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Could you please explain pass-through Ginnie Maes? Where can I find a listing of them? How large does an investment have to be? Are there brokers who specialize? Although I deal with a full-service broker, I am having great difficulty trying to obtain information. Maybe the commission is too low on these instruments, or maybe everyone is still share-minded? -- Richard Rubin


Your question, I assume, is prompted by bond guru

Bill Gross'


missive, in which he anoints Ginnie Mae pass-throughs as the best investment in the bond market today.

Gross, managing director at


and manager of

(PTTAX) - Get Report

Pimco Total Return, the largest and one of the best-performing bond mutual funds, is well known for his often bizarre monthly commentaries, in which he explains his latest strategies.

In his May essay, Gross argues that Ginnie Mae pass-throughs will outperform both Treasury and corporate bonds over the next several years. They'll outperform Treasuries because their yields are significantly higher, and they'll outperform corporates because corporate bond credit quality will deteriorate, he predicts. Ginnie Mae bonds, "to my best guess are an 8.5% 'total return' investment over the next 5-10-15 years," Gross writes.

So, what in heaven's name



In a word: mortgage-backed securities.

Ginnie Mae is the nickname for

Government National Mortgage Association

, a government agency within the

Department of Housing and Urban Development

. It was created in 1968 to promote home ownership by fostering a public market for home mortgages.

Here's what Ginnie Mae does: It buys home mortgages originated under programs run by the

Federal Housing Administration

, the

Veterans Administration

and the

Rural Housing Service

. It then pools the mortgages and issues securities backed by the payments on the loans.

Crucially, Ginnie Mae guarantees the holders of its securities full and timely payment of both interest and principal, even if the underlying borrowers default. And that guarantee is backed by the full faith and credit of the U.S. government, just like Treasury securities are.

But Ginnie Mae mortgage-backed securities always yield more than Treasury securities to compensate investors for

prepayment risk

. As you doubtless are aware if you have a mortgage, mortgage borrowers may accelerate the repayment of their loans, even refinance them.

For borrowers, that's a convenience that can save them money over the long haul. But for investors in mortgage-backed securities, it's a hassle, since it keeps them from being able to predict their returns, as they could with a regular bond whose issuer does not have a prepayment option. Ginnie Mae yields are higher than Treasury yields to compensate investors for that uncertainty, which is called prepayment risk. (In addition, mortgage-backed securities are fully taxable, while Treasury interest is deductible at the state level.)

There are other types of mortgage-backed securities, but only Ginnie Maes are backed by the full faith and credit of the U.S. government. Other major issuers of MBS, as they're called on the Street, are

Fannie Mae



Freddie Mac


. Though Fannie and Freddie are called agencies by buyers of their regular bonds, both are actually government-sponsored enterprises. They guarantee timely payment of both interest and principal on their MBS, but those guarantees are not backed by the government. (In addition, there are MBS from issuers that are entirely private.) Gross presumably favors Ginnie Maes at the moment because there's no credit risk associated with them, and their yields are higher than Treasuries'.

A bit more complexity: There are various types of Ginnie Mae securities. Pass-throughs are the original and simplest kind. The interest and principal payments on the underlying mortgages "pass through" to the holders of the mortgage-backed securities, pro rata, minus a servicing fee. But Ginnie Mae also issues REMICs -- Real Estate Mortgage Investment Conduits -- and so-called Platinum securities, which have more complicated structures. Ginnie Mae's

Web site explains the various types in more detail.

Getting the Dope on Pass-throughs

If you've had trouble getting information about Ginnie Mae pass-throughs from your broker, that might be because the minimum investment is $25,000. Needless to say, they are not very popular with retail investors. Having said that, any full-service broker ought to be able to provide information about them. The market is very large and liquid.

Fannie Mae and Freddie Mac pass-throughs and REMICs have $1,000 minimums, but if it's the U.S. government guarantee you're after because you believe, as Gross does, that we're headed for a period in which anything that doesn't have it isn't likely to perform well, you'll think twice.

Ginnie Mae REMICs also have $1,000 minimums, but there are lots of different kinds. Ginnie Mae pass-throughs saddle all the investors in a given pool with the same degree of prepayment risk. Ginnie Mae REMICs, on the other hand, reallocate the prepayment risk so that some investors wind up with more, others with less. It's really complicated.

Probably the easiest way to buy exposure to Ginnie Mae pass-throughs is through a Ginnie Mae mutual fund. There are dozens, but the best performers that are sold without a "load," or sales charge, according to


, have been

(VFIIX) - Get Report

Vanguard GNMA (0.30% annual expense ratio),

(LEXNX) - Get Report

Lexington GNMA Income (0.99%),

(BGNMX) - Get Report

American Century GNMA (0.59%) and


Dreyfus BASIC GNMA (0.65%). The Sept. 24, 1999

Fixed-Income Forum took a closer look at GNMA mutual funds.

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