GNMA Bonds: A Diversification Tool for Uncertain Times

GNMA Bonds: A Diversification Tool for Uncertain Times

Time to read: Minutes
Christian Wilson

Christian Wilson, CFA

Head – Global Client Portfolio Management

GNMAs can be a compelling way to defend against unexpected market shocks, offering a risk profile similar to Treasuries but with higher yields.


  • What are GNMAs: GNMA bonds are privately issued mortgage-backed securities that enjoy the full faith and credit of the U.S. government, offering diversification benefits compared with other short-term investment instruments and attractive yields relative to Treasury bonds.
  • An anchor during market shocks: Historically, GNMA bonds have outperformed when equities and credit securities decline, helping to generate positive returns through bear markets.
  • Why GNMAs now: Soaring mortgage rates have massively reduced prepayment risk, creating what we believe is one of the most compelling entry points for GNMA bonds in more than 20 years.

What are GNMAs?

GNMA bonds are any privately issued mortgage-backed securities guaranteed by the Government National Mortgage Association (GNMA, also known as “Ginnie Mae”) to have timely repayment of principal and interest. GNMA is a wholly owned government agency established in 1968 to guarantee mortgage-backed securities for single-family and multi-family loans insured by various government agencies. GNMA bonds are the only mortgage-backed securities that enjoy the full faith and credit of the United States government.

Exhibit 1. GNMAs offer attractive yields over Treasuries
Yield to worst
Exhibit 1. GNMAs offer attractive yields over Treasuries

As of 05/31/23. Source: Bloomberg, Voya IM. Yield to worst is the minimum yield that can be received on a bond. Duration is the weighted measure of the length of time a bond will pay out. Past performance is no guarantee of future results. See back page for definitions and important disclosures.

GNMAs can be an anchor during market events

Investors seeking relative safety typically consider instruments such as U.S. Treasuries, money market funds, short term bond funds, or cash. Unfortunately, cash and money market instruments do not offer the diversification potential of GNMA bonds, and U.S. Treasuries offer less yield relative to GNMAs.

GNMA bonds have a history of mitigating risk and delivering attractive yield through a variety of market environments, helping investors navigate an uncertain market environment. Few “low-risk” bond sectors have delivered this protection historically, including short-term bond strategies.

For example, the S&P 500 has declined in 28 of the 93 quarters since the start of 2000. GNMA bonds had positive returns in a large majority of these periods, and frequently outperformed the fund averages for the Short-Term and Ultrashort Morningstar peer groups. Notably, GNMAs had positive returns in periods of extreme volatility, such as the global financial crisis and Covid. By contrast, the average ultrashort and short-term bond fund had negative returns during these crises, as they may include more credit risk than investors realize.

One notable exception was in 2022, when aggressive rate hikes by the Federal Reserve created substantial headwinds for most fixed income sectors, including GNMA bonds.

Exhibit 2. When stocks have struggled, GNMA bonds have often been resilient
Quarterly total return
Exhibit 2. When stocks have struggled, GNMA bonds have often been resilient

As of 05/31/23. Source: Standard & Poor’s, Morningstar, Voya IM. Past performance does not guarantee future results. See back page for definitions and important disclosures.

How do GNMA bonds compare with various “low risk” alternatives?



Why GNMAs now

Historically, the benefits of falling interest rates on GNMA bonds have been tempered by the resultant increase in mortgage refinancing. Today, however, recent years have provided opportunities to purchase a new home or refinance a higher-rate loan at historically low mortgage rates. As a result, many homeowners are sitting happily with mortgage rates that are significantly lower than the current prevailing rate.

This means there would need to be a substantial move lower in rates to bring back the financial incentive to refinance. Said another way, the “option” homeowners have to “call” their mortgage is deep out of the money, and negative convexity is near zero. We believe this situation makes GNMA bonds a historically attractive diversifier.

Exhibit 3. Surging mortgage rates have improved the outlook for GNMAs
Mortgage rate
MBS convexity

As of 05/31/23. Source: Freddie Mac (Primary Mortgage Market Survey), Bloomberg.

Key takeaways

  • GNMA bonds offer investors the backing of the U.S. government, and have historically provided diversification potential, often outperforming when equities and credit securities decline.
  • GNMAs often carry a higher yield than U.S. Treasuries, as they do today.
  • We see a compelling entry point in GNMA bonds; in an interest rate rally, investors should reap the benefits with limited headwinds, as the option for many homeowners to refinance their mortgages is deeply out of the money.


Index definitions and important disclosures

An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations, as volatility and other characteristics may differ from a particular investment.GNMA bonds: Bloomberg U.S. GNMA Index, an unmanaged index covering mortgage-backed passthrough securities of the Government National Mortgage Association.Morningstar categoriesU.S. Short-Term Bond: Short-term bond portfolios invest primarily in corporate and other investment-grade U.S. fixed-income issues and have durations of one to 3.5 years (or, if duration is unavailable, average effective maturities of one to four years). These portfolios are attractive to fairly conservative investors because they are less sensitive to interest rates than portfolios with longer durations. U.S. Ultrashort Bond: Ultrashort bond portfolios invest primarily in investment-grade U.S. fixed-income issues and have durations typically of less than one year. This category can include corporate or government ultrashort bond portfolios, but it excludes international, convertible, multisector, and high-yield bond portfolios. Because of their focus on bonds with very short durations, these portfolios offer minimal interest-rate sensitivity and therefore, low risk and total return potential. Morningstar calculates monthly breakpoints using the effective duration of the Morningstar Core Bond Index in determining duration assignment. Ultrashort is defined as 25% of the three-year average effective duration of the MCBI.

Investment risks

All investing involves risks of fluctuating prices, and the uncertainties of rates of return and yield inherent in investing. As interest rates rise, bond prices fall, reducing the value of the Fund’s share price. To the extent that the Fund invests in asset-backed, mortgage-backed or mortgage-related securities, its exposure to prepayment and extension risks may be greater than investments in other fixed-income securities. Other risks of the Fund include but are not limited to: credit risks, extension risks, other investment companies’ risks, prepayment risks, u.s. government securities and obligations risks and securities lending risks. Investors should consult the Fund’s Prospectus and Statement of Additional Information for a more detailed discussion of the Fund’s risks. While the Fund invests in securities guaranteed by the U.S. government as to timely payments of interest and principal, the Fund shares are Not Insured or Guaranteed. An investment in the Fund is not a bank deposit and is not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. Past performance is no guarantee of future returns.