What are agency bonds?

Agency bonds are issued by federal agencies other than the U.S. Treasury or private corporations that are backed by the federal government. Bonds not issued directly by government agencies are called government sponsored entities (GSE). While interest rates payments are fixed, coupon rates can vary (FRN bonds I talked about before). Most agency bonds are exempt from paying local and state taxes but not all. Agency bonds are one of the safest bonds and can be compared with treasury bonds for their low risk and high liquidity. The bonds itself are backed by the full faith and credibility of the U.S. government.

Agency bonds also have an overall higher yield while having almost the same risks vs treasury bonds. The small risk increase comes from political influences that can change the market of the GSE’s. While treasury bonds are very liquid, agency bonds have lower liquidity. Agency bonds are callable, meaning they can stop issuing the bond before the maturity date.

Probably the biggest concern for investors is the minimum investment amount. The minimum investment is $10.000. Unless you have a large amount of money, agency bonds are typically not for the general individual investor.

The largest issuers of agency bonds are federal home loan banks and credit banks. Quote from some of the largest banks (FHLBanks):

Penke

“The FHLBanks are 11 regionally based, wholesale suppliers of lendable funds to financial institutions of all sizes and many types, including community banks, credit unions, commercial and savings banks, insurance companies and community development financial institutions. The FHLBanks are cooperatively owned by member financial institutions in all 50 states and U.S. territories. The steady supply of lendable funds from FHLBanks helps U.S. lenders invest in local needs including housing, jobs and economic growth.”

Pro and cons of agency bonds

Pro’s Cons
Not taxable in most cases Callable
Backed by the government High minimum investment ($10.000 or more)
Low risk, moderate yield Lower liquidity vs treasury bonds
  Interest rate risk


Chapters: The Ultimate Investing Guide

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