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Sleep at night funds

By Sheyna Steiner ·
Friday, September 7, 2012
Posted: 2 pm ET

In today's no- or low-yield world, safety-oriented investors have few great options. Bonds generally have done very well but there's no guarantee that will continue indefinitely, and there's the looming risk of interest rate increases at some point in the future that could drag down the value of longer-term bond funds.

That caveat also applies to the safest of investments -- U.S. Treasuries and the bond funds that invest in them. While they're ultra-safe, yields on the shorter side reflect the worries of global investors. On the longer end, the yields are much better, relatively, but it may be too risky to wade out to 20 years for 5 percent interest.

That's investing: weigh the risks and make your choices. But there are government securities that offer the same guarantees as U.S. Treasuries and may come with a bit more yield -- specifically, Ginnie Mae bonds or bond funds. The mutual funds are probably more relevant to a wider swath of investors, as the minimum investment in individual issues will be $25,000.

This week, the Kiplinger website ran a story titled "Ode to Ginnie Mae" in which Jeffrey Kosnett waxed poetic about the government-owned corporation.

This is hands-down my favorite category of government bonds in today's low-interest-rate environment and ought to be yours, too. You should be able to get a yield of about 2.5 percent from a fund that simply owns pools of U.S.-guaranteed home mortgages. There's no chance that you'll lose anything from defaults and foreclosures. And because the average duration of these funds is relatively short, you expose your principal to much less interest rate risk than you would if you invested in regular Treasury bonds …

Full government backing is only part of the reason I'm partial to GNMAs. The other reason is results. The performance of GNMA securities and the funds that invest close to 100 percent of their assets has been terrific. It's easy to find a GNMA fund that hasn't had a losing calendar year in this century and, more remarkably, hasn't even suffered a nasty short-term setback.

Because Ginnie Mae is owned by the government, bonds it issues are backed by the full faith and credit of the U.S. government. But they're not free of risk. Like all bonds, Ginnie Maes are subject to interest rate risk.

When the Federal Reserve raises short-term interest rates, possibly in 2014, the value of existing bonds may go down, which is why experts recommend avoiding very-long-term bonds right now.

There is also the risk that some of the mortgages bundled in the securities will be paid early, which could eat into returns. Overall though, nervous investors may find that they help them sleep at night with the government-backed promise.

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