Federal Agency Security refers to debt instruments issued by federal government agencies. Examples include organizations like the Federal National Mortgage Association (FNMA), Federal Home Loan Banks (FHLB), the Federal Farm Credit Bank (FFCB), and the Tennessee Valley Authority (TVA). These securities are not general obligations of the U.S. Treasury but are government-sponsored, which results in high credit ratings close to U.S. Treasury securities.
Types of Federal Agency Securities
Mortgage-Backed Securities (MBS)
Issued by:
- Federal National Mortgage Association (Fannie Mae)
- Federal Home Loan Mortgage Corporation (Freddie Mac)
Farm Credit Bonds
Issued by:
- Federal Farm Credit Bank (FFCB)
Power Bonds
Issued by:
- Tennessee Valley Authority (TVA)
Home Loan Bonds
Issued by:
- Federal Home Loan Banks (FHLB)
Special Considerations
- Credit Ratings: Though not directly backed by the full faith and credit of the U.S. government like Treasury securities, their government sponsorship provides high credit ratings.
- Interest Rates: Generally, these securities offer competitive interest rates that can be slightly higher than U.S. Treasuries due to their quasi-governmental status.
- Market: These securities are typically traded in secondary markets, ensuring liquidity for investors.
Historical Context
Federal agency securities were created to help fulfill specific governmental goals, such as improving access to mortgage financing, supporting agricultural credit, and providing financing for public utility and infrastructure projects.
Applicability
Investors who seek relatively high credit quality while willing to accept a marginally higher risk compared to U.S. Treasury securities might find federal agency securities attractive.
Comparisons
-
Federal Agency Securities vs. U.S. Treasury Securities:
- Credit Risk: Both have high credit ratings, but Treasuries are considered safer.
- Interest Rates: Federal agency securities typically offer slightly higher yields.
-
Federal Agency Securities vs. Corporate Bonds:
- Credit Quality: Federal agency securities generally have higher credit ratings.
- Yield: Corporate bonds may offer higher yields but come with higher risk.
Related Terms
- GSE: Government-Sponsored Enterprise. Federal agencies like Fannie Mae and Freddie Mac are GSEs.
- MBS: Mortgage-Backed Securities. Debt obligations packaged and sold by entities like Fannie Mae.
- Treasury Bond: A long-term, marketable debt instrument issued by the U.S. Treasury.
Frequently Asked Questions
What makes federal agency securities different from U.S. Treasuries?
Federal agency securities are issued by government-sponsored entities and not directly by the U.S. Treasury. Hence, while having high credit ratings, they are not backed by the full faith and credit of the U.S. government.
Are federal agency securities safe?
Yes, they are considered very safe due to their close ties to the government, though they do carry slightly more risk than U.S. Treasuries.
How can I invest in federal agency securities?
These securities can be bought through brokers, financial advisors, or directly when they are issued. They are also traded in secondary markets.
References
- U.S. Securities and Exchange Commission. “Federal Agency Securities.”
- Federal Reserve Bank. “Government-Sponsored Enterprises and Federal Agency Securities.”
- Investopedia. “Agency Securities.”
Summary
Federal Agency Securities are debt instruments issued by various federal agencies, providing high credit quality investment options with slightly higher yields than U.S. Treasuries. Their government sponsorship means they are highly rated and relatively low-risk investments, suitable for investors seeking safety and liquidity in their portfolios.
