What are Agency Bonds?

Published by Thomas Herold in Investments

'Agency Bonds' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Agency bonds are those bonds that are actually issued by United States’ government sponsored entities. This means that these bonds are not government guaranteed, as they are created by private companies. They are backed up implicitly by the United States government, since these organizations were created to permit some categories of individuals to have the ability to receive lower cost financing, in particular first time home buyers and students.

The biggest, best recognized names in Agency Bond issuers prove to be Sallie Mae, Freddie Mac, and Fannie Mae. These three large companies are different from government agencies in that they are not guaranteed by the United States’ government’s promise of full faith and credit. Instead, they are all privately held and run companies that are given government charters as a result of their critical activities that carry out government directed policies.

Agency bonds are used to raise money to help these companies offer farm loans, home loans, student loans, and international trade financing. As a result of the government deeming these activities to be significant enough to grant charters, the markets consider that the Federal Government will not permit these chartered firms to go under. This gives their agency bonds the implied government sponsored entity guarantee. As a result of this implicit guarantee, these agency bonds carry ratings and yields that are comparable to government issued debt.

As an example, Private Export Funding Corporation bonds prove to be backed up by actual collateral of United States government securities. Federal Farm Credit Banks’ bonds are not, although it is a government sponsored entity. Despite the differences, the yield-to-maturity of the two bonds are 4.753% and 4.760% respectively. These two organizations’ debt obligations are nearly priced the same, demonstrating once again the implicit guarantee in the government sponsored entity securities.

The issue of taxation is another important one to consider when you are looking at Agency Bonds. All agency bonds are taxable on Federal levels. Many are not taxed on state levels. This is critical if you are an investor who resides in a state that has its own taxes. The interest payments from the best known of these organizations like Freddie Mac and Fannie Mae can be taxed on a state level. The majority of others agency bonds avoid this taxation, making their rates more attractive for many investors.

The vast majority of all agency bonds outstanding, more than ninety percent, are issued by only the four largest government sponsored entities. By largest size, these are Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, and Federal Farm Credit Banks. The Federal Home Loan Banks’ and Federal Farm Credit Banks’ agency bonds are not state income taxable.

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The term 'Agency Bonds' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.