GNMA funds right now

[SecondAttempt]

Would you invest in GNMA funds right now?

As I build up the bond side of my portfolio in anticipation of retiring in about a year and a half I'm trying to understand bond funds better.

Mortgage rates are moving higher. I realize this drives down th eprice of existing mortgages held by GNMA funds and those funds have taken a hit. And the low rate mortgages are fairly fresh so they will not mature out anytime soon. But I would think this is priced in and the fact that they are now buying mortgages at late 90s rates should be a good thing. I am thinking about DCA into a GNMA fund as part of my bond portfolio starting in 2023.

Is this a horrible and stupid mistake?

 

[all4j]

Would you invest in GNMA funds right now?

As I build up the bond side of my portfolio in anticipation of retiring in about a year and a half I'm trying to understand bond funds better.

Mortgage rates are moving higher. I realize this drives down th eprice of existing mortgages held by GNMA funds and those funds have taken a hit. And the low rate mortgages are fairly fresh so they will not mature out anytime soon. But I would think this is priced in and the fact that they are now buying mortgages at late 90s rates should be a good thing. I am thinking about DCA into a GNMA fund as part of my bond portfolio starting in 2023.

Is this a horrible and stupid mistake?

Since I have a chance to jump in before this devolves into another thread of disinformation on bond funds, I'll bring up an item without specifically giving a recommendation. The real answer depends on what you think of the future; while this is true of bond funds in general (a point that seems lost in much of the discussion), GNMAs do have some wrinkles.

If tl,dr...understand what "convexity" in bond funds means before investing. It isn't just the rise in interest rates, but rate of rise that needs to be considered.

You touch on important points. Likely to see a real slowdown in refis. But that possibly means the expected duration of GNMAs (as you mentioned priced in) might increase more than you might think & increase of coupons might be slower than nominal bonds. If you are retiring & plan to NOT reinvest distributions, while perhaps not horrible/stupid, perhaps is "premature".

Happy investing & hope you get pertinent feedback!

 

[FANOFJESUS]

I would wait until the Fed is finished raising rates maybe in March.

 

[Chuckanut]

As mortgage rates rise and start to approach 8%, are the GNMA funds starting to show some appeal?

 

[Spock]

Even if mortgage rates rise, mortgage funds won't hold on to those rates as those high rate mortgages will be re-fi'd as soon as rates drop again.

 

[copyright1997reloaded]

Even if mortgage rates rise, mortgage funds won't hold on to those rates as those high rate mortgages will be re-fi'd as soon as rates drop again.

Yep. And those 3% mortgages will be paid back a lot slower than the original models estimated.

 

[Texas Proud]

I would not... I did GNMA when I was much younger but today I want to lock in the duration...


GNMA will have a possibility of higher rate mtgs being refied if the rates go down again so a lot of principal repayments...


It is not for everybody buy I bought individual bonds and preferred shares...

 

[OldShooter]

Why not just buy the bonds? https://investor.vanguard.com/investor-resources-education/understanding-investment-types/gnma-bonds

 

[Texas Proud]

Why not just buy the bonds? https://investor.vanguard.com/investor-resources-education/understanding-investment-types/gnma-bonds

Maybe because of this first sentence...


Please note: Vanguard no longer offers the purchase of GNMA bonds. If you currently own GNMA bonds, Vanguard can sell them for you.

 

[OldShooter]

Maybe because of this first sentence... "Please note: Vanguard no longer offers the purchase of GNMA bonds. If you currently own GNMA bonds, Vanguard can sell them for you."

IIRC there are several other brokers besides VG. Unless we are talking about a relatively small amount of money, IMO it's not a good idea to let a broker's administrative rules drive one's investment strategy.

 

[Texas Proud]

IIRC there are several other brokers besides VG. Unless we are talking about a relatively small amount of money, IMO it's not a good idea to let a broker's administrative rules drive one's investment strategy.

I do not disagree... but when saying someone should buy individual GNMA bonds and reference VG... and then VG does not even let you buy them... just saying....

 

[Chuckanut]

IIRC, the problem with owning a number of individual GNMAs is that you get principle and interest back and you need to account for that on the income tax.

 

[all4j]

As mortgage rates rise and start to approach 8%, are the GNMA funds starting to show some appeal?

Maybe more appeal than a year ago when thread started, but not enough for me yet. I’m looking at more than the mortgage rate though. It’s an interesting time to re-visit for a couple of reasons.

1st, this week has seemed to me to have more volatility in bonds than usual. Including today, I’m seeing headlines about yields not seen in 16 years etc – mainly looking at 10 year, 30 year, mortgage rates. I’m reading that as a significant market message. We see much talk about fed raising ‘rates’, but really they only directly raise rates at the shortest end. The significance of the ’16 year’ time period is that is about the start of the GFC; back before central bank intervention. So maybe market is finally starting to price in risk again? My experience is that it’ll take a while; others will disagree. I don’t expect it will move steadily in a straight line.

Also, I’ll point out that the fed has been reducing its holdings of MBSs, which affects the supply/demand. There is a school of thought that the fed might change course on that specific even if not on the reserve rate. In other words, try to moderate mortgage rates even if corporate bonds have to pay higher rates.

Most broad based bond index funds will already have 20-something percent in MBS.

Secondly, I think it is often good to revisit past ‘guesses’ to see if predictions/actions were on target. I personally don’t regret not getting into gnmas a year ago. So much discussion on bonds/bond funds is really emotion, not financial. Hindsight can help us see where we might have had blindspots.

 

[all4j]

IIRC, the problem with owning a number of individual GNMAs is that you get principle and interest back and you need to account for that on the income tax.

I think it depends, gnmas aren’t all created equal. I strongly suspect the reason Vanguard no longer sells them is because of low demand from retail investors & the difficulty in doing so. Here’s what I’d be looking at if I were to buy an individual gnma. GNMAs are fairly complex, with lots of moving parts. Market is relatively thinly traded. With a minimum of around $25K, I wouldn’t be buying in vast numbers! The seller sitting across the table from me will have more tools, spent more time evaluating with better knowledge than me. I’d have to go thru a retail broker & pay wider spread. In short, I’d start in the hole. Once bought, I wouldn’t get monthly payouts, be able to reinvest/rebalance as I could with a fund. I wouldn’t have the diversification of holdings or liquidity to get out if wanted. Duration wouldn’t be managed. Probably more. I just don’t see that I need to buy the individual bond & take such a hit just because someone will sell it to me.