Voya GNMA Income Fund Quarterly Commentary - 4Q24
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.
Portfolio Review
For the quarter, the Fund outperformed the Index on a NAV basis. Outperformance was mostly attributable to the outperformance of CMOs while the longer duration profile of the strategy detracted.
Current outlook and strategy
Agency MBS held in during the fourth quarter despite a significant rate sell off and curve steepening. The 10-year Treasury rate ended the quarter at 4.57% and 2-year/10-year steepened 20 bp. Housing activity decelerated as we went through winter seasonals and remained relatively low from a historical perspective due to elevated mortgage rates. Inflation, as measured by Consumer Price Index, has remained tractable as it met median market estimates in both October and November.
From a technical perspective, lower coupons remain sensitive to supply and demand factors. As the largest part of the Index with no new supply, lower coupons tend to outperform when there’s passive index flows into fixed income and mortgage funds. Demand for Ginnie versus Conventionals is also impacted by technical factors. 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 in 2025. From a fundamental perspective, prepayment speeds for recently produced, high coupon, Veteran Affairs (VA) loans remain elevated due to the efficiency of VA’s streamlined refinancing program.
Housing prices remained stable during the quarter with Case-Shiller 20-City Home Price Index up a seasonally adjusted 0.32% in October. 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 allocations to conventional MBS, where technical demand and fundamental value appear more favorable. The Fund also maintains allocations 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 option-adjusted basis. Additionally, the Fund maintains a preference for higher coupon collateral such as 4.5s to 5.5s.
Key Takeaways
The U.S. Federal Reserve continued cutting rates during the quarter and according to the Fed’s dot plot in December, two additional cuts are projected for 2025. In the fourth quarter, the Fed reduced its balance sheet through runoff, with 4Q24 runoff equating to roughly $48 billion in additional mortgage-backed securities (MBS) supply.
Interest rates sold off across the board and curve steepened with the 10-year rising 80 basis points (bp) and the 2-year/10-year steepening 20 bp during the quarter. Accordingly, the 30-year fixed mortgage rate increased roughly 62 bp to 6.86%.
The 30-years GNMA Index delivered marginally positive excess returns during the quarter despite the rate selloff. Belly coupons were the worst performers along the coupon stack, while higher coupons (5.5+) outperformed.
The Voya GNMA Income Fund outperformed it’s benchmark, The Bloomberg 30-year GNMA Index (the Index) on a net asset value (NAV) basis.