Fixed-income investors searching for higher yields have an alternative to stingy bank savings and money market funds — bonds backed by mortgage debt. Some mutual funds that invest in them yield more than 4%.
Is that a joke? Didn’t a mortgage-market implosion trigger the financial crisis and Great Recession? Aren’t mortgage-backed securities terribly risky?
Some are, but not all. Bonds backed by the Government National Mortgage Association, better known as Ginnie Mae, are quite safe. The company, owned by the U.S. Department of Housing and Urban Development, creates securities out of mortgages backed by the Federal Housing Administration and Department of Veterans Affairs.
The federal government guarantees that investors in Ginnie Mae bonds will receive all of the principal and interest payments they are owed. If a homeowner with an FHA or VA loan stops making payments, the government uses tax money to make up the difference.
Other types of mortgage-backed securities offer no such guarantee, and they have been hammered by homeowners’ rising default rates.
Ginnie Mae bonds aren’t completely risk-free, though. They can lose value if interest rates rise and newer bonds pay higher yields. But mutual funds containing Ginnie Mae bonds constantly replace older bonds with newer ones, gradually adjusting to changes in prevailing rates.
Mutual funds offer the easiest way to invest in Ginnie Maes. Among some of the most popular is the Vanguard GNMA Fund (Stock Quote: VFIIX), currently yielding 4.29%, according to Morningstar Inc. (Stock Quote: MORN). The Vanguard fund returned 4.9% in the first nine months of the year. Most importantly, it returned 7.2% in 2008, despite the financial market catastrophe, and it has had a long string of winning years. Average annual return has been 6.2 % over the past decade, and 8.4 % since the fund was started in 1980.