GNMA Fund Outlook For 2013

[rembrandt]

The principal in my GNMA fund has been steadily decreasing the last couple of months. How long do you think this will last and how low do you think it can go? I am thinking of switching to a muni or high yield fund. I am leery of stocks but am considering a 2030 fund. Any ideas? Thanks.

 

[LOL!]

A high yield fund is like investing in stocks. That is, one might consider it 20% or 30% stocks and only 70% or 80% bonds. So if you want that, just take 20-30% of your GNMA fund and buy a stock index fund.

It's funny that you mentioned munis because they "popped" after the election, but have a negative performance since December 07 when they dropped about 1.5% in 10 days because of rumors that their dividends might be taxed. They have since recovered to a 0.5% loss when the new tax laws didn't change that.

The 3-month returns of intermediate bonds is flat, so I don't see what you are saying about GNMA funds. Since they are guaranteed as to payment of interest and principal, one can consider them easily Treasury bonds. In today's low interest rate environment, GNMAs are doing exactly what they should be doing.

If you wish to chase yield and safety, then you are probably better in CDs right now. If you wish to chase yield and don't care about safety, then by all means jump into high-yield bonds, but I myself would just up my equity allocation if I wanted to chase performance.

If you want to chase yield with a little bit of safety, you can do corporate bonds and stay with short-term durations.

In essence, there is no place to hide nowadays in bond funds. Every choice you make is not like a choice you could've made a few years ago.

Hope this helps.

 

[audreyh1]

The principal in my GNMA fund has been steadily decreasing the last couple of months. How long do you think this will last and how low do you think it can go? I am thinking of switching to a muni or high yield fund. I am leery of stocks but am considering a 2030 fund. Any ideas? Thanks.

I've been adding more since it's been going down. The "hot money" just ran over to buy riskier non-agency mortgage bonds instead, so I see it as a buying opportunity and better yield for a govt-backed security.

 

[rembrandt]

I bought in at $10.11 per share. Now it's at $9.97. Any reason to panic?

 

[audreyh1]

I bought in at $10.11 per share. Now it's at $9.97. Any reason to panic?

Yes, please panic and get it over with. You can always buy back later.

BTW, my GNMA fund paid out a couple of large capital gains last year in Sept and Dec, resulting in a NAV drop of 0.17, but I got that amount in capital gains distributions, so that part is not a "loss". Maybe your fund did the same.

Taking into account that distribution, my fund NAV is actually up .05 since the end of 2011, after a year's worth of dividends and capital gains distributions. What's not to like?

 

[REWahoo]

Yes, please panic and get it over with. You can always buy back later.

After it goes back up.

 

[pb4uski]

Mine is about 2.5% off from its 12 month high and 1.7% off from my average cost basis. Just normal dip IMO - not worried at all. Never thought to look at it until I saw this post.

Yours is only 1.3% off of your average cost.

 

[rbmrtn]

I just did almost opposite. I sold muni funds early december. Mainly because the dividends have dropped dramatically over the year ( old bonds maturing, new ones not paying anything ), also large CG since i bought in late 08. Bought some more GNMA in January, after CG payout in Dec, payout is over 3%.

 

[braumeister]

GNMAs are still a very good choice. You are undoubtedly getting back way more in dividends/CG dists than you lose if the price decreases, and they are about as safe as any investment out there.

 

[brewer12345]

Anyone who is invested in GNMAs should understand what "negative convexity" means.

 

[braumeister]

Brewer12345 is right, of course. When interest rates start climbing, it will be worthwhile reevaluating GNMA fund investments. Safety isn't an issue, but outlook may be problematical. For the time being, I think they're fine.

 

[rbmrtn]

vanguard paper on convexity

http://www.vanguard.com/pdf/icrddc.pdf?2210045720

 

[ejman]

So please help a dummkopf (sp?) when interest rates rise a GNMA bond fund would do worse in total return than say an intermediate term corporate bond fund because of convexity?

 

[brewer12345]

So please help a dummkopf (sp?) when interest rates rise a GNMA bond fund would do worse in total return than say an intermediate term corporate bond fund because of convexity?

Correct. They also do not do as well when rates fall. Basically, you get a somewhat higher yield because you have sold options. So you do best when rates stay stable.

 

[LOL!]

So please help a dummkopf (sp?) when interest rates rise a GNMA bond fund would do worse in total return than say an intermediate term corporate bond fund because of convexity?

You mixed government-guaranteed with corporate bond, so who knows about total return in this case! Now if you had said GNMA versus intermediate term Treasuries, then who knows because people perceive these as different.

See the historical record. What happened to GNMA fund (compared to other bond funds) when interest rates rose?

There is the theory about negative convexity and the theory about mortgage refinancing. Somehow the theory never matches reality. Why is that?

 

[audreyh1]

Anyone who is invested in GNMAs should understand what "negative convexity" means.

I notice some GNMA funds, like FGMNX, have come down to pretty low durations - like 2.6 years. Is this an attempt to mitigate the effects of negative convexity once interest rates rise?

 

[brewer12345]

I notice some GNMA funds, like FGMNX, have come down to pretty low durations - like 2.6 years. Is this an attempt to mitigate the effects of negative convexity once interest rates rise?

Generally, quoted durations on mrtgage securities and funds of them are estimates (read: a sham). Nobody knows when the underlying mortgages will refi/default/pay off, so they guess. The drop in durations you see reported could just be due to new estimates of faster prepayment speeds rather than a change in the underlying bonds.

 

[mathjak107]

i think i mentioned the newsletter i follow had as dump the ginnie fund last month. better oppertunity elsewhere in bonds.

it does not mean they guessed right in doing so but i am only mentioning we did so.

 

[LOL!]

If one goes to morningstar.com and makes a "growth of" chart to compare bond funds over the past 3 months, one sees that they have all returned between 0% and about 0.6% in those 3 months. NAVs may have danced around because of the capital gains distributions that many bond funds had in December.

As expected, bond funds with less risk (more Treasuries and Government agencies) or shorter duration (i.e. less risk) are up less than bond funds with longer duration and more risk (corporates).

I think this is always the way it has been with bond funds in the past and will be the way it is with bond funds going forward.

So how much of the drop in NAV mentioned by the OP is just the normal December cap gains distribution? Well, they can look that up though rbmtrn mentioned a number.