Q. My wife and I are both in our seventies. We have a considerable amount of money invested in the Vanguard GNMA mutual fund. How will the latest move by the Federal Reserve to purchase mortgage bonds affect this fund? I have a feeling this does not bode well for us. —J.R., by email
A. Let's start with getting an idea of just how large the Federal Reserve’s promised monthly $40 billion purchase is. The Vanguard GNMA fund (ticker:VFIIX) is the largest, by far, of all the funds that specialize in securitized, government-backed mortgages. Formed in 1980, it has grown year after year through a combination of low expenses and superior performance. According to Morningstar, the fund has ranked in the top 19, 15, 9 and 4 percent of competing funds over the trailing 3, 5, 10 and 15 year periods. Over the last year it has been in the top 36 percent.
All that said, Federal Reserve mortgage purchases to stimulate the economy by suppressing interest rates will be done at a rate sufficient to absorb the entire Vanguard GNMA fund— in the first month. It would take only a few more months to absorb the entire mutual fund sector that specializes in GNMA securities.
The entire GNMA market, however, is about $7 trillion, a much larger figure. Even so, these monthly purchases will have a profound effect. Whether it will be good, or bad, for you as a shareholder is another question. Here's why.
If you buy a conventional bond fund, the value of the bonds will decline when interest rates rise and rise when interest rates fall. This happens because the value of the fixed interest rate coupon on your bond remains the same, so new investors will pay more or less for it depending on whether rates rose or fell.
That doesn't happen with a mortgage-backed security. Why? Because the people making mortgage payments are free to refinance or keep their mortgages. So guess what they do?
When interest rates decline, they refinance to lower rates, depriving the mortgage owner of an increase in value. When interest rates rise, they hold onto their mortgages longer than they otherwise might. This locks the mortgage investor into a below-market yield and causes values to decline somewhat.
As a consequence, the cash yield on GNMA funds has run a bit higher than the yield on comparable conventional bond funds. Although the average effective maturity, according to the Morningstar website, of the fund is 5.5 years, it's recent yield was 2.94 percent. The yield on a 5-year Treasury at the same time was 0.65 percent. That suggests holders are being well rewarded for their interest rate risk.
Will you lose money or face some disaster? Probably not. What you should prepare for is a continuing decline in interest income from the fund.
Q. I am probably not going to earn enough credits to qualify for Social Security. Does this mean I won’t qualify for Medicare as well? Or is Medicare something one automatically receives? —M.S. by email
A. Those who don't qualify with enough work credits through the regular Social Security program can qualify for Supplemental Security Income benefits. This program guarantees that everyone has at least some level of disability or retirement income, even if they haven't worked long enough to qualify for Social Security.
Supplemental Security Income is funded from general revenues, not from the employment tax. Currently, some 5.5 million people receive SSI benefits according to the Social Security Administration. The majority are disabled and under age 65, but some 908,000 are 65 or older. In all states, the SSI benefit is reduced for people who live in the households of other people.
This year the basic monthly SSI payment is $698 for an individual and $1,048 for a couple. This compares to an average monthly benefit of $1,130.94 for individuals who receive Social Security retirement benefits.
The basic SSI monthly benefit is often supplemented with additional funds that vary from state to state. According to the Social Security website, for instance, the monthly minimum in California is $854.40. If you qualify for SSI benefits, you will also qualify for Medicaid. In addition, you will also be eligible for food stamps. The value of food stamps now averages $133.14 a month. Currently, 46.4 million Americans are receiving food stamps.