Safety and a higher yield? Typically you can have one or the other. But sometimes you get both. That’s the case with bonds issued by the Government National Mortgage Association, or Ginnie Mae, as it’s commonly known.
In today’s episode of The Inside View, we take a closer look at Ginnie Maes in a conversation with David Ballantine, lead manager of the Payden GNMA Fund (PYGNX). As he explains, Ginnies are mortgage-backed bonds fully secured by the U.S. government. That means Ginnies are effectively of the same credit quality as U.S. Treasuries. Yet Ginnies also tend to offer a yield premium over Treasuries. Currently, Ginnie yields are generally available at 140 basis points over Treasury bonds, Ballantine says.
According to Morningstar, Payden GNMA ranks high for trailing performance in the past five years among intermediate government portfolios. The portfolio’s 7.7% total return in 2008 was not only one of the fund’s better years since it was launched in 1999; last year’s gains also looks attractive generally, given the steep losses almost everywhere else in the capital markets. That’s no guarantee that the fund will continue to excel, of course. Indeed, the strong gains in Treasuries and GNMAs in 2008 offered a bullish tailwind generally last year, and one that’s not likely to be repeated.
Keep in mind, too, that Ginnies bear prepayment risk as mortgage-backed bonds. That risk tends to rise when interest rates fall and homeowners are inclined to pay off old mortgages by refinancing at lower rates. Then again, interest rates have already fallen to levels unseen in decades. That raises questions about the future for bonds generally, although one might wonder if the outlook is different for Ginnies.
With investors looking for a safe haven and a decent yield, it’s a perfect time to take a closer look at these bonds as an asset class and consider the possibilities, and risks. With that in mind, listen in as Dave Ballantine discusses an obscure but intriguing corner of the U.S. government bond market…

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