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I have enjoyed good returns with my GNMA fund for about 20 years now. (BGNMX) For the time being I have been reinvesting the dividends back into the fund but the day will come that I would want that income stream. With this bond market environment as it is, are GNMA's still a good option going forward?
the short answer is no. they are one of the worst assets going forward if you believe that the rates will normalize, i.e. will go higher. these funds outperformed similar maturity treasuries and will start underperforming during the rise in interest rates due to their negative convexity. the higher the interest (and thus mortage) rates, the fewer mortgage refinancings there are, the longer duration the GNMA securities become. you don't want increasing duration during rising interest rates. probably makes sense to move to a shorter or more predictable duration fund. best, jr
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