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JerichoHill
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Ask An Economist

Postby JerichoHill » Wed Apr 04, 2007 7:51 pm

It is what it says. Hi, I'm JerichoHill aka the DC Economist. This thread serves as a repository for questions that are more economic than financial in nature. For example, interest rates we could discuss in many places, but here one might ask "Is the Fed going to be raising rates this year?"

I've moderated a few threads like this before. I'll try to answer your questions as factually and neutrally as possible.

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Postby samerwriter » Wed Apr 04, 2007 9:30 pm

I've always been curious about the relationship between GNMA yields and interest rates. It's surprised me that the yield and NAV on my Vanguard GNMA mutual fund has changed fairly little over the years, despite fluctuations in mortgage rates. I'd expect as mortgage rates increase for the NAV to decrease, but the NAV seems to stay fairly steady...

Any ideas as to why that happens?

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Postby jdroth » Wed Apr 04, 2007 9:34 pm

See, this is why I'm glad to have guys like you frequenting GRS. Samerwriters question is basicaly gibberish to me. It's like <i>Star Trek</i> technobabble! :(

That's why this site has been so valuable to me -- I'm always learning from you guys.

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Postby JerichoHill » Thu Apr 05, 2007 6:13 am

Yeah, I understand JD, I do.

GNMA are mortgage backed securites (Ginnie Mae), and NAV is Net Asset Value. I'm going to wager a guess here because I quite frankly don't invest in GNMA's. Assuming that most mortgage backed securities are fixed-rate products, changes to the interest rates only marginally impact the GNMA's overall composition, thus would lead to only small changes for the short-term. I'd that that if long-term projections on rates were to swing one way or the other, then we'd see some impact.
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Postby plonkee » Thu Apr 05, 2007 10:40 am

I have a question:

Most personal finance bloggers are US based and any asset allocations assume the majority of stocks held would be within the US market. I'm in the UK, am I correct in guessing that it would be more suitable for me to hold the majority of my stocks within the UK market?
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Postby JerichoHill » Thu Apr 05, 2007 10:43 am

I wouldn't agree with that, totally, but I suppose its a decent enough guide. I am US based, but about 40 % of my investment portfolio is in foreign (European) Index Funds. I figure its form of risk-hedging. Typically both do well, but if the US is sluggish, that should mean that more than likely, Europe should be good. It's like, if the dollar falls, my dollars are insulated because I'm in European stocks and currency.

I was talking to (I guess) my new personal finance advisor yesterday. One thing he said struck well. When you invest, you want to reduce your standard deviation, the highs and the lows, and try to make your annual return more smoothed and predictable. That's why you hedge.

I'd imagine you'd be more likely to be involved in European investments, but having some money in Asian indexes or American indexes would reduce some risk for you.
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Postby MossySF » Sun Apr 08, 2007 10:45 am

What's the incentive for investing in mortgage backed securities? When you buy bonds, you gain/lose value when interest rates go down/up. When you own mortgage securities, people can refinance when interest rates go down so you only have the interest rake hike downside. I have heard of prepay penalties for subprime/alt-prime loans but GNMA/FNMA should all be prime. Or have they simply found that people are uncaring about their mortgages and only a small percentage actually will refinance to a lower rate?

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Postby JerichoHill » Sun Apr 08, 2007 3:40 pm

I think, because of the sheer amount of mortgages and types, interest rate changes and refi's have their effect diluted. The appeal of MBS, like other investment vehicles, mainly lies in diversifying one's portfolio of investments. I would argue it would be unnecessary if one already had a housing builders index fund, or similiar instrument.

I dont know about folks not caring about refi's. Dont have any data for that readily available, but I can check tomorrow.
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Postby Dylan » Mon Apr 09, 2007 1:35 pm

On the mortgage backed securities, I’d also add that pre-payment risk is built into the underlying loan rates and reflected in the security’s pricing. So, in theory, you are being compensated for some of that risk.

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Postby nickel » Mon Apr 09, 2007 2:58 pm

Is the Fed going to be raising rates this year?

(Sorry, couldn't resist the obvious.)

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Postby JerichoHill » Mon Apr 09, 2007 5:15 pm

Ha, that's a funny question Nickel. There are two economists on my floor, myself (Civil Rights) and (Housing) and we have a bet on the interest rate. He's taken the up-side and I've taken the down-side. This is a function of two competing issues.

Housing Economist Dude -- Thinks that rates will go up because inflation is still present in the economy, unemployment continues to go down and is below full employment (and we agree we're below the natural rate), which creates inflationary pressure, and real wage growth is/was fairly stagnant. That is the argument for rates rising.

Me -- I'm taking the down side. While inflation is still present, raising rates hasn't gotten rid of it. Concurrently, we have just gotten reports that do show SOME real wage growth. This is a positive development (counter-acts inflation). The economy is still sputtering though, and could use some invigoration. We also have a potential liquidity and confidence crisis blooming in the mortgage industry, so if that tightens, interest rates need to drop.

Which all said and done, probably means nothing...as in, the fed does nothing.
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