Voya GNMA Income Fund Quarterly Commentary - 3Q24
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
For the quarter, Voya GNMA Income Fund outperformed it’ the benchmark, the Bloomberg GNMA Index on a net asset value (NAV) basis. Outperformance was driven by beneficial reinvestment rates on to-be-announced (TBA) holdings, as well as a modest overweight to duration. Meanwhile, selections within pools also contributed, while allocations to collateralized mortgage obligations (CMO) detracted.
Current outlook and strategy
Agency MBS staged an impressive comeback in the third quarter as the yield curve bull steepened amidst cooling inflation data and increased scrutiny on employment and labor. Housing activities accelerated as we went through summer seasonals, but still remained relatively low due to elevated mortgage rates. Inflation, as measured by Consumer Price Index, has met market estimates in both July and August. An increased probability of a potential recession would 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 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 for the remainder 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 0.27% in July. 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 conventional, where technical demand and fundamental value appear more attractive. Additionally, the Fund maintains an allocation to CMOs which offer greater longer-term value with higher spreads relative to generic collateral, especially on an option-adjusted basis. Finally, the Fund maintains a preference for higher coupon collateral such as 4.5s to 5.5s.
Key Takeaways
The U.S. Federal Reserve telegraphed and initiated its rate cut program during the quarter. According to Fed’s dot plot in September, two additional cuts were expected this year. In the third quarter, the Fed reduced its balance sheet through runoff, with 3Q24 runoff equating to around $54 billion in additional mortgage-backed securities (MBS) supply.
Interest rates rallied across the board with the 10-year falling 62 basis points and the 2-year and 10-year significantly steepening 50 bp during the quarter. Accordingly, the 30-year fixed mortgage rate decreased around 80 bp to 6.15%.
GNMA MBS outperformed by 32 bp as rate rallied during the quarter and more clarity was provided with regards to Basel III endgame. Belly coupons outperformed the wings of the coupon stack.
Housing market activity increased as we went through summer seasonals. Both new home sales and existing home sales accelerated, however, overall home sales remain subdued by historical standards.