An agency bond is a security issued by a government-sponsored enterprise or by a federal government department other than the U.S. Treasury. Some are not fully guaranteed in the same way that U.S. Treasury and municipal bonds are. An agency bond is also known as agency debt.
Key Takeaways
Federal government agency bonds and government-sponsored enterprise bonds pay slightly higher interest than U.S. Treasury bonds.
Most, but not all, are exempt from state and local taxes.
Like any bonds, they have interest rate risks.
How Agency Bonds Work
Most agency bonds pay a semi-annual fixed coupon. They are sold in a variety of increments, generally with a minimum investment level of $10,000 for the first increment and $5,000 for additional increments. GNMA securities, however, come in $25,000 increments.
Some agency bonds have fixed coupon rates while others have floating rates. The interest rates on floating rate agency bonds are periodically adjusted according to the movement of a benchmark rate, such as LIBOR.
Like all bonds, agency bonds have interest rate risks. That is, a bond investor may buy bonds only to find that interest rates rise. The real spending power of the bond is less than it was. The investor could have made more money by waiting for a higher interest rate to kick in. Naturally, this risk is greater for long-term bond prices.
Types of Agency Bonds
There are two types of agency bonds, including federal government agency bonds and government-sponsored enterprise (GSE) bonds.
Federal Government Agency Bonds
Federal government agency bonds are issued by the Federal Housing Administration (FHA), Small Business Administration (SBA), and the Government National Mortgage Association (GNMA). GNMAs are commonly issued as mortgage pass-through securities.
Like Treasury securities, federal government agency bonds are backed by the full faith and credit of the U.S. government. An investor receives regular interest payments while holding this agency bond. At its maturity date, the full face value of the agency bond is returned to the bondholder.
Federal agency bonds offer a slightly higher interest rate than Treasury bonds because they are less liquid. In addition, agency bonds may be callable, which means that the agency that issued them may decide to redeem them before their scheduled maturity date.
Government-Sponsored Enterprise Bonds
A GSE is issued by entities such as the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage (Freddie Mac), Federal Farm Credit Banks Funding Corporation, and the Federal Home Loan Bank.
These are not government agencies. They are private companies that serve a public purpose, and thus may be supported by the government and subject to government oversight.
GSE agency bonds do not have the same degree of backing by the U.S. government as Treasury bonds and government agency bonds. Therefore, there is some credit risk and default risk, and the yield offered on them typically higher.
To meet short-term financing needs, some agencies issue no-coupon discount notes, or “discos,” at a discount to par. Discos have maturities ranging from a day to a year and, if sold before maturity, may result in a loss for the agency bond investor.
Government-sponsored enterprise bonds do not have the same degree of backing by the U.S. government as Treasury bonds and other agency bonds.
Tax Considerations
The interest from most, but not all, agency bonds is exempt from local and state taxes. Farmer Mac, Freddie Mac, and Fannie Mae agency bonds are fully taxable.
Agency bonds, when bought at a discount, may subject investors to capital gains taxes when they are sold or redeemed. Capital gains or losses when selling agency bonds are taxed at the same rates as stocks.
Tennessee Valley Authority (TVA), Federal Home Loan Banks, and Federal Farm Credit Banks agency bonds are exempt from local and state taxes.
Agency bonds are securities issued by U.S. government agencies or Government-Sponsored Entities (GSEs). Agency bonds are considered low-risk, although not as safe as U.S. Treasurys. Agency bonds can be callable and paid off by the borrower before they mature.
is a security issued by a government-sponsored enterprise
government-sponsored enterprise
A government-sponsored enterprise (GSE) is a quasi-governmental entity established to enhance the flow of credit to specific sectors of the U.S. economy. Created by acts of Congress, these agencies—although they are privately held—provide public financial services.
or by a federal government department other than the U.S. Treasury. Some are not fully guaranteed in the same way that U.S. Treasury and municipal bonds are. An agency bond is also known as agency debt.
Agency bonds, also known as agency debt, is the debt issued by a government-sponsored enterprise (GSE) or a federal agency. The key difference between a GSE and a federal agency is that a GSE's obligations are not guaranteed by the government, whereas a federal agency's debt is backed up by a government guarantee.
The income from agency bonds is subject to federal income taxes when held in taxable accounts, but income from some of the agencies is exempt from state and local income taxes: Not exempt from state and local income taxes: Fannie Mae and Freddie Mac. Exempt from state and local income taxes: FHLB, FFCB, and TVA.
Key Takeaways. Agency bonds are securities issued by U.S. government agencies or Government-Sponsored Entities (GSEs). Agency bonds are considered low-risk, although not as safe as U.S. Treasurys. Agency bonds can be callable and paid off by the borrower before they mature.
The Bonds can be categorised into four variants: Corporate Bonds, Municipal Bonds, Government Bonds and Agency Bonds. The Bond prices are inversely proportional to the Coupon Rate. When the rate of interest increases the bond prices decrease and rate of interest decreases, the bond price increases.
Private activity bonds are municipal bonds that are issued to raise money for a private project (as opposed to a project for the good of the public). These bonds are exempt from federal taxes under the regular income tax system, but subject to tax under the alternative minimum tax system.
Features & Benefits. GSE and agency bonds generally offer yields slightly higher than U.S. Treasuries of the same maturity. The extra yield is a reflection of the fact that their credit risk does not have the unconditional backing of the U.S. government, though they are considered to be high credit quality.
For an investor, one of the major advantages of munis is that they are typically exempt from federal income tax. These debt securities are often excused from local and state tax as well, particularly when the bond's investor lives in the state in which the bond was issued.
These trades are settled through NSCC - the National Securities Clearing Corporation. U.S. Government and agency bond trades settle in Federal Funds, which are good funds on the business day of the fund's transfer (the next business day for regular settlement of government securities).
Treasury securities like T-bills and T-notes are very low-risk as they're issued and backed by the U.S. government. They provide a safe way to earn a return, albeit generally lower than aggressive investments.
Agency MBS are pools of securitized residential mortgage loans that are issued and guaranteed by US government agencies. The agency MBS investable universe is broad, providing a large opportunity set for security selection.
This means interest on these bonds are excluded from gross income for federal tax purposes. In addition, interest on the bonds is exempt from State of California personal income taxes.
High-yield or junk bonds typically carry the highest risk among all types of bonds. These bonds are issued by companies or entities with lower credit ratings or creditworthiness, making them more prone to default.
You can lose money on a bond if you sell it for less than you paid or the issuer defaults on their payments. When you buy or sell a bond, the commission is built into its price. The investment firm marks up the price of the bond slightly to cover the costs of selling the bond.
Equities are generally considered the riskiest class of assets. Dividends aside, they offer no guarantees, and investors' money is subject to the successes and failures of private businesses in a fiercely competitive marketplace. Equity investing involves buying stock in a private company or group of companies.
The U.S. Department of the Treasury currently sells two types of savings bonds, the EE and I series. Both series have different interest rates, which are either fixed or change with inflation.
Corporate bonds fall into two broad credit classifications: investment-grade and speculative-grade (or high yield) bonds. Speculative-grade bonds are issued by companies perceived to have a lower level of credit quality compared to more highly rated, investment-grade, companies.
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