GoI, or anyone else who has thoughts on this matter.
I'm looking to rotate some of my stock gains into more safer bond funds. I was looking at Vanguard mutual funds. One that seems intriguing to me is their GNMA mutual fund. It is just made up of government mortgage backed securities. The average maturity is 5-8 years.
Overall its very low risk, and low yield. You it take it for what it is. But it does offer higher yields than treasury bonds of the same duration. The downside is the risk of prepayment. It appears this is what has hurt the fund's performance over the last 5 years. The average bond in the fund returns about 3.5 percent yet the average performance of the fund itself over the last 5 years has been only 1.8 percent.
But here is my theory, if rates gradually go up over the next few years, Shouldn't the volume of mortgage refinancing go down, (all other things being equal)? If so, I see this as a good investment opportunity. Just wondering what others think.