Agency Bonds
Agency bonds are debt securities issued by government-sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. These bonds are not directly backed by the government but are considered to have low credit risk due to the implicit guarantee of the issuing agency. They are often used to finance activities related to housing, agriculture, and other public services.
7 Key excerpts on "Agency Bonds"
eBook - ePubInvesting in Fixed Income Securities
Understanding the Bond Market
- Gary Strumeyer(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...As their importance and size has increased, so too has the chorus of concerns raised by investors and regulators about what the agencies do and how they do it. In this section, we’ll attempt to demystify the agency market, and gain a better understanding of who the GSEs are and how their securities are issued and traded. In addition, we will take a close look at the callable agency market with an eye toward using option pricing models to better analyze and evaluate these securities. The government agency market is a challenging one to get your arms around. It’s a market filled with different names and acronyms, shorthand for entities created by Congress to provide funding mechanisms to meet important needs or national policy. Some are entities created and wholly owned by the government; some were chartered by Congress, but are privately owned and operated, and others were altered during their tenure as a GSE. So before we address anything else, let’s get our definitions straight and group the major agencies into their proper categories. U.S. agency securities are debt obligations of either government-sponsored enterprises (GSEs) or federal agencies. GSEs are publicly chartered, but privately owned entities. Securities issued by these entities are typically not backed by the full faith and credit of the federal government. GSEs are financing entities created by Congress to help provide a continuous low-cost source of capital to certain specific groups of borrowers, including homeowners, farmers, and students. With the creation of the GSEs, these borrowers have gained greater access to the capital markets and reduced their financing costs. As we look at each of the major GSEs separately, notice how the creation of each was a national response to a funding crisis that required government intervention. Federal agencies, in contrast, are fully owned by the U.S. government but are authorized to issue debt on their own behalf...
eBook - ePub- Frank J. Fabozzi, Frank J. Fabozzi(Authors)
- 2018(Publication Date)
- Wiley(Publisher)
...The only federal agency that is an active issuer of short-term debt obligations is the TVA. With the exception of securities of the Tennessee Valley Authority and the Private Export Funding Corporation, the securities are backed by the full faith and credit of the United States government. Interest income on securities issued by federally related institutions is exempt from state and local income taxes. Government sponsored enterprises (GSEs) are privately owned, publicly chartered entities. They were created by Congress to reduce the cost of capital for certain borrowing sectors of the economy deemed to be important enough to warrant assistance. The entities in these privileged sectors include farmers, homeowners, and students. GSEs issue securities directly in the marketplace. Today there are six GSEs that currently issue debentures: Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Agricultural Mortgage Corporation, Federal Farm Credit System, Federal Home Loan Bank System, and Student Loan Marketing Association. The interest earned on obligations of the Federal Home Loan Bank System, the Federal Farm Credit System, and the Student Loan Marketing Association are exempt from state and local income taxes. Although there are differences between federal agencies and GSEs, it is common to refer to the securities issued by these entities as U.S. agency securities or, simply, agency securities. In this chapter we will discuss the short-term debt obligations issued by the six GSEs and the TVA. Chapter 9 provides information about each of these agencies and other securities that are covered. All of the securities issued by these entities expose an investor to credit risk. Consequently, agency securities offer a higher yield than comparable maturity Treasury securities. Fannie Mae Fannie Mae issues short-term debt in the form of discount notes...
eBook - ePubInterest Rate Markets
A Practical Approach to Fixed Income
- Siddhartha Jha(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...Furthermore, there is generally a noncall period when the issuer cannot redeem the bonds. An example structure would be a 3NC1 (3 noncall 1) bond, which is not callable for one year and then can be redeemed every six months after that up to the maturity date of three years. Agency debt has been a staple of the fixed income markets for years as a way for investors to earn extra yield. This is especially the case for buyers of callable debt, who give up the right of call to the issuer for the extra yield the debt offers. Compared to Treasuries, there is far more structural variety in the Agency market as investors can approach them in reverse inquiry, which involves asking the agencies themselves for a certain type of debt to be issued. If such a type of debt suits the agency, it can be issued for the investor to purchase. The heterogeneity may add variety, but it makes individual issues less liquid than the very standardized bonds of the Treasury market. Most of the liquidity in the Agency curve is present from the front end to the 10-year point with some debt issued in the 30-year space. Until 2007, the central banks considered the Agency market as a way to earn some extra yield over Treasury debt with the same implicit safety. This appetite has tended to fluctuate since the credit crunch, but as long as the credit risk is perceived to be that of the U.S. government, Agencies are likely to remain an important asset class for foreign central banks. As mentioned, the credit crunch brought forth serious doubts about the viability of the agency model, and the future of the agencies remains in doubt after their conservatorship. Nonetheless, due to the market's enormous size, Agency debt is unlikely to disappear for years to come. CORPORATE BONDS Debt issuers separate the different classes of fixed income debt. Treasury debt is issued by the government while mortgages are essentially issued by households. Another important class of issuers is corporations...
eBook - ePubMarket Players
A Guide to the Institutions in Today's Financial Markets
- Gail Rolland(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...Having an explicit guarantee would always be preferable as it removes any uncertainty. If we think about Autostrade there could be a big difference between a government-owned road builder and a private company operating in the same industry so when the markets commit to lending long-term this will obviously influence their decision. If the debt issued carries an explicit government guarantee then this clearly reduces risk and should also lower the borrowing cost. It is interesting, though, that even with government guarantees these borrowers typically have to pay more than the government to raise their funds, because they are still one step away and there is a timing risk here. If you buy a government guaranteed bond you will get your money back in the event of a default (we hope!) but there could be a delay before this happens as the legal issues are sorted out. This is why in times of uncertainty the investors tend to demand a higher risk premium than would logically be expected. This risk premium shows itself in the yield of the debt, the cost to the borrowers. There are two main debt forms that the agencies use when borrowing in the financial markets. On the one hand they issue standard debt, which is issued with the full faith and credit of the issuer, or sometimes they will use an asset-backed structure. In general the structure looks like the diagram in Figure 18.1. Figure 18.1 Asset-Backed Agency Debt Structure This is the basic structure but it can quickly become far more complex as we involve Special Purpose Vehicles (SPVs) which are created to buy the assets, repackage them and then issue the securities into the market. This diagram, though, shows in a nutshell the flow of funds which is the all-important point to an asset-backed security. This is the structure used by FNMA, one of the US mortgage agencies that we will look at below...
eBook - ePubHow a Second Grader Beats Wall Street
Golden Rules Any Investor Can Learn
- Allan S. Roth(Author)
- 2009(Publication Date)
- Wiley(Publisher)
...We call these junk bonds. I went on to say that if we lend money to companies that are more like Brittany, in that we know them pretty well and they will be able to pay back our money, we only get a 5 percent return. This is because we know these companies behave much more like Brittany than Randy. We call these government and investment-grade corporate bonds. “Oh, I get it,” said Kevin happily. “I don’t want the junk bonds because I might not get my money back.” And having gotten it, Kevin went forward buying a total bond fund of government and investment-grade bonds earning about 5 percent, yet with the knowledge that he was going to get his money back. The Common Sense of Lending Money to Someone Who Will Pay You Back A bond is essentially when an investor loans money to an entity (corporate or governmental) for a defined period at a certain interest rate. Bonds are used by companies, municipalities, states, and U.S. and foreign governments to finance a variety of projects and activities. 2 Bonds stabilize our portfolio’s performance, and the mix of bonds with a global stock portfolio dramatically impacts the amount of risk we are taking. This is a critical component of anyone’s investment portfolio—even for the second grader who doesn’t look at his portfolio, and especially for the adults who look all of the time. While this is a tad oversimplified, bonds are issued by three types of organizations: 1. U.S. government or agencies of the U.S. government. Examples include Treasury bills or GNMA mortgage bonds. Some of these bonds are exempt from state taxes. 2. Municipalities. Local governments issue municipal (or muni) bonds, which are typically exempt from federal taxes. 3. Corporations. Companies issue bonds that are almost always fully taxable. A Second Role of Bonds: Income to Live On I discussed only the risk-mitigating role of bonds with Kevin. Most bonds pay a periodic interest payment that can be either received in cash or reinvested into our accounts...
eBook - ePubThe Handbook of Traditional and Alternative Investment Vehicles
Investment Characteristics and Strategies
- Mark J. P. Anson, Frank J. Fabozzi, Frank J. Jones(Authors)
- 2010(Publication Date)
- Wiley(Publisher)
...CHAPTER 5 U.S. Treasury and Federal Agency Securities The securities issued by the U.S. Department of the Treasury (U.S. Treasury hereafter) are called Treasury securities, Treasuries, or U.S. government securities. Because they are backed by the full faith and credit of the U.S. government, market participants throughout the world view them as having no credit risk. Hence, the interest rates on Treasury securities are the benchmark default-free interest rates. In this chapter, the different types of marketable Treasury securities are explained. In addition, we describe securities issues by federal agencies, entities chartered by Congress to provide funding support for the housing and agricultural sectors of the U.S. economy and specific funding projects of the U.S. government. The largest issuers are also known as government-sponsored enterprises (GSEs). GSEs are either public or government owned shareholder corporations (Fannie Mae, Freddie Mac, and Tennessee Valley Authority) or the funding entities of federally chartered bank lending systems (Federal Home Loan Banks and the Federal Farm Credit Banks). The debt of the GSEs is not guaranteed by the U.S. government. TREASURY SECURITIES Treasury securities are classified as nonmarketable and marketable securities. The former securities include savings bonds that are sold to individuals and state and local government series (SLGS) securities that are sold to state and local government issuers of tax-exempt securities. There are two types of marketable Treasury securities issued: fixed-principal securities and inflation-indexed securities. Advantages of investing in Treasury securities in addition to their minimal credit risk (assuming the U.S. government action in the future does not alter this perception) is that they are highly liquid and the interest paid is exempt from state and local income taxes. Fixed Principal Treasury Securities: Treasury Bills The U.S...
- Thomas Herold(Author)
- 2020(Publication Date)
- THOMAS HEROLD(Publisher)
...What are Government Bonds? Government bonds are debt instruments that governments issue to pay for government expenditures. Within the United States, federal government issues include savings bonds, treasury notes, treasury bonds, and TIPS Treasury inflation protected securities. Investors should carefully consider the risks that different countries’ governments possess before they invest in their bonds. Among these international government risks are political risk, country risk, interest rate risk, and inflation risk. Governments generally have less credit risk, though not always. Savings bonds are a type of United States government bonds that the Treasury department sells. They are available in an electronic form. The Treasury offers them directly from their website, or individuals can buy them from the majority of financial institutions and banks. When savings bonds reach maturity, the investors get back the bond’s face value along with interest which accrued. These savings bonds may not be redeemed the first year of issue. Any investors who redeem them in their first five years of issue lose three months interest for cashing out too early. The Treasury of the United States also issues intermediate time frame bonds known as Treasury notes or T-Notes. These notes provide interest payments semiannually at a coupon rate which is fixed. These notes typically are denominated in $1,000 face values. Those with three or two year maturity dates come in $5,000 denominations. Before 1984, T-Notes were callable and gave the Treasury the right to buy them back given specific conditions. The U.S. government’s longest term bonds are Treasury Bonds, or T-Bonds. These have maturity dates ranging from ten to 30 years time. They also provide interest payments on a semiannual basis and come in $1,000 denominated values. These T-bonds are important because they pay for federal budget shortfalls, are a form of monetary policy, and ensure the country is able to regulate its money supply...
