GMNA going forward

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Exeter
Posts: 75
Joined: Thu Jan 05, 2012 7:09 am

GMNA going forward

Post by Exeter »

I've a portion of my TIRA in Vanguard GNMA Fund (VFIIX) and the dividends this year are well below the average for the prior several years. Looking at this and the likelihood of increasing interest rates and inflation, I'd appreciate thoughts on holding or moving into either the Total Bond Market (VBTLX) or Intermediate Invst Grade-Adm (VFIDX) which I also hold in the TIRA. I'm less concerned about NAV than dividends as I'm retired and I don't need to draw from the TIRA for income. I want to keep this limited to a bond fund for stability.
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David Jay
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Re: GMNA going forward

Post by David Jay »

Don’t be lured by better numbers in those other funds. Their yields are dropping as well as the higher yield bonds in those funds are maturing and being replaced by new - and lower yielding - bonds.

We are all in the same boat. There is no yield right now. Don’t chase that rabbit.

[edit: I am not saying to stay in the GNMA fund necessarily, but don’t expect the dividends of those other funds to continue at current levels, especially intermediate term funds. Intermediate term yields will continue to fall for several years if interest rates don’t rise.]
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
sycamore
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Re: GMNA going forward

Post by sycamore »

+1 to David Jay's point that all bond funds have low yields right now.

How and when rates rise is something we'll find out in the months and years to come. Maybe there'll be spike or two, or maybe rates will gradually rise 1 point only to fall back 1/2 point and then putter around for months then spike back up, or maybe rates will be range-bound between 0 and 2 for decades to come.

I don't know of any bond fund that can handle all the possible scenarios well.

If you're committed to never dipping into principal / selling shares, you may have to invest in riskier bonds (like corporate bonds or longer duration bonds) to get the higher dividends you want. Personally using one fund (like Total Bond) would be my approach. It won't be ideal for many scenarios but it won't be the worst and might just be good enough.

In regards to inflation, you can use TIPS or I-Bonds to deal with unexpected inflation ("expected" inflation presumably is baked into nominal bonds' rates). TIPS bond funds have low yields as well but at least you get some inflation protection. Again, we won't know which bond fund will be better for inflation until months or years from now. Some investors split their bond holdings (say 50/50 or 65/35) between nominal bonds and TIPS bonds. And some investors don't use TIPS at all -- much of their spending needs are/will be inflation-protected by their Social Security income.
Topic Author
Exeter
Posts: 75
Joined: Thu Jan 05, 2012 7:09 am

Re: GMNA going forward

Post by Exeter »

Thanks for the advice, pretty much what I thought. I'll stick to my allocation model and we'll just have to see how things go.
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grabiner
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Re: GMNA going forward

Post by grabiner »

What is going on is that bond fund dividend payments lag interest rates. When a fund buys a bond at a premium or discount, the premium or discount is amortized, so the dividend payments are based on the yield to maturity at the time of purchase. Thus, if a fund bought a bond in 2016, the dividends were set at that time to correspond to yields five years ago. If the fund sells the bond and buys a new bond, the dividend on the new bond will match the current yield, which is lower.

The number you want to use for comparison of funds is the SEC yield (although Vanguard cautions that this yield is somewhat misleading for GNMAs; when rates fall, homeowners refinance, leading to a larger return of capital to invest at the new lower yield).
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