Primarily invests in Government National Mortgage Association (GNMA) securities with maturities in excess of one year and which have the same credit quality as U.S. Treasury securities, but higher yields to compensate for prepayment uncertainty.
Key Takeaways
- The U.S. Federal Reserve is expecting one rate cut this year and has kept short-term interest rates unchanged during the quarter. Fed is reducing its balance sheet through runoff, with 2Q24 runoff equating to around $54 billion in mortgage-backed securities (MBS).
- Interest rates modestly sold off with the 10-year rising 20 basis points (bp) as well as the 2-year and 10-year slightly steepening 6 bp during the quarter. Accordingly, the 30-year fixed mortgage rate increased around 22 bp to 6.96%.
- GNMA MBS underperformed Treasury hedges by 17 bp, mostly driven by their rate directionality and news about possible sales by banks. Lower coupons outperformed the belly and higher coupons according to Bloomberg.
- Housing market activity increased as we went into summer seasonals. Both new home sales and existing home sales have increased, however, overall home sales remain subdued by historical standards.
- For the quarter, the Voya GNMA Income Fund outperformed its benchmark, the Bloomberg GNMA Index on a net asset value (NAV) basis.
Current Strategy and Outlook
Agency MBS did not get any relief in the second quarter as rates sold off and talks of potential sales of MBS by banks overhung the market. Housing activities started to tick up as we move into summer seasonals, but remain relatively low due to elevated mortgage rates. Inflation, as measured by Consumer Price Index (CPI), has come in slightly below than median market estimate in both April and May. Fears of a potential recession should benefit MBS demand as a flight-to-safety entices money managers to increase allocations.
From a technical perspective, lower coupons remain sensitive to supply and demand factors. As the biggest part of the index with no new production, lower coupons tend to outperform when there’s passive index flows into Fixed Income and Mortgage Funds. Demand for Ginnie versus Conventionals is also impacted by technical factors. If the reproposed banking regulations require smaller banks to follow similar regulatory requirements akin to their larger, global systemically important bank (GSIB) counterparts, we could see resurgent bank demand for Ginnie Mae MBS in the second half of 2024. From a fundamental perspective, prepayment speeds for recently produced, high coupon, Veteran Affairs (VA) loans remain elevated due to the efficiency of VA’s streamlined refinancing program.
Housing prices remained stable during the quarter with Case-Shiller 20-City Home Price Index up a seasonally adjusted 0.38% in April. Overall MBS supply appears to be relatively docile for the foreseeable future for both gross and net issuance; however, the GNMA fund managers will continue to monitor the technical factors impacting MBS supply.
The GNMA Income Fund maintains an allocation to conventionals where fundamental value is more attractive. The Fund remains overweight off-benchmark GNMA and agency-backed collateralized mortgage obligations (CMO) which offer greater longer-term value with higher spreads relative to generic collateral, especially on an option-adjusted basis. Additionally, the Fund maintains a preference for higher coupon collateral such as 4.5s to 5.5s.
Portfolio Review
For the quarter, the Voya GNMA Income Fund outperformed its benchmark on NAV basis. The outperformance was mostly attributable to floater positioning and off-benchmark CMO holdings. Duration overweight subtracted from Fund excess performance.
Key Takeaways
The U.S. Federal Reserve is expecting one rate cut this year and has kept short-term interest rates unchanged during the quarter. Fed is reducing its balance sheet through runoff, with 2Q24 runoff equating to around $54 billion in mortgage-backed securities (MBS).
Interest rates modestly sold off with the 10-year rising 20 basis points (bp) as well as the 2-year and 10-year slightly steepening 6 bp during the quarter. Accordingly, the 30-year fixed mortgage rate increased around 22 bp to 6.96%.
GNMA MBS underperformed Treasury hedges by 17 bp, mostly driven by their rate directionality and news about possible sales by banks. Lower coupons outperformed the belly and higher coupons according to Bloomberg.