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Interest Rates - VG GNMA Fund
Old 08-30-2010, 05:21 AM   #1
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Interest Rates - VG GNMA Fund

It is anyone's guess when interest rate will start moving up. But, they can't go much lower and eventually, they will go up.

While I intend to stay diversified in my fixed holdings, I am shortening the duration on my aggregate bond holdings.

I am hold some short-term bond funds to accomplish part of this.


I noticed the the VG GNMA fund has a fairly short duration at this time... very short for what is labeled as an intermediate term bond fund.

https://personal.vanguard.com/us/fun...T#hist=tab%3A2

It hold government mortgage backed securities.

It has a fairly decent return and a low duration.


Any insight into how this might hold up when rates rise?

How are these securities different than say... 10 year treasuries?
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Old 08-30-2010, 07:00 AM   #2
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Depends on what exactly they hold. If these are bonds backed by 30 year fixed mortgages, it can get pretty nasty if rates rise because you have a fixed coupon and people stop refinancing, which stretches your avg maturity at exactly the wrong time. If they own POs or other structured slices of a pool, it may not be to big a deal.
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Old 08-30-2010, 07:19 AM   #3
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According to Vanguard: GNMA Fund

Average maturity: 1.8 years

Average duration: 1.7 years
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Old 08-30-2010, 08:04 AM   #4
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Folks argue about GNMAs even after the cows come home and they will continue to argue about them. Here's an old thread at bogleheads which goes into gory detail: Bogleheads :: View topic - Vanguard GNMA

Yes, duration is shorter for some time now as the managers has been seeing the writing on the wall.

GNMAs are said to have early refinance risk (I don't see how that can happen since the mortgage business has been grinding to a halt and rates can't go significantly lower) and negative convexity. So they are said to be different from Treasuries. You get a higher yield for that extra risk. Some folks argue that you are not compensated for that extra risk.

Go back and look what happened to the GNMA fund the last time interest rates rose. Does it scare you?
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Old 08-30-2010, 09:10 AM   #5
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"Go back and look what happened to the GNMA fund the last time interest rates rose. Does it scare you?"

What would be a good period? I checked Vanguard site for price history for 1994-95 and got Jan 94 at 10.40 then dropping to 9.54 in Jan 95 but popping back to 10.43 in Dec 95.
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Old 08-30-2010, 11:15 AM   #6
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Don't just check price history, but check total return instead.

Anyways, the question was a set up. The history of the Vanguard GNMA fund during interest rate increases does not scare me. I don't think it behaved much differently than other bond funds.
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Old 08-30-2010, 11:45 AM   #7
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The NAV of vfiix, has, over the years, fluctuated between 9.50 and 10.50. It is at a high right now and if rates go up the NAV will go down. If you are investing for (long term) income I would not be too concerned with NAV at any one point although it is nice to buy at the bottom.
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Old 08-30-2010, 05:12 PM   #8
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Thanks for the comments.

I found this writeup on Moodys on GNMA... not VG's Funds

GNMA
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Old 08-30-2010, 06:15 PM   #9
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Quote:
Originally Posted by chinaco View Post
Thanks for the comments.

I found this writeup on Moodys on GNMA... not VG's Funds

GNMA
Interesting, a search on efmoody.com brings up UC Berkeley Mathematics. Thanks for the link.
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Old 08-30-2010, 07:27 PM   #10
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Hope this is OK with chinaco !!!
First I should point out, this is a hypothetical question.
Not entirely true for me personally.
With this thread speaking to interest rates and GNMA and such, this question came to my mind.
I know we have different options, anything from stocks to bonds to Pen Fed money market certificates paying up to 3.75%. Just to add another option: buying houses that are in default? Or just lower priced real estate to be bought?
What do you think you would do today (investment wise) if you were sitting on say 500k cash right now? Or could put your hands on that much with little or no penalties?
Looking forward to thoughts and suggestions.
Steve
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Old 08-30-2010, 07:40 PM   #11
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^An easy question with an easy answer: I would fold it into my investments and follow my existing asset allocation.

If you aren't happy with what you are doing now, then you got problems. But if you are happy, then an extra $500K shouldn't make any difference.
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Old 08-31-2010, 04:19 AM   #12
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Originally Posted by CuppaJoe View Post
Interesting, a search on efmoody.com brings up UC Berkeley Mathematics. Thanks for the link.

Yes... its not the investment service.
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Old 08-31-2010, 04:43 AM   #13
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A VG writeup.

https://personal.vanguard.com/funds/reports/icrddc.pdf


An interpretation of interest rate sensitivity of GNMA

http://moneywatch.bnet.com/investing...d-yields/1018/
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