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.
Key Takeaways
- The U.S. Federal Reserve is expecting three rate cuts this year but has kept short-term interest rates unchanged during the quarter. Fed is reducing its balance sheet through runoff, with 1Q24 runoff equating to roughly $45 billion in mortgage-backed securities (MBS).
- Interest rates significantly sold off with 10-year rising 32 basis points (bp) and the 2-year and 10-year slightly flattening 5 bp during the quarter. Accordingly, the 30-year fixed mortgage rate increased around 16 bp to 6.74%.
- MBS underperformed Treasury hedges as they have been trading directionally with rates. While declining rate volatility has been beneficial to mortgage performance, sluggish demand technical factors has been a headwind. Lower coupons slightly outperformed the belly and higher coupons according to Bloomberg.
- Housing market activity increased slightly as we move away from winter seasonals. Both new home sales and existing home sales have increased with existing home sales increasing at a greater rate.
- For the quarter, the Voya GNMA Income Fund outperformed its benchmark, the Bloomberg GNMA Index on a net asset value basis (NAV).
Current Strategy and Outlook
Agency MBS was off to a rocky start as rates sold off and bank demand became less clear into the Basel proposal overhaul. Housing activities started to tick up as we move away from slower winter seasonals, bolstering supply technical factors. Inflation, as measured by Consumer Price Index (CPI), has come in slightly higher than market consensus in both January and February. Fears of a potential recession should benefit MBS demand as a flight-to-safety entices money managers to increase allocations.
From a technical factor perspective, lower coupon remains sensitive to supply and demand factors. For example, option-adjusted spread (OAS) for uniform MBS (UMBS) 2s widened 10 bp on the back of Truist’s announcement in February to sell mortgages. Additionally, 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. From a fundamental factors perspective, we observed accelerated prepayment speed for recently produced Veteran Affairs (VA) loans in January and February, which is most likely a function of lenders utilizing VA’s streamlined refinancing program to take advantage of the rate rally towards the end of last year.
Housing prices remained stable during the quarter with Case-Shiller 20-City Home Price Index up a seasonally adjusted 0.14% in January. 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 Voya GNMA Income Fund maintains an allocation to conventional MBS due to better fundamental factors. The Fund remains overweight to off-benchmark GNMA and agency- backed collateralized mortgage obligations (CMO) which offer greater longer-term value with higher spreads relative to generic collateral, especially on an OAS basis. Additionally, the Fund maintains a preference for higher coupon collateral such as 4.5s and 5s.
Portfolio Review
For the quarter, the Fund outperformed its benchmark. The outperformance was mostly attributable to floater positioning and off-benchmark CMO holdings. Duration overweight subtracted from Fund excess performance.
Key Takeaways
The U.S. Federal Reserve is expecting three rate cuts this year but has kept short-term interest rates unchanged during the quarter. Fed is reducing its balance sheet through runoff, with 1Q24 runoff equating to roughly $45 billion in mortgage-backed securities (MBS).
Interest rates significantly sold off with 10-year rising 32 basis points (bp) and the 2-year and 10-year slightly flattening 5 bp during the quarter. Accordingly, the 30-year fixed mortgage rate increased around 16 bp to 6.74%.
MBS underperformed Treasury hedges as they have been trading directionally with rates. While declining rate volatility has been beneficial to mortgage performance, sluggish demand technical factors has been a headwind. Lower coupons slightly outperformed the belly and higher coupons according to Bloomberg.