years are left on the mortgages in the portfolio. The drop in the fund this past month matches the change in mortgage rates the way you would expect from the duration number.
z3r0c00l
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Re: GNMA downward spiral

Post by z3r0c00l »

If this was a smart investment for you in the first place, I suggest you continue to reinvest dividends, and leave the fund alone for at least five years. That is what you should have expected with this investment - it is on a 5+ year investment timeframe. Now you are in the most important part, sticking with your plan. Having said that, you may very well be better off with some other bond fund like total bond or muni bonds (if in taxable.) But one should not let a drop in NAV be the reason for swapping funds. *A 3.6% drop!*

Vanguard even warned you about the horizon for this investment:

"Vanguard funds classified as conservative to moderate are subject to low-to-moderate fluctuations in share prices. In general, such funds may be appropriate for investors with medium-term investment horizons (four to ten years)."

I don't really understand GNMA funds, and so don't buy them. Perhaps we have reason to believe that it is a solid enough fund and I think over time, it will make the money back as rates go up. That will take years.
Last edited by z3r0c00l on Thu Jun 13, 2013 5:49 am, edited 1 time in total.
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tibbitts
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Re: GNMA downward spiral

Post by tibbitts »

I don't see anything alarming about recent GNMA fund performance. Just glancing at YTD, it appears to have fallen all of .15% more than the more highly regarded Intermediate Bond Index. That's well within the range of a single day's likely fluctuation. Most of us probably wouldn't choose GNMA for our only bond exposure, but over time it's not likely to perform much differently than roughly-similar-duration funds.

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nedsaid
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Re: GNMA downward spiral

Post by nedsaid »

Don't sweat it too much. I remember the US Stock Market going down 22% in one day back in 1987.

The losses on GNMA funds are close to what other bond funds are experiencing. Every dog has its bad days too. I owned a GNMA fund through my workplace savings plan since 1999 and it has done well. Did well though the tough bear markets of 2000-2002 and 2007-2009. The fund did what it was supposed to.

It is unnerving because we are used to the 30 year bond bull market. We are finding out that the Net Asset Values of Bond Funds can go down too.
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Re: GNMA downward spiral

Post by Call_Me_Op »

hoops777 wrote:I simply bought the fund based on reasons stated and ignored the differences.Where is the opportunity here in the middle of this difficulty Mr.Einstein? :D
Glad you asked. The opportunity is one for learning. In this case, the lesson regards duration, and the fact that it works differently for mortgage-backed bonds. In the case of mortgage-backed bonds, due to negative convexity, the duration is not a reliable measure of interest-rate sensitivity (because the duration is constantly changing). The second more obvious point is that all bonds are sensitive to interest rates, and they can all lose value over certain time periods.
Last edited by Call_Me_Op on Thu Jun 13, 2013 5:42 am, edited 1 time in total.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
jdb
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Re: GNMA downward spiral

Post by jdb »

nedsaid wrote:Don't sweat it too much. I remember the US Stock Market going down 22% in one day back in 1987.

The losses on GNMA funds are close to what other bond funds are experiencing. Every dog has its bad days too. I owned a GNMA fund through my workplace savings plan since 1999 and it has done well. Did well though the tough bear markets of 2000-2002 and 2007-2009. The fund did what it was supposed to.

It is unnerving because we are used to the 30 year bond bull market. We are finding out that the Net Asset Values of Bond Funds can go down too.
The last sentence above should be laminated and put as the lead reference going forward on all discussions of bonds and bond funds. I suspect there will be a lot more posts in future from investors shocked that bond NAV's going down. Stay the course. Thanks nedsaid.
richard
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Re: GNMA downward spiral

Post by richard »

hoops777 wrote:I bought it because the yields were a little better,they are guaranteed by the govt and because they have a decent duration.Bad decision in terms of timing.Don't time the market....don't time the market...well I said ok I will not time the market and plunk it down against my better instincts.Horrible decision.Utter stupidity.Lost a good amount of money since oct and have a feeling this is going to continue straight down.That Pen fed CD looks real good right now.The decision now of course is to sell it and take my lumps or hold it forever and take how many years to get back to even.Ridiculous situation to be in.I knew better and did it anyway.I put all of my bond allocation into short term corp,GNMA and limited duration muni.I wanted out of the bond market entirely and was going to go the CD route and even opened an acct at PenFed.Full protect mode but did not pull the trigger.CD's to go with my 100K or so in Ibonds.Oh Well.
Yield is a function of interest payments and principal value. If principal fluctuates, so does yield. The government does not guarantee a non-fluctuating principal value.

Trends usually continue until they change. There's no good reason to believe "this is going to continue straight down." If the market believed it, it would have gone down that much already.

Many believe in stay the course (follow your investment policy). Some people believe the right strategy is to buy rather than sell when prices go down. Buy low sell high is usually a better strategy than buy high sell low. Sell low is better than sell lower, but the issue is knowing the future direction of interest rates. That's not a common skill.
Valuethinker
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Re: GNMA downward spiral

Post by Valuethinker »

hoops777 wrote:Any thoughts on the GNMA fund now down to 10.60 from well over 11 not too long ago?Am I suppose to watch this continue down to 10 or so and hope in 5 years to be even again?
it's the nature of bond funds that they fluctuate around 10. If there is no default, then a bond fund should wind up back at 10.00 in the long run. (that's a very rough rule of thumb of a much more complex subject-- I am being very simplistic). A fund like Vanguard HY keeps NAV going down because some of the bonds default (but you get higher yields on the way).

It's worth reading Larry Swedroes' bond book and having a sense of why you own this fund. If you do still want to own it, you should be pleased, as the price drop means a higher yield going forward.

There are specific risks associated with Mortgage Backed Securities (GNMA and other US government agency bonds in particular) that need to be understood if you are going to own the fund. The good news is that they tend to show up only when there are big interest rate moves.
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zaplunken
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Re: GNMA downward spiral

Post by zaplunken »

GNMA does well in a declining or stable interest rate environment. I bought a bunch in 2007 and they were excellent but I exchanged out of them a while back, maybe 1 year. Glad I did. People don't get the danger involved in GNMA.

Now I stupidly put money into the Vg TIPS fund in Nov 2012 and lost 5% so far whereas if I put that into TSMI I'd be up 13-15% roughly based upon the increase of the DJIA, S&P 500, NASDAQ. :oops: Dumping TIPS, parking in a short term bond fund for reallocation back into equities to up my AA from 40/60 to 50/50. Don't ask when cuz you won't like my answer! 8-)
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FNK
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Re: GNMA downward spiral

Post by FNK »

zaplunken wrote:Now I stupidly put money into the Vg TIPS fund in Nov 2012 and lost 5% so far whereas if I put that into TSMI I'd be up 13-15% roughly based upon the increase of the DJIA, S&P 500, NASDAQ. :oops: Dumping TIPS, parking in a short term bond fund for reallocation back into equities to up my AA from 40/60 to 50/50. Don't ask when cuz you won't like my answer! 8-)
Unless you're trolling, you probably need to step away from your portfolio. This is exactly not the way we manage money.
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G-Money
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Re: GNMA downward spiral

Post by G-Money »

hoops777 wrote:Any thoughts on the GNMA fund now down to 10.60 from well over 11 not too long ago?Am I suppose to watch this continue down to 10 or so and hope in 5 years to be even again?
The last time GNMA was at $11 or higher was 12/27/12. The low since then was $10.58 on 6/12/13. A drop of <4% in a nearly 6 month span doesn't seem that dramatic to me, even for a bond fund. Source: https://personal.vanguard.com/us/funds/ ... &year=#res

I'd keep on keepin' on. 8-)
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livesoft
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Re: GNMA downward spiral

Post by livesoft »

G-Money wrote:... A drop of <4% in a nearly 6 month span doesn't seem that dramatic to me, ...
... especially since the fund paid out capital gains distributions which causes the NAV to drop without changing the value of your holdings. It's best to look at total return and not the NAV.

So if one believes a drop of 1% is a downward spiral, then I suggest they reset their expectations and their vocabulary. 1% isn't even a significant dip.
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G-Money
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Re: GNMA downward spiral

Post by G-Money »

livesoft wrote:
G-Money wrote:... A drop of <4% in a nearly 6 month span doesn't seem that dramatic to me, ...
... especially since the fund paid out capital gains distributions which causes the NAV to drop without changing the value of your holdings. It's best to look at total return and not the NAV.
Good point. I don't usually look at price or distribution history, so I foolishly forgot to check the latter when looking up the former.
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