Ginnie Mae yield?

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dave1054
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Ginnie Mae yield?

Post by dave1054 »

How do I compare GNMA (vfiix) yield to other bonds and money markets. Does the published yield of 1.99% include partial principle payments? Does that effect share price?

Overall, opinions on vfiix as safe place to park money is appreciated.
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David Jay
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Re: Ginnie Mae yield?

Post by David Jay »

As with all other fixed income choices (Money Markets, CDs, bills, bonds), yields are falling. If you are hanging your hat on 1.99%, understand that it is dropping, just not as fast as Money Market or short term bonds (those have already dropped, making the GNMA yield look high by comparison).
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grabiner
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Re: Ginnie Mae yield?

Post by grabiner »

While the GNMA yield is reliable, there is a hidden risk. A GNMA represents a pool of mortgages. If rates fall, homeowners will refinance their mortgages, and you will not get the benefit of the rate decrease on those mortgages. Conversely, if rates rise, refinancing becomes less common, and thus the duration of the fund will increase.

Since GNMAs lose more when rates rise and gain less when rates fall than would be expected from their duration, investors demand higher yields as compensation for the asymmetric risk. (Munis have similar issues; most munis are callable, and will be called if rates fall but not if rates rise.)

The market considers GNMA funds to be about as risky as the total bond market, since the funds have similar yields. The advantage of a total-market index is that the risks are diversified; corporate bonds have credit risk, while GNMAs have no credit risk but have more risk from rising rates.
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not4me
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Re: Ginnie Mae yield?

Post by not4me »

dave1054 wrote: Wed Apr 15, 2020 6:41 am How do I compare GNMA (vfiix) yield to other bonds and money markets. Does the published yield of 1.99% include partial principle payments? Does that effect share price?

Overall, opinions on vfiix as safe place to park money is appreciated.
I'm guessing when you say "published yield" you are looking at SEC yield? There has been a recent thread on using SEC yield & you may want to spend some time understanding what that really is. I don't know the specific regarding the partial payment, but I would think the sec yield might not include that. Have you tried searching the forum for other threads?

As to safety, it may depend on whether you mean relatively safe or not & how much you are willing to pay for that safety. That is, would you take a lower rate on a fdic insured cd? If you intend to 'park' the money for a "short" (whatever that is) time, treasuries might be almost as good, especially after tax?

Good luck
StealthRabbit
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Re: Ginnie Mae yield?

Post by StealthRabbit »

'Post / during virus' allocations
Early retiree, Looking for safety (1st)... yield (2nd) for significant cash reserves + bond side (~40% of portfolio). (income tax free state)

Is VFIIX at risk if significant mortgage failures in the next few yrs?

Corp bonds are similarly at risk of default (I would think)

I see a slight spike in NAV of VFIIX the last few days, as if in 'demand'. This the risk I perceive from mortgage defaults my be a wrong 'perception'.

Thx.
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grabiner
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Re: Ginnie Mae yield?

Post by grabiner »

StealthRabbit wrote: Mon Apr 20, 2020 11:36 am 'Post / during virus' allocations
Early retiree, Looking for safety (1st)... yield (2nd) for significant cash reserves + bond side (~40% of portfolio). (income tax free state)

Is VFIIX at risk if significant mortgage failures in the next few yrs?
There is no risk to principal; GNMAs are guaranteed by the government.

The risk of GNMAs is different: if interest rates rise, the duration will increase because homeowners do not refinance, so you will lose more than is indicated by the duration.
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Re: Ginnie Mae yield?

Post by Northern Flicker »

StealthRabbit wrote: Mon Apr 20, 2020 11:36 am 'Post / during virus' allocations
Early retiree, Looking for safety (1st)... yield (2nd) for significant cash reserves + bond side (~40% of portfolio). (income tax free state)

Is VFIIX at risk if significant mortgage failures in the next few yrs?

Corp bonds are similarly at risk of default (I would think)

I see a slight spike in NAV of VFIIX the last few days, as if in 'demand'. This the risk I perceive from mortgage defaults my be a wrong 'perception'.

Thx.
GNMAs are backed by the full faith and credit of the US treasury per the prospectus. (This is believed to be de facto true of FNMAs and FMACs, but not contractually guaranteed for them).

Mortgage defaults will mean a prepayment of all principal, which will not be optimal when rates are low, but a GNMA investor will not lose principal from a default. But a prepayment when rates are low is undesirable, and a GNMA investor will expect to be compensated for it with a higher yield.

Most likely, the current spread between GNMAs and treasuries reflects an elevated level of prepayment risk, either from defaults, home sales, or mortgage refis.
Risk is not a guarantor of return.
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