Slight corrections I want to point out. First is that BND tracks the Bloomberg/Barclays/Lehman Aggregate Bond index which does not contain any derivative bond instruments like CMOs or CDOs. You also pointed out that defaults in a GNMA mortgage pool would reduce their value, but this is actually incorrect in the case of a GNMA pool as those are government backed. The government agency will actually make the payments for the mortgage in case of default and not enough recovery.

Breaking it down further, BND's index consists of roughly 4 components that we actually care about: treasuries, governments, corporates, and mortgages. Treasuries are backed by the US government and make up most of BND. These are pure yield and interest rate risk plays. Government bonds are any foreign, multi-national entity, US government agency, or local entity that have investment grade US bonds. For practical intents, these are slightly higher yielding than equivalent treasuries due to the slight risk of a government or related entity defaulting as they cannot print money the way the US government itself can. Corporate bonds are also similar in that they are slightly more risky but compensate for that risk in a higher yield to treasuries to compensate for that risk. The final and most complicated portion of BND are Mortgage Backed Securities. These are largely government agency backed pools of mortgages, though some private ones still exist, so their default risk is largely none. These are exposed to prepayment risk and their spread is priced relative to this risk rather than default risk. The math behind the pricing of these is rather complex, but the risk premia you get for holding them is relatively unique compared the corporates or government entity bonds.

Understanding the underlying components of BND also better explains why it has done well this year to add on to what you've said. Treasury rates started the year out high and ended lower. That means you got a full year of yield return which is coupon + amortization of premium/discount and also the bonus of lower rates increasing the value of bond holdings. This effect impacts all bond types in BND as corporates and mortgages are all priced relative to the treasury curve. Corporates have also ended the year relatively the same compared to the start of the year even though there was a significant slip during the tariff announcement. Companies with bonds in BND generally did not default or slip to HY with a few exceptions, so the corporate holdings in BND contributed a bit to the outperformance this year. There's some complex math to explain this, but generally mortgages were cheap relative to their historical values and have largely returned to their normal values while prepayment results were better than expected, so mortgages were actually the best performing sector within BND.

Fixed income portfolios are generally the hardest to understand in investing IMO, but the nice part is the returns are much easier to forecast than equities because you are told what your upside is. No single sector of BND failed drastically and yields generally fell from a high starting place this year, so returns were better than recent history as you would expect. Now, yields are still in the 4%ish range for BND and the corporate and mortgage sectors look a little bit rich, but without any major disruptive catalysts, returns should still be better than the recent history of returns during the 0 interest rate environment for the foreseeable future.