U.S. Agency Bonds

U.S. government agency securities are issued by divisions of the U.S. government. Government-sponsored enterprises are privately-owned entities and publicly-chartered organizations. They were developed by Acts of Congress to help reduce the borrowing cost for important sectors of the economy.

 

U.S. Government Agencies

These federal securities are backed by the full faith and credit of the U.S. government and are exempt from registration with the Securities and Exchange Commission (SEC). Some U.S. government agencies include:

  • Government National Mortgage Association (GNMA)
  • Farmers Housing Administration (FHA)
  • General Services Administration (GSA)
  • Small Business Administration (SBA)
  • Tennessee Valley Authority (TVA)

U.S. Government-Sponsored Enterprises (GSE)

Privately-owned, publicly chartered financing entities created by an Act of Congress to provide liquidity to the loans of particular groups of borrowers such as farmers, ranchers, homeowners and students. GSEs have an implied but not explicit backing of the U.S. government. These GSE agencies include:

  • Federal Home Loan Mortgage Corporation (FHLMC), also known as Freddie Mac
  • Federal National Mortgage Association (FNMA), also known as Fannie Mae
  • Federal Home Loan Banks (FHLBanks)
  • Federal Farm Credit System
  • Rural Telephone Bank
  • Washington Metropolitan Area Transit Authority

GSEs issue both in discount and coupon notes and bonds. Discount notes have short-term maturities, ranging from overnight to 360 days. Coupon notes and bonds have maturities that extend beyond two years. GSEs are exposed to potential credit risk because they are not guaranteed by the federal government.

 

Safety

  • U.S. agency securities are backed by the full faith and credit of the U.S. government.
  • GSE issues are direct debt obligations of the issuing entity. They have an implied backing of the U.S. government, though¬†not an explicit backing.

Yield

  • Agency and GSE notes and bonds usually trade at yields offering a positive spread over Treasuries.
  • Agencies and GSEs have large trading volumes, keeping liquidity risk low.

Diversity

  • Secondary market capabilities available for both U.S. agencies and GSEs.
  • U.S. agencies are exempt from registration with the SEC.
  • U.S. agencies and GSEs offer a wide range of maturity terms.
  • Both U.S. agencies and GSEs are issued on a regular basis.

Limitations

  • GSE interest payments may be taxable income.
  • Unlike U.S. agencies, GSE issues are not backed by the full faith and credit of the U.S. government, exposing investors to potential credit risk. However, it is widely believed by institutional investors in the market that the U.S. government would financially support an agency if the need occurred.