As an investor looking for stable, income-producing securities, you may be comparing Ginnie Mae bonds with short-term government or investment-grade corporate bonds. There are distinct tradeoffs between the two, and a final decision is usually a choice between stability or higher interest rates.
GNMA is the acronym for the Government National Mortgage Association, commonly called Ginnie Mae. The agency puts a federal government guarantee on mortgage-backed securities -- MBS -- from pools of FHA and VA home loans. Mortgage securities pay out monthly payments of principal and interest as homeowners of the loans in a mortgage pool make their monthly payments. Ginnie Mae bonds typically pay a higher interest than Treasury securities while providing a federal government guarantee. Ginnie Mae bonds do not have a fixed maturity, but are paid off as homeowners make monthly payment and sell or refinance their homes.
Short-term bonds are fixed-rate debt securities with maturities of three years or less. The category can include short-term Treasury notes and bonds plus investment-grade corporate bonds. Shorter-term bonds have less price fluctuation than longer-term bonds when interest rates change. In times of a normally sloped yield curve, the tradeoff for the short-term price stability is lower interest rates. For example, at the time of publication, the three-year Treasury note was paying just 0.55 percent, while the 10-year note had a yield of 2.77 percent.
Video of the Day
Brought to you by
Related pagesdda accounts affidavit of death of joint tenant california instructions convertible bonds advantages how much does a broken tooth cost to fix how to cancel delta dental insurance bank of america debit card activation number citi dividend rewards calendar underreported income irs penalty bank of america credit dispute department amortization formula accounting underwriter loan approval can i get medicare through my spouse home equity loan no appraisal synonym of honestly 2013 standard deduction for over 65 share transfer tax implications industry financial ratio averages futures rollover que es 401k allergy id bracelets contingent liabilities gaap yearly salary of a social worker property seized for unpaid taxes irs taxpayer pin article 1 section8 where can i get a vanilla visa card payday loans default what happens how to qualify for a mortgage with poor credit bond and debenture difference compass ga www hchdonline com gold card application if your car is stolen does insurance replace it phone number for tax refund offset discover card cash advance banks example of pro forma balance sheet donate crutches aetna dmo benefits intuit hourly paycheck calculator does secondary insurance cover copay sharebuilder routing number decree of foreclosure stocks etrade california law for renters rights florida doc stamps calculator repo laws in florida 401k fully vested illinois short term disability diminishing balance method calculator irs request a copy of tax return scottrade limit price wisconsin tax refund status how much do soffits and fascias cost hud bidding schedule k-1 form 1041 how to get missed payments removed from credit report monroe county section 8 highest paying waiter jobs how to compute contribution margin ratio coned pay online payday loan alabama tenants rights in foreclosure closing bank account with overdraft how to fill out money order moneygram deep discount securities alabama quit claim deed form forfeited stock options disputing a charge on credit report loans for mobile homes with bad credit where can i buy at&t refill card how to heal abscess tooth qwick rate twisting insurance minimum credit score for a va home loan 1099 for unemployment how long are travellers cheques valid for wa state statute of limitations on debt donate a mattress
In most interest rate conditions, GNMA bonds will pay higher yields than short-term, high-quality bonds. At the time of publication, the yield on GNMA bonds was as high as 2.6 percent compared to less than 1 percent for short-term government and corporate bonds. Ginnie Mae bonds work best in a stable interest rate environment. If rates increase, the term of mortgage securities will stretch out as homeowners hang on to their current loans. Falling rates will result in moderate price increase of GNMA securities. However, Ginnie Mae investors may see their principal return faster as homeowners refinance to lower rates.
Short-Term Bond Advantages
Short-term bonds provide a high level of principal stability. Rising interest rates cause bond price to fall and short-term bonds will decline less than longer-term bonds. A short-term bond will mature soon and the proceeds can be reinvested at a higher rate if rates are increasing. Short-term bonds are a better choice than Ginnie Mae bonds when rates are expected to increase or if stability of principal is a primary investment goal. Short-term bond principal amounts are returned at one time when a bond matures. This feature makes reinvestment easier than with GNMA bonds, where principal is returned in small amounts each month.