Safe Ginnie Mae bonds have been yielding nearly two percentage points more than Treasury bonds, instead of the long-term average of just...

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Safe Ginnie Mae bonds have been yielding nearly two percentage points more than Treasury bonds, instead of the long-term average of just over 1 percent, spelling an opportunity for investors. The higher spread is due, in part, to the big supply of Ginnie Maes and other mortgage-backed securities in the market and the financial troubles of rivals Fannie Mae and Freddie Mac.

But unlike bonds of Fannie and Freddie, Ginnie Mae bonds are backed by the full faith and credit of the U.S. government, just like Treasurys.

“The whole mortgage marketplace has been strained, pretty much making Ginnie Mae the only game in town for securitization and subprime borrowers,” says David Ballantine, a bond-fund manager at Payden & Rygel. Today’s wider spreads are the result of basic market forces, Ballantine says. “Originator supply is simply more than demand,” and that weighs on prices, forcing yields higher.

Ginnie Mae, which stands for Government National Mortgage Association, is a government entity whose goal is to increase the availability of affordable housing. Unlike publicly traded Fannie and Freddie, Ginnie Mae doesn’t buy mortgages or issue securities backed by these loans. Private lenders that have Ginnie Mae approval issue securities that it guarantees. This allows them to free up capital so they can make additional loans.

Ginnie Maes traditionally offer higher yields than Treasurys because of the risk the underlying mortgages will be prepaid.

This means investors may have to redeploy their principal earlier than planned, potentially at a lower interest rate.

Also, as the government takes steps to shore up Fannie and Freddie, their bonds seem less risky than in the past — so money is flowing into them and out of Ginnie Maes, further weighing on prices.