Should i sell gnma

Backed by Uncle Sam. That satisfies the safety requirement. The question is whether the income is enough to match or exceed any possible erosion of the principal—a concern if mortgages lose value or higher-rate loans are refinanced in such numbers that these funds fill up with lower-rate debt in a sort of accidental bait and switch. Managers perform graduate-school math to analyze the optimal interest rate and maturity combination in their funds to soften this threat, but sometimes market forces are just too powerful.

However, our current lodestar is rising, not falling, rates. That suggests standard bonds such as the year Treasury are in more jeopardy. Logically, yes. Moreover, because mortgages have a limited lifespan, whether because a home is sold or the note is prepaid, GNMA securities have a much shorter duration than Treasury, municipal or corporate bonds.

A rule of thumb is that for every one-percentage-point rise in rates, you lose principal equal to duration. Currently, the duration on the mortgage component of the Bloomberg Barclays Aggregate Bond index is 2. That gap will widen as mortgage rates edge higher while short-term interest rates remain in Federal Reserve lockup. Skip to header Skip to main content Skip to footer. Home Investing for Income.

For the past few decades, owning a GNMA fund has been a reliable way to pocket a higher yield than Treasury bonds offer, even while investing in a security that's backed by the full faith and credit of the U. Many investors have used GNMA funds as core bond holdings or even receptacles for short-term assets. Morningstar senior fund analyst Eric Jacobson chalks up the popularity of GNMA funds as core holdings to the favorable interest-rate environment that has prevailed since the last major increase in During the past few months, however, many GNMA holders have probably had their faith shaken a bit.

Morningstar senior fund analyst Sarah Bush noted that GNMAs were especially vulnerable during the recent sell-off because their prices had soared as a result of their government backing. True, recent GNMA losses aren't as high as those experienced by some other bond categories during the so-called taper tantrum that ensued when Federal Reserve chairman Ben Bernanke commented that the Fed may begin pulling back on its bond-buying program.

This article summarizes which categories were hardest-hit during that period. For investors who have grown complacent about their GNMA holdings or are using a GNMA investment to meet short-term income needs, the group's recent stumble should serve as a wake-up call for what could lie ahead.

Bondholders on a Tightrope Like other types of mortgage-backed securities, GNMA bonds consist of home loans that are bundled up and securitized, or turned into bonds. When mortgage-holders make their interest and principal payments, those payments flow through to holders of the securities. GNMA bonds are the only mortgage-backed securities that are backed by the full faith and credit of the U. Owing to those guarantees, GNMA securities held up well even during the depths of the housing market crisis, when many homeowners ran into trouble making their payments.

Aggregate Bond Index--no slouch itself that year--by nearly 2 percentage points. Yet despite their strong showings in environments when lower-quality bonds have gotten stung, GNMA bonds carry other risks. Prepayment risk is one of the major pitfalls of mortgage-backed bonds and explains why GNMAs yield more than Treasuries. In addition to receiving their pro rata shares of the scheduled interest and principal payments associated with the mortgages, holders of mortgage-backed securities may also receive some of their principal back ahead of schedule.

That happens when mortgage-holders prepay their mortgages, often because they have refinanced and taken out a new lower-interest loan in place of their old, higher-interest one. Mortgage holders are obviously more likely to refinance when rates are dropping, so bondholders get their money back and must reinvest it in a lower-yielding environment. To Read the Full Story. Subscribe Sign In. Continue reading your article with a WSJ membership. Resume Subscription We are delighted that you'd like to resume your subscription.

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