Bubba – The GSE Strips are guaranteed so no worry there. The reason for the interest rate is that because they are a zero-coupon note where you receive interest and principal at the maturity date.
Thus, they nearly always trade at a discount to the face value of the note to account for the lower IRR, etc of the zero coupon.
We invest/trade in this general area and are achieving north of 15% (some trades net us 40%+/yr) annual cash flow with investments back by GSE Bonds which are all guaranteed.
We trade in/out of the GSE Bonds around dividend dates so we capture excess levels of dividends with very short holding periods/exposure.
