GNMA bonds, or Government National Mortgage Association bonds, are debt securities that are backed by the full faith and credit of the U.S. government. GNMA bonds are issued by the Government National Mortgage Association, which is a federally-owned corporation within the U.S. Department of Housing and Urban Development.
The income from GNMA bonds is exempt from state and local taxes, and the bonds themselves are backed by the full faith and credit of the U.S. government, making them a very safe investment. GNMA bonds can be a good choice for investors who are looking for a fixed income investment that offers stability and safety.
What are GNMA Bonds?
Ginnie Mae is a government-owned corporation within the Department of Housing and Urban Development. Ginnie Mae guarantees the timely payment of principal and interest on residential mortgage-backed securities (MBS) that are backed by FHA loans, VA loans, rural development loans, and other loans insured or guaranteed by federal agencies.
Ginnie Mae I MBS are composed of single-family FHA-insured mortgages, single-family VA-guaranteed mortgages, and multifamily mortgages. Ginnie Mae II MBS consist only of single-family FHA-, VA-, and RHS-guaranteed mortgages. Ginnie Mae III MBS are composed of only multifamily mortgages. Because GNMA I securities back a greater diversity of loan types than GNMA II securities, they typically offer greater liquidity in the secondary market and slightly higher yields than GNMA II securities.
GNMA Bond Characteristics
Ginnie Mae securities are backed by the “full faith and credit” of the United States Government. GNMA bonds are sometimes referred to as Ginnie Maes, or just GNMAs.
The face value of a GNMA bond is $25, but they are usually sold in $25 increments. For example, if you want to buy a bond that has a face value of $1,000, you would purchase 40 bonds (40 x $25 = $1,000).
GNMA bonds have a fixed interest rate and pay interest every six months. The maturity date is the date on which the principal (face value) of the bond will be repaid. GNMAs can have maturities ranging from one to 30 years.
Find further sources of information in mortgage backed gnma yield table explained article, as well as in what is unique about gnma bonds?.
Advantages and Disadvantages of GNMA Bonds
The Government National Mortgage Association (GNMA or “Ginnie Mae”) is a government-owned corporation within the Department of Housing and Urban Development (HUD). GNMA’s mission is to “promote homeownership and enhance the liquidity of mortgage investments.” One way GNMA does this is by guaranteeing the timely payment of interest and principal on securities backed by FHA-insured, VA-guaranteed, and rural housing service (RHS) mortgage loans.
GNMA bonds are debt securities issued by GNMA. The principal and interest payments on GNMA bonds are guaranteed by the full faith and credit of the United States government. GNMA bonds are issued in denominations of $25, $50, $100, $1000, $5000, and $10,000.
There are several reasons why investors might consider buying GNMA bonds:
1. Safety: The full faith and credit guarantee of the United States government makes GNMA bonds one of the safest investments available.
2.Liquidity: GNMA bonds are very liquid and can be easily bought and sold in the secondary market.
3. yield: GNMA bonds typically offer higher yields than comparable Treasury securities. For example, as of June 1, 2018, the yield on a 10-year Treasury note was 2.96%, while the yield on a 10-year GNMA bond was 3.31%.*
4. Capital appreciation potential: GNMA bonds may rise in value if interest rates fall. For example, if you bought a 10-year GNMA bond with a 4% coupon for $1000 when interest rates were 6%, your bond would be worth more than $1000 if rates fell to 4%.*
However, there are also some reasons to be cautious about investing in GNMA bonds:
1. Interest rate risk: Like all fixed-income securities,GNMA bonds are subject to interest rate risk—the risk that prices will fall if interest rates rise. For example, if you bought that same 10-year GNMA bond for $1000 when rates were 4%, your bond would be worth less than $1000 if rates rose to 6%.* Since long-term rates are more volatile than short-term rates, longer-term GNMA bonds are subject to greater interest rate risk than shorter term bonds.* Also keep in mind that while prices of individualGNMA securities may fluctuate due to changes in general market conditions or other factors unrelated to changes in interest rates, Ginnie Mae’s guarantee protects against loss of principal due to defaults on underlying mortgages.* Given these risks, it’s important to consider your investment objectives carefully before investing in any fixed income security—includingGNMAs—and consult with your financial professional about each one’s unique features
Investing in GNMA Bonds
Ginnie Mae is a government-owned corporation within the Department of Housing and Urban Development. Its main function is to help make homeownership more accessible by ensuring that mortgage loans are available and affordable. The Ginnie Mae team carries out this mission by guaranteeing the payment of principal and interest on bonds issued by approved lending institutions, which use the proceeds to finance mortgage loans for homebuyers.
Ginnie Mae is the only government agency that guarantees the timely payment of both principal and interest on bonds backed by loans insured or guaranteed by a government agency. This full faith and credit guarantee makes Ginnie Mae securities among the safest investments available.
The vast majority of Ginnie Mae securities are what are known as pass-through securities. This means that each security represents a pro-rata share of a pool of mortgage loans, with each loan guaranteed by a government agency such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
Ginnie Mae also issues what are called MBSs, or Mortgage-Backed Securities. These bonds are similar to pass-through securities, in that they represent a pro-rata share of a pool of similar loans; however, MBSs are not backed by the full faith and credit guarantee of the United States Government.
While GNMA pass-through securities are backed by the U.S. Government, they are not themselves obligations of, or guaranteed or insured by, the federal government
After reading this guide, you should have a better understanding of what GNMA bonds are and how they work. GNMA bonds can be a great way to invest in mortgage-backed securities, but it’s important to understand the risks involved before investing. As with any investment, it’s always a good idea to speak with a financial advisor to see if GNMA bonds are right for you.