Surprising GNMAs

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pkcrafter
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Surprising GNMAs

Post by pkcrafter » Wed Oct 09, 2013 7:48 pm

Here's a chart of GNMA (VFIIX) and Total Bond Index (VBMFX) that surprised me. Returns are identical for the time period, but TBM is a bit more volatile.
GNMA Blue
TBM Red

Image

Here's another chart going back to 1986. It will be interesting to see how these two funds perform over the next 10 years.

Image
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Re: Surprising GNMAs

Post by livesoft » Wed Oct 09, 2013 7:51 pm

Here's another recent thread on GNMAs: http://www.bogleheads.org/forum/viewtop ... 23815&f=10
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Re: Surprising GNMAs

Post by john94549 » Wed Oct 09, 2013 8:36 pm

My Mom's fund (FUSGX) recently turned the corner in distribution yield. It would appear the demise of these types of bond funds was greatly over-estimated. Comparing the value today with that of several months ago, it's a great yawn, assuming dividends re-invested. Back in May, it was roughly $160K. Today, it's roughly the same.

Bottom line: Folks are paying more for those mortgages now, maybe 4.5 versus 3.5. That gets reflected in the roll (duh). Her monthly dividend is thus creeping up.

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Re: Surprising GNMAs

Post by grabiner » Wed Oct 09, 2013 8:52 pm

pkcrafter wrote:Here's a chart of GNMA (VFIIX) and Total Bond Index (VBMFX) that surprised me. Returns are identical for the time period, but TBM is a bit more volatile.
This isn't surprising; Total Bond Market includes corporate bonds, which have credit risk, in addition to the interest-rate risk that all bonds have. Note that a lot of the volatility was in 2008-2009, when credit risks increased temporarily.

GNMAs have prepayment risk, but that is just one form of interest-rate risk; they don't gain as much as other bonds do from falling rates, because homeowners may refinance when rates fall.
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Re: Surprising GNMAs

Post by Jim180 » Wed Oct 09, 2013 10:34 pm

john94549 wrote:My Mom's fund (FUSGX) recently turned the corner in distribution yield. It would appear the demise of these types of bond funds was greatly over-estimated. Comparing the value today with that of several months ago, it's a great yawn, assuming dividends re-invested. Back in May, it was roughly $160K. Today, it's roughly the same.

Bottom line: Folks are paying more for those mortgages now, maybe 4.5 versus 3.5. That gets reflected in the roll (duh). Her monthly dividend is thus creeping up.
Keep in mind that since rates are rising nobody is prepaying mortgages so the duration keeps increasing on GNMA's. For example the Vanguard GNMA Fund now has a higher duration than the TBM. That is usually not the case. So as interest rates continue to normalize I would expect the the GNMA Funds to lose a bit more in NAV than the TBM.

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Re: Surprising GNMAs

Post by Valuethinker » Thu Oct 10, 2013 5:45 am

Jim180 wrote:
john94549 wrote:My Mom's fund (FUSGX) recently turned the corner in distribution yield. It would appear the demise of these types of bond funds was greatly over-estimated. Comparing the value today with that of several months ago, it's a great yawn, assuming dividends re-invested. Back in May, it was roughly $160K. Today, it's roughly the same.

Bottom line: Folks are paying more for those mortgages now, maybe 4.5 versus 3.5. That gets reflected in the roll (duh). Her monthly dividend is thus creeping up.
Keep in mind that since rates are rising nobody is prepaying mortgages so the duration keeps increasing on GNMA's. For example the Vanguard GNMA Fund now has a higher duration than the TBM. That is usually not the case. So as interest rates continue to normalize I would expect the the GNMA Funds to lose a bit more in NAV than the TBM.
What you are saying is straight out of the CFA syllabus or any bond textbook.

It is not believed here, I fear. GNMAs just have this magical aura.

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Re: Surprising GNMAs

Post by livesoft » Thu Oct 10, 2013 5:56 am

I don't think the Vanguard GNMA fund has a magical aura. Sure GNMA bonds have negative convexity and extension risk along with interest rate risk and beauty risk, but the market is applying those risks all the time in the NAV. Wellington and Wellesley also have beauty risk in that there appear to be a lot of unreasonable fans of those latter funds as well that will hold through thick and thin. Maybe that's not in the CFA syllabus? But maybe you are right and a better term is "magical aura" for these funds?
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Re: Surprising GNMAs

Post by nisiprius » Thu Oct 10, 2013 6:54 am

It is, however, yet another case where credible experts explain why certain investments "tend to" behave in certain ways, for plausible sounding reasons, and yet when you go look at what has actually happened there just isn't any indication of their acting that way. When it's only a few years it doesn't mean anything, but when it gets to be going on for 33 YEARS--Vanguard GNMA is older than Total Bond--you begin to think that the past 33 years might well have compensated a long-term holder for any stumbles in the future.

Also, for whatever it's worth, which is to say almost nothing, I see that Morningstar not only gives VFIIX five stars, it also gives it a "gold" analyst rating.

I don't think GNMAs have a magical aura in this forum. I do think that this forum has a lot of Total Bond holders like me, who are holding 26% in "securitized" assets, whose nose is not sensitive enough to be offended by the delicate odor of putrefaction that some profess to scent in GNMAs, and are willing to shrug off the possibility that their apple has a soft spot in it figuring that it hasn't rotted yet and if it does most of the apple will still be OK.
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Re: Surprising GNMAs

Post by larryswedroe » Thu Oct 10, 2013 7:59 am

MBS are more stable because of the optionality in them
They won't rise in value as much when rates fall because borrowers will exercise their option to prepay (if they can). And even when rates rise some people pay off loans early for variety of reasons like having to move.

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Re: Surprising GNMAs

Post by Valuethinker » Thu Oct 10, 2013 8:28 am

I don't know what 'beauty risk' is.

If it is what I think it is, then the argument is proceeding by false analogy.

Understanding the design of a financial security and the inherent risks in it is one thing. You can make an argument that the investor is fully compensated for that risk in higher yield and higher return (although not in the case of GNMAs historically). Or you can make a case that the risk, although inherent in the security, won't show up for structural reasons (maybe GNMA borrowers don't refinance as much?).

But you can't simply dismiss that risk by alluding to another kind of risk (of which I have never heard) called 'beauty risk'.

And then arguing that 'beauty risk' is trivial, therefore extension risk (or prepayment risk) is trivial.

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Re: Surprising GNMAs

Post by Valuethinker » Thu Oct 10, 2013 8:31 am

nisiprius wrote:It is, however, yet another case where credible experts explain why certain investments "tend to" behave in certain ways, for plausible sounding reasons, and yet when you go look at what has actually happened there just isn't any indication of their acting that way. When it's only a few years it doesn't mean anything, but when it gets to be going on for 33 YEARS--Vanguard GNMA is older than Total Bond--you begin to think that the past 33 years might well have compensated a long-term holder for any stumbles in the future.
Precisely the problem. Where is the additional return according to GNMAs? Or was it simply drowned out in the growth of the credit premium?

Also, for whatever it's worth, which is to say almost nothing, I see that Morningstar not only gives VFIIX five stars, it also gives it a "gold" analyst rating.

I don't think GNMAs have a magical aura in this forum. I do think that this forum has a lot of Total Bond holders like me, who are holding 26% in "securitized" assets, whose nose is not sensitive enough to be offended by the delicate odor of putrefaction that some profess to scent in GNMAs, and are willing to shrug off the possibility that their apple has a soft spot in it figuring that it hasn't rotted yet and if it does most of the apple will still be OK.
Nisi I think you are understating the tone of the GNMA threads.

The argument made there is not that TBM is OK because it's only 26% MBS (Larry Swedroe disagrees in his books, btw) but that because GNMAs have not historically shown up extension risk, it does not exist.

In fact, given the higher risks that GNMAs run, one would have expected them to do *significantly better* than US Treasuries. Which they have not-- about the same.

BTW all US MBS, not just GNMAs. MBS from other countries generally do not have prepayment risk-- the mortgage markets are different eg German pfandbriefe or Spanish cedulos.

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Re: Surprising GNMAs

Post by hsv_climber » Thu Oct 10, 2013 8:47 am

Lets not forget that GNMA and TBM share ~24% of their portfolios, i.e. ~24% of TBM is in Mortgage-backed securities. That is a big chunk that might be responsible for the high correlation.

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Re: Surprising GNMAs

Post by pkcrafter » Thu Oct 10, 2013 9:49 am

As I mentioned, I was surprised the GNMA has tracked TBM so well almost perfectly over a period of 26 years. A 10,000 investment in GNMA has grown to 56.7k vs 53.1k for TBM. As we have been warned, GNMAs are supposed to be more volatile and are supposed to carry more risk, but there is no trace of it at all, and volatility appears to have been slightly lower than TBM. Here are two links that offer some insight into GMNA risk. It appears that Vanguard's GNMA may actually have less risk than the average GNMA fund. Vanguard rates both GNMA and TBM at a risk level of 2. But note also that GNMA duration has risen from 2.2 years to 6.0 years over the past few years. Will that lead to more volatility and/or comparatively lower returns?

http://www.cbsnews.com/8301-505123_162- ... ond-yields/

http://assetbuilder.com/scott_burns/the ... gnma_funds

What can we conclude? Do Vanguard GNMA funds actually have less risk than the average GNMA fund, or has the GNMA risk potential actually not shown in in the past 26 years? If that's the case, then the lesson for investors is past data, even long term data, may have no value in determining risk. It might be that GNMA risk will materialize in the next decade as conditions change, who knows.

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Re: Surprising GNMAs

Post by Valuethinker » Thu Oct 10, 2013 11:23 am

hsv_climber wrote:Lets not forget that GNMA and TBM share ~24% of their portfolios, i.e. ~24% of TBM is in Mortgage-backed securities. That is a big chunk that might be responsible for the high correlation.
Until Freddie and Fannie entered conservatorship in summer 2008, their bonds traded at a c. 50 bp premium to GNMA bonds, reflecting that the latter had a legal guarantee from the US Treasury, and the former only an implicit promise.

So the MBS in the fund now are equivalent to GNMA bonds, but were not, entirely, pre 2008.

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Re: Surprising GNMAs

Post by nedsaid » Thu Oct 10, 2013 4:00 pm

I have owned a GNMA fund offered by Vanguard's largest competitor in my workplace savings plan since 1999. It has performed like a champ. I also own the Vanguard Total Bond Market and the Vanguard TIPs fund in the same workplace plan. I have been pleased with all three of these funds and how they have performed.

Over long periods of time, I would expect the performance of GNMAs and the Vanguard Total Bond Market to be very close. I was glad to see the graphs on this thread that confirmed my suspicion. When I checked last week, the GNMA fund had actually weathered the storm in bonds a tad bit better than Total Bond Market Index. So for me, I am not sweating it.
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Re: Surprising GNMAs

Post by Valuethinker » Fri Oct 11, 2013 1:33 am

nedsaid wrote:I have owned a GNMA fund offered by Vanguard's largest competitor in my workplace savings plan since 1999. It has performed like a champ. I also own the Vanguard Total Bond Market and the Vanguard TIPs fund in the same workplace plan. I have been pleased with all three of these funds and how they have performed.

Over long periods of time, I would expect the performance of GNMAs and the Vanguard Total Bond Market to be very close. I was glad to see the graphs on this thread that confirmed my suspicion. When I checked last week, the GNMA fund had actually weathered the storm in bonds a tad bit better than Total Bond Market Index. So for me, I am not sweating it.
Historically, they have.

Where this would change is if you had significant movements (say over 100-150 basis points) in the yield curve- -then extension/ prepayment risk might hit you.

It's interesting that the fund, an actively managed fund, has moved its duration out (from 1.9 to 6 years). Suggesting the manager does not see this as a big risk.

The moving duration of Mortgage Backed Securities is always their most difficult feature. (for government guaranteed ones ie no credit risk).

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Re: Surprising GNMAs

Post by nisiprius » Fri Oct 11, 2013 5:53 am

You know what I would really like? I didn't see it in the wiki but maybe I didn't look in the right place. When I look at the "composition" of Total Bond, I realize there are a lot of basic bond categories that I can't give a definition for and don't know what they are. Clueless.

What I mean is, I don't know what an "agency" is, I don't know what the difference between "Commercial Mortgage-Backed" and "Non-Agency Residential Mortgage-Backed" is, I don't know what "Government related" is, I have no clue what a "Covered bond" might be.

The test of cluedness would be this. Someone with a clue ought to be able to answer the question "does this fund contain GNMA bonds, and, if so, which category do they fall in? Why isn't that category just called GNMA, what other stuff falls in that same category, and is there enough of it to matter?"

It would be neat if someone would give very short definitions and capsule summaries of these terms and their main risk source and riskiness.

This is Fidelity's list of categories, which I think is the same list as Morningstar's. The terms with asterisks are the ones I feel clueless or in a state of low clueage about. The percentages are for Total Bond.

*Agency Mortgage-Backed 22.37%
*Asset-Backed 0.45%
Bank Loan 0.00%
Cash & Equivalents 2.71%
*Commercial Mortgage-Backed 1.35%
Convertible 0.01%
Corporate Bond 22.93%
*Covered Bond 0.00%
Future/Forward 0.00%
Government 40.43%
*Government Related 6.80%
Municipal Tax-Exempt 0.00%
Municipal Taxable 0.89%
*Non-Agency Residential Mortgage-Backed 2.01%
Option/Warrant 0.00%
Preferred Stock 0.06%
Swap 0.00% 0.06%
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Re: Surprising GNMAs

Post by Valuethinker » Fri Oct 11, 2013 7:12 am

nisiprius wrote:You know what I would really like? I didn't see it in the wiki but maybe I didn't look in the right place. When I look at the "composition" of Total Bond, I realize there are a lot of basic bond categories that I can't give a definition for and don't know what they are. Clueless.

What I mean is, I don't know what an "agency" is, I don't know what the difference between "Commercial Mortgage-Backed" and "Non-Agency Residential Mortgage-Backed" is, I don't know what "Government related" is, I have no clue what a "Covered bond" might be.

The test of cluedness would be this. Someone with a clue ought to be able to answer the question "does this fund contain GNMA bonds, and, if so, which category do they fall in? Why isn't that category just called GNMA, what other stuff falls in that same category, and is there enough of it to matter?"

It would be neat if someone would give very short definitions and capsule summaries of these terms and their main risk source and riskiness.

This is Fidelity's list of categories, which I think is the same list as Morningstar's. The terms with asterisks are the ones I feel clueless or in a state of low clueage about. The percentages are for Total Bond.
*Agency Mortgage-Backed 22.37%
US government guaranteed. FNMA, FMAC, GNMA, FHB, TVA there's a couple of others.
No credit risk. Repayment and extension risk.
*Asset-Backed 0.45%
Bank Loan 0.00%
Cash & Equivalents 2.71%
As described. Other asset backed includes car loans, student loans, personal loans, credit cards-- you can securitize anything. Without knowing the bonds and the ratings, impossible to assess.

*Commercial Mortgage-Backed 1.35%
Higher credit risk. CMBS are usually 5-10 years in term. Low repayment risk, low extension risk. Significant risk at end of term (if the building is worth less than the loan, a common problem now).
Convertible 0.01%
A lot of these are low credit quality. You get the right to convert into stock at a pre agreed price. Useful if the company has a lot of upside eg a pharma co waiting for a drug approval. But also usually more risky issuers.

Corporate Bond 22.93%
If investment grade then down to BBB-. Vanguard Manager tries to avoid the (frequent) callable issues, I believe-- where if interest rates drop, the borrower repays you early. Credit risk moves in and out with economic cycle but is usually not too grievous. Pays a yield premium over Treasuries. Maturity normally up to 10 years although Verizon just did a $100bn issue including 30 year bonds, so they do exist (longer the maturity, greater the credit risk).

Many corporate bonds are 'Eurobonds'. This is a reference to where they are issued (internationally) rather than anything about currency, and should not worry you.
*Covered Bond 0.00%
Common in Europe. An MBS where the risk of the mortgages remains with the originating bank, so in the end the credit risk of the bond is the risk of the bank which issues it (unless the mortgages pay off).

Future/Forward 0.00%
Government 40.43%
*Government Related 6.80%
Municipal Tax-Exempt 0.00%
Municipal Taxable 0.89%
As described elsewhere. 'Government related'? Not sure. But I suspect bonds issued by US government entities (Latin American Development Bank, Asian DB, perhaps some local development agencies etc.). Credit risk of the US government.
*Non-Agency Residential Mortgage-Backed 2.01%
The stuff which imploded in the credit bubble - Private Label RMBS. Not guaranteed by anyone. If these are new issues (post 2008) they will be the bluest of blue chip mortgages though-- all 80% Loan to Value or less, good credit histories, etc.
Option/Warrant 0.00%
Preferred Stock 0.06%
Swap 0.00% 0.06%
[/quote]

Prefs are more risky than bonds (for the same issuer) being equities. Swaps it is impossible to know what these are without knowing more about the contracts.

All Bonds

All bonds have interest rate risk. Higher coupons (for the same maturity) slightly lower. Except floating rate bonds (Floating Rate Notes-- FRNs).

Many private sector bonds have call risk (repayment risk is really a form of call). Interest rates go down, and the bonds get repaid early by the borrower. Priced on 'Yield to Call' not 'Yield to Maturity'.

Junk bonds (BBB- below) have risks as Larry S describes: risk you get called if they get upgraded to investment grade (a normal provision), plus equity like credit risk on the part of the borrower. The spreads over safe Treasuries really correlate with the economic cycle.

Note also when default rates are high, then recoveries (the usual rule of thumb is 30 cents on the dollar, but it varies hugely by sector and timing and borrower for example utilities have traditionally run 70-80 cents on the dollar) are also lower. Bond holders (unless mortgage or asset backed) typically only get paid after all secured creditors ie the bankers to the company. A nasty correlation between default and lower recovery.

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Re: Surprising GNMAs

Post by Valuethinker » Fri Oct 11, 2013 7:25 am

pkcrafter wrote:As I mentioned, I was surprised the GNMA has tracked TBM so well almost perfectly over a period of 26 years. A 10,000 investment in GNMA has grown to 56.7k vs 53.1k for TBM. As we have been warned, GNMAs are supposed to be more volatile and are supposed to carry more risk, but there is no trace of it at all, and volatility appears to have been slightly lower than TBM. Here are two links that offer some insight into GMNA risk. It appears that Vanguard's GNMA may actually have less risk than the average GNMA fund. Vanguard rates both GNMA and TBM at a risk level of 2. But note also that GNMA duration has risen from 2.2 years to 6.0 years over the past few years. Will that lead to more volatility and/or comparatively lower returns?

http://www.cbsnews.com/8301-505123_162- ... ond-yields/

http://assetbuilder.com/scott_burns/the ... gnma_funds

What can we conclude? Do Vanguard GNMA funds actually have less risk than the average GNMA fund, or has the GNMA risk potential actually not shown in in the past 26 years? If that's the case, then the lesson for investors is past data, even long term data, may have no value in determining risk. It might be that GNMA risk will materialize in the next decade as conditions change, who knows.

Paul
BTW those are very good links. Thank you.

It feels to me like GNMA should have paid about a 0.5 (perhaps to 1.0) per cent. pa higher return to compensate investors for higher risks. That they have not done so means:

- (active) VG fund manager is adroit at dodging those risks
- those risks are not as large as I think (based largely on CFA teachings etc.) - either they are well priced in the initial yields or factors in the US mortgage market lower the risk (maybe GNMA mortgage borrowers don't refi as much?)
- they just have not shown up yet, because we have been in a declining interest rate environment, with a sharp move recently towards credit quality

Assetbuilder looks like a quality company -- I have not agreed with everything Scott Burns has written about macroeconomics, but I did like the site and the investing perspective.

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Re: Surprising GNMAs

Post by pkcrafter » Fri Oct 11, 2013 8:52 am

I played with the charts a little more using St and Int. term treasuries. GNMA easily beats st-term T, but Intermediate term beats GNMA for most of the time period, but with higher volatility. Since 2008, GNMA has outperformed Int. term treasury with less volatility. I tried this because GNMA had a duration which was shrinking for several years and reached a low of 1.9, but then duration expanded to it's present value of 6. That brings up the question of fair comparison and it also highlights one of the curiosities of GNMA funds--the moving duration.

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Re: Surprising GNMAs

Post by nedsaid » Fri Oct 11, 2013 9:41 pm

I used to think GNMAs had big weaknesses compared to plain vanilla intermediate term bond funds.

First, if interest rates drop the mortgage holders would tend to refinance. So an investor in a GNMA fund would get less of the capital gains than investors in intermediate term bond funds.

Secondly, if rates go up then homeowners would hold on to their mortgages.

This is the prepayment and extension risks that another poster mentioned.

GNMAs "weaknesses" are not as bad as perceived. As far as prepayment risk, many bonds have call dates. When you get past the call date, the issueing company can refinance their bonds just as a homeowner can refinance his mortgage. So "prepayment risks" are not unique to GNMAs. Bonds with call dates have this risk as well.

Folks worry about the effect of rising interest rates on the 15 and 30 year mortgages held in the GNMA pool. A couple factors reduce the effective maturity on the mortgages. First, Americans move and move a lot. Something like every seven or eight years. Second, each payment is a combination of interest and principal. A thirty year mortgage actually has a effective maturity of much less than the 30 years. Rick Ferri had a great post that explained this concept.

So the prepayment and extension risk of GNMAs might be higher than Intermediate Term Bonds but not by much. I am comfortable holding them. The core of my bond investments are still the Investment Grade Intermediate Term Bonds. The Vanguard Total Bond Market Index is an excellent representation of Intermediate Term Bonds. But having some GNMAs right along side the core holdings are just fine.
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Re: Surprising GNMAs

Post by nedsaid » Sat Oct 12, 2013 9:50 am

I was checking the year to date performance of my bond funds this morning. My GNMA fund has fared better than anything else, even the Total Bond Market Index. Doesn't mean much but it is interesting. I think the risks of GNMAs are overstated.
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Re: Surprising GNMAs

Post by livesoft » Sat Oct 12, 2013 9:53 am

To help folks out with 'beauty risk', let me just write that tulips are beautiful. So is TIAA Real Estate Account.
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Re: Surprising GNMAs

Post by Doc » Sat Oct 12, 2013 10:28 am

pkcrafter wrote:As I mentioned, I was surprised the GNMA has tracked TBM so well almost perfectly over a period of 26 years. A 10,000 investment in GNMA has grown to 56.7k vs 53.1k for TBM. As we have been warned, GNMAs are supposed to be more volatile and are supposed to carry more risk, but there is no trace of it at all, and volatility appears to have been slightly lower than TBM.
If you look at a 12 month rolling return chart instead of a growth chart there are at least 4 periods where TBM and GNMA didn't track.

The chart has too much detail to show up well here so go to the source.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D

What this may indicate as to long term returns is unclear to me.
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Re: Surprising GNMAs

Post by pkcrafter » Sat Oct 12, 2013 11:47 am

Thanks, Doc, those rolling returns are interesting, but they do show that TBM was slightly more volatile. Maybe not surprising because of the corp bonds that Grabinar pointed out. What can we conclude--that Vanguard GNMA is not as risky as we thought, the risk has not shown up, or a little of both? I found this:

Vanguard GNMA annualized returns since inception (/27/1980) = 7.85%
Barclay's U.S. GNMA index = 8.20%

Ned, I think your analysis is correct, so what will happen now if interest rates rise significantly? The first thought is people will hold their lower interest mortgages, and GNMAs will significantly lag other bond funds, but I think you make a good point that many people will still be purchasing new mortgages. Home ownership:

http://www.creditsesame.com/blog/how-lo ... eir-homes/

Maybe we have experienced GNMAs with st-term bond duration and intermediate term returns, and in the future we will see intermediate term duration and st-term returns.




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Re: Surprising GNMAs

Post by Doc » Sat Oct 12, 2013 12:53 pm

pkcrafter wrote: What can we conclude--that Vanguard GNMA is not as risky as we thought, the risk has not shown up, or a little of both?
The prepayment/extension risk is most likely to show up when interest rates are rapidly changing. Except for the short 2008 upheaval we have had gradually changing interest rates since the Carter times.

In any case I avoid MBS (and therefore TBM) because I have Larry's bond book. I like to be able to have some control over my FI risk rather than have it change on the whims of the market.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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nedsaid
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Re: Surprising GNMAs

Post by nedsaid » Sat Oct 12, 2013 1:39 pm

The question was asked, what happens to GNMAs if rates rise considerably? Another poster mentioned that we have seen for the most part gentle changes in interest rates.

A great question and a great point. My postings are based on having owned GNMA funds since 1999 and just watching how they have performed. I don't pose as a bond market expert. The truth is we don't know exactly. Look at what has happened to TIPS this year. Most bonds funds are down 2-3% and TIPS are down 7-8%. If an extraordinary situation in the bond market happened, perhaps we could see GNMAs diverge from the Total Bond Market in similar fashion. A "panic" in GNMAs while the rest of the bond market is down much less.

This is why I have emphasized over and over that asset classes have an annoying habit of not performing precisely as expected. Markets do not have to meet our expectations.

If GNMAs cratered for some reason, it would be a buying opportunity that I suspect would not last too long. At some point, market equilibrium would re-establish itself. Over the long term, I would expect GNMAs and the Total Bond Market Index to perform in similar fashion. In periods of market distress, because of the extension and prepayment risks, GNMA's might be more volatile than the Total Market Bond Index. Whether all this actually happens is anyone's guess.
A fool and his money are good for business.

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