Homeowners who have refinanced their mortgages tend to have more mortgage debt than those who have not. While lower rates spur the retail side of mortgages, lower mortgage payments for consumers mean lower interest income for investors. Managers of funds like Ginnie Mae will realize lower yields when old mortgages are called in and replaced by those refinanced at a lower interest rate. As a result, a manager of a Ginnie Mae fund must invest the unanticipated proceeds from these paid-off mortgages in funds with lower coupon rates. This is referred to as prepayment risk.
Investors receive payments or coupons out of the interest and principal on the underlying mortgages.
These private corporations operate under congressional charters to help finance home mortgages by purchasing loans from lenders and packaging them as securities for investors. This helps limit risk for banks and other lenders who originate the loans, while providing fresh funds for further lending. Bond yields move up or down along with interest rates, but inverse to stock yields. The recent stock market downturn has seen a rise in the bond market. When the prime rate is lowered, people have more cash with which to buy stocks which strengthens the stock market.