Gyroscopic Investing

Why has the GMNA fund been so amazing the last decade? Falling interest rates causing principal appreciation?

It seems like, at least for the last decade, the GMNA fund has been the place to be to score 2% to 3% above the "cash" short term rate, while having minimal principal fluctuations.

There was a point where it dropped 7% over the course of 1.5 years. However, this "risk" has been more than compensated for.

I've always thought GMNAs were crap. If interest rates rise, bonds do bad, and when interest rates fall, bonds do good. But for mortgages, when interest rates fall, people re-finance. So in theory, whether interest rates go up or down, GMNAs should get screwed.

Then there's all the shit mortgages out there.

If I had to guess, I'd say GMNAs have above risk-adjusted returns because the federal government has stepped in and bailed out the market. I'd also wager that this is now built into the market, and going forward, we probably can't expect similar "free money" returns on GMNAs.

I'm tempted to keep a small portion of my cash in GMNAs but I'll keep that for variable portfolio if I decide to do that at all.

I'm sure CraigR has a comment on these. I heard Craig refer to the 20% "crap" that VG is putting in their treasury funds as MBS shit.

Perhaps one of the reasons GNMA's have done so well is that people can't refinance so easily.  When you are upside down on your mortgage and don't have any cash, you can't refinance.  I have a friend who bought a large amount of GNMA bonds several years ago.  He has been pleasantly surprised about how little return of principle has occurred unlike in the past when he has owned them.
Norm

This fund is actively managed. There is a video on the reference link, where the fund manager describes what they do.

https://personal.vanguard.com/us/funds/ ... IntExt=INT

I believe the gist is that they target bonds whose mortgages are owed by people with "good" but not "great" credit ratings. They feel that those homeowners are less likely to refinance, sell, or walk away from their homes. Apparently you can see what is inside a GNMA bond...

Personally I would not categorize it as cash in a PP. Rather, I would consider it part of a VP. I used it for a while, but got out of it when I moved into the PP.

S