AboutWarren Boroson Expertise Author of "Keys to Investing in Mutual Funds" (Barrons), "Ultimate Mutual Fund Guide" (Probus), "How to Pick Stocks Like Warren Buffett" (JKLasser), and "The Reverse Mortgage Advantage" (McGraw-Hill). Former financial columnist for Gannett News Service.
Experience Author of 20 books; winner of 1996 Personal Finance award from Investment Company Institute and Washington University. Formerly on staffs of Money and Sylvia Porter's Magazine. Had a radio program (on WEVD) about mutual funds and a newsletter, FundDigest.
I understand the bare basics of investing in GNMA's but am unclear how rising or falling interest rates affect yield. I believe there is a relationship but I would appreciate it if you could clarify that and explain what to expect under both circumstances. Thank you very much!
Charlie
Answer Dear Charlie:
Mortgages are a complicated subject. Someone at Fidelity who runs a GNMA fund told me that buying them was the most complex financial decision possible--and Fidelity used a lot of computer time to figure out what to buy and what to sell.
If interest rates go up, people stop refinancing. There's no benefit to locking in a new rate. So, high-paying mortgages aren't taken away. That's good.
But if interest rates go up, fixed-income investments in general suffer...including mortgages because the new mortgages that are for sale are paying more. That's bad. In fact, it overshadows the good news that mortgages aren't being refinanced.
So, what did Fidelity do? It tried to buy older mortgages--where the borrowers had never thought of refinancing because they were apparently asleep at the switch. And, when Fidelity sensed that interest rates would go up, it concentrated on shorter-term mortgages.
So, overall, mortgages will be hurt if interest rates go up--but not terribly badly. And if you hold on through the rough period, your mortgage fund will begin paying more--thanks to the higher interest rates.
