As part of the U.S. government's broad focus on the economy and making credit available to businesses and consumers, it is putting attention on mortgage markets and has actively pushed mortgage rates lower in the last few months. Primarily, the U.S. Federal Reserve has committed about $500 billion to buy mortgage-backed securities (MBS) in an effort to push down rates.

With the purchase of about $200 billion in MBS thus far, we have seen rates drop almost 100 basis points. With rates hovering around 5%, there has been an uptick in mortgage applications for refinancing. However, because many homeowners lack sufficient equity in their homes to be eligible to refinance, prepayment activity will be lower than before the onset of the housing crisis.

Ginnie Mae (GNMA) securities are mortgage-backed securities that are guaranteed by the full faith and credit of the U.S. government. These represent the primary investment universe of FTIF Franklin U.S. Government Fund. For investors seeking lower-risk assets, one could argue that investing in a portfolio of GNMA securities may offer several advantages over U.S. Treasuries. In addition to the U.S. government backing, GNMAs offer an income advantage over Treasuries. Currently, the 10-year U.S. Treasury yield stands at about 2.82% (as of 6/3/09), while GNMAs are about two percentage points higher. This is an important factor to consider since overall interest rates are quite low.

In addition, research shows that a broad, diversified portfolio of GNMAs, such as that held by FTIF Franklin U.S. Government Fund, has the potential for lower volatility-volatility being one measure of risk-than U.S. Treasuries. Combined with greater income potential than Treasuries, the reduced risk of a diversified GNMA-focused fund can serve as a compelling option for risk-averse investors.

Going forward, I think the process of deleveraging within the U.S. economy will continue during 2009. I believe we are going to see savings rates continue to climb, and it is going to take a while for consumers to feel confident enough to spend their money. Of course, with consumer spending historically accounting for 70% of the U.S. economy, top-line growth is probably going to be sluggish. These dynamics are likely to continue weighing on credit-sensitive debt markets and possibly the equity markets.

Investments in GNMA securities through our FTIF Franklin U.S. Government Fund may be an option for risk-averse investors who are looking for a place to put their money to work while volatility persists in other areas of the markets.

Please click here for more information on the FTIF Franklin U.S. Government Fund.

Posted: 22 April 2009