Voya GNMA Income Fund Quarterly Commentary - 2Q25
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.
Portfolio review
The Voya GNMA Income Fund outperformed the Index on a NAV basis. During the quarter, outperformance was mostly attributable to collateralized mortgage obligations (CMO) and modest duration overweight.
Current outlook and strategy
Agency MBS outperformed in the second quarter in sympathy with the overall risk-on sentiment as we recovered from Liberation Day. 10-year Treasury rate ended the quarter little changed at 4.23% and 2-year/10-year bull steepened. Housing activities remained slow as mortgage rates remained elevated. Inflation, as measured by Consumer Price Index (CPI), has remained tractable as it was mostly in line with median market estimates in both April and May.
From a technical perspective, lower coupons remain sensitive to supply and demand factors. As the largest part of the index with no new supply, 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. 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 down only slightly 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.
Voya GNMA Income Fund maintains an off-benchmark allocation to conventional MBS, where technical demand and fundamental value appear more attractive. The Fund also maintains allocations to 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.
Key Takeaways
The U.S. Federal Reserve held rates steady during the quarter and according to the Fed’s dot plot in June, only two cuts are expected by the end of 2025. In the second quarter, the Fed reduced its balance sheet through runoff, with 2Q25 runoff equating to roughly $52.5 billion in additional mortgage-backed securities (MBS) supply.
The yield curve bull steepened with 10-year rate little changed on the quarter. The 30-year fixed mortgage rate increased roughly 9 basis points (bp) to 6.73%.
GNMA MBS outperformed Treasury hedges by 8 bp in sympathy with the risk-on sentiment towards the end of the quarter. Belly coupons (e.g. 3.5s and 4s) were the worst performers along the coupon stack according to Bloomberg.
Housing market activity remained muted due to elevated mortgage rates. Both new home sales and existing home sales remained subdued by historical standards.
The Voya GNMA Income Fund outperformed its benchmark, the Bloomberg GNMA Index (the Index) on a net asset value (NAV) basis.