GNMA fund for bond portion of AA

[Chuckanut]

What do people think of using a GNMA fund in place of a total bond index in the bond portion of the AA?

 

[brewer12345]

Google "negative convexity."

 

[audreyh1]

What do people think of using a GNMA fund in place of a total bond index in the bond portion of the AA?

The bond index already holds plenty of mortgage backed securities.

I don’t like them in a very low interest rate environment because they behave worse than other government bonds when rates rise due to people hanging on to their low-interest rate mortgages. Fund duration lengthens.

So, no, personally I would not concentrate in these.

 

[Chuckanut]

I did google the negative convexity. I see your point.

 

[kevink]

Far better to be in 100% Treasuries IMHO - better by far than a GNMA fund and also a much better choice in general and especially in this market than a total bond fund. Bond authorities like Annette Thau and Larry Swedroe invariably recommend 5 year Treasuries as the risk:return sweet spot but obviously the right duration is going to depend on what else is in your portfolio and what roll bonds serve in it.

If you prefer to take your risk on the equity side and have bonds for safety and to dampen volatility Treasuries are the only bonds that will benefit you in a flight to safety - like the ones that we've already seen this year.

Personally I wouldn't be jumping in to 30 year Treasuries with yields at 1.2% but historically a Treasury "barbell" of half short term (1-3 year and/or Treasury money market) and half LTT's (owned directly or in a fund like TLT) has performed very well. Bond convexity is especially powerful when interest rates are low (as shown by TLT's ~21% increase in value YTD). But as brewer12345 pointed out convexity cuts both ways. I personally prefer shorter maturities and loads of cash (STT's and FDIC insured CDs) in a pandemic.