3.15% Yield and GNMA

As rates move higher, we continue to recommend GNMA ARMs as a way to help reduce a portfolio’s overall duration. GNMA ARMs carry a zero risk weight and are 100% government guaranteed.  Along with their low duration, they currently offer well over 3% yield with limited extension risk. They are designed with a resetting coupon thereby adjusting to market changes in interest rates. This pool will reset beginning 7/1/21 and annually thereafter which will result in an asset with a duration of 1.00 (annual adjustments). The structure below contains a 7.50% life cap and currently has a yield of 3.15%.

GNMA 3/1 Hybrid ARM
Zero Risk Weighted
1/1/5 Cap Structure
G2MA5155
Current Coupon 2.50%
Maturity date 4/20/2048
Average Life is 5.30 years
Duration is 4.61
Yield to average life is 3.15%
Dollar price is 99-22/32nds
Reset date is 7/1/21 and annually thereafter
Reset index is 1 year CMT + 150 basis points
Life cap is 7.50%
Annual collar is 1.00%
298 loans
Weighted average loan size is $232,000
Geographic mix:  California 18%, Florida 9%, Texas 11%
Weighted average credit score is 673
Issued 4/1/18
1 year CMT is currently 2.20 (this coupon would go to 3.50% if resetting now)

3.15% Yield with a coupon reset coming in 3 years is a nice way to put money to work knowing your duration will be low and your rate will adjust with the market in the future.