“E.J., what’s going on with Vanguard GNMA?” my mother asked me the other day. “Hi mom” I said. “Hang in there.”
Hard to believe but Vanguard GNMA is yielding just over three percent today. Yes, its price is down but you only lose when you sell. And I’m not selling. I’m buying more at lower prices and taking the three percent. Because it’s a three percent world. I’m just living in it.
“How about bank CDs?” you might ask. I see the teaser rates out there. But you can feel like a mouse on a wheel chasing rates and locking in FDIC protection. You can put a lot of money in Vanguard GNMA and avoid the hassle.
With GNMAs you have peace of mind because they’re backed by the full faith and credit of the U.S. government (and typically offer a higher yield than U.S. Treasuries). And when corporations went belly up in 2008, Vanguard GNMA made over seven percent for investors.
GNMA is not all roses. You can’t be a glutton and take every bite out of a rising interest rate apple. It’s called extension risk—the average holding period is extending (meaning fewer refis) making it more difficult to take advantage of higher rates. But how much are you really missing out on?
It’s important to remember that the Federal Reserve is a political beast where members are anointed, I mean, appointed. It’s an attractive post for someone who knows how to get along well with others. In other words, tanking the real estate market with higher mortgage rates will not be good for one’s job security.
I’ll continue to take my risk-free three percent and be happy it’s not less—a memory I’m all too familiar with. And if you’re wondering what’s going on with Vanguard GNMA, believe me, you’re not alone.