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Sunday, September 13, 2009

Bob Brinker GNMA Advice

Bob Brinker had a lot to say about GNMAs and his favorite GNMA fund from Vanguard (VFIIX Charts) this weekend.

Here is David Korns "interpretation" of the September 12 and 13, 2009 Moneytalk (Bob Brinker Host) shows. You can read more about David Korn at the end of this article.


Caller: This caller read an article in the WSJ about banks selling Fannie Mae and Freddie Mac and buying up GNMAs. Could this be what is pushing up the net asset value of GNMA and decreasing the interest on GNMAs? Bob said that that interest rate yields are low across the board right now. Just look at the 5-year note as an example, it is yielding only 2.3%. Yields are low because the government is trying to keep rates low right now now to stimulate the economy. There is an inverse relationship between low yields and high net asset values, and that is what you are seeing. Bob said he doesn't blame the banks for wanting to purchase GNMAs as they have a direct Treasury guarantee which you don't have on Fannie Mae and Freddie Mac.

Caller: Are you worried that with banks purchasing GNMAs at blistering rate, whether the supply of these will dry up? Bob said GNMA is profoundly involved in the mortgage market and there hasn't been any scarcity of mortgage securities. In terms of GNMA scarcity, it is not an issue.

DAVID KORN: I found the article the caller was referring to which was published Thursday. It is entitled, "Banks Load Up on Mortgages, in New Way" which you can find at this url:

Caller: With the net asset value of the GNMA so high, is it still a good security to own? Bob said he thinks that for those who are willing to accept the inevitable net asset value of GNMAs, these securities offer a premium yield. There is no question you have to accept an overall range in the net asset value in normal times between $9.50 to $10.50.

DAVID KORN: The net asset value of the Vanguard GNMA Fund that Bob recommends (VFIIX) closed Friday at $10.73. The following url takes you to a 5-year chart that shows you just how high the NAV is relative to other times:

Caller: What do you think about using a GNMA fund for a short-term savings account. Bob said if you do that, you have to accept the fact that when you go to withdraw your money, the net asset value could have declined. You will earn the premium interest yield during the time you own it, but the principal is not guaranteed to not decline like a certificate of deposit. In a high quality money market fund, you can also depend on the principal staying the same, although these days the rates paid on money market funds is paltry.

DAVID KORN: Indeed. Some of the big institutions are paying pretty much nothing on money market funds. Vanguard's Prime Money Market Fund, for example, is paying just 22 basis points, and that is one of the higher ones out there. For limited amounts of short term cash, I like the high yield checking accounts where you can get really decent rates. There are also some good savings accounts that allow for bigger deposits. I cover those in The Retirement Advisor. (Free Sample Issue)

Caller: This retired caller owns a lot of GNMAs and relies heavily on the GNMA yield for his current income. The caller noted that the GNMA yield has dropped recently, and even had a big one day drop of close to 0.7%. Bob noted that the Vanguard GNMA fund he recommends is yielding 3.7%. The flipside to that lower yield, is that you are looking at record high net asset values in the share price. In times of interest rate stress, the GNMA fund could trade in the $9 range. The caller seemed upset about the low yield, and Bob asked whether he would really be happy with a net asset value decline that would result in higher yields. Bob didn't think he would be.

The caller continued to express concern over the current yield, and eventually Bob suggested that if he was nervous about the GNMA fund, he could put together a ladder of FDIC insured CDs.

DAVID KORN: It's not just lower yields in GNMAs that are causing concern among retirees and others who rely on interest from their investments for income. Its interest from money market accounts, certificates of deposit and Treasuries really across the board.

Kirk Comment: Make sure you read this new CD rate survey that looks at the CD Rates at Largest US Banks .

David Korn Links:
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The Retirement Advisor Portfolios

Dollar Value on 8/31/09


Model Portfolio 1



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The Retirement Advisor Model Portfolios all began with $200,000 on 1/1/2007

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