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Originally Posted by brewer12345
GNMAs are backed by Uncle Sam. As such, they effectively have no credit risk. What might be a source of risk is interest rate risk. If the market is bad, homeowners would likely not pay down their loans as fast, so you would have a loger duration than expected. If the market is really bad, there will be a lot of borrower defaults, which Ginnie would make good with cash, so you'd have a shorter duration than expected.
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Yeah, Ginnies aren't a good place to be if rates really start rising. Part of the problem is the sometimes strange nature of asset backed securities. What could happen in a worst case scenario is this. Rates start rising, meaning that few people will be doing re-fi's on their home. So now you have a 30 year maturity (probably slightly less due to sales of some of the homes) bond that pays a paltry yield, and the market will just hammer it. IF and thats IF rates do go up sharply, GNMA's are one of the worst places to be.
That is why diversification is just if not more important with bonds than it is with stocks. I still own some as part of my bond portfolio, but I take a very long view. I think they are a great asset class, but you don't want to be heavily invested in that kind of environment.
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