Bonds: The Unbeaten Path to Secure Investment Growth

Chapter 8. U.S. AGENCY DEBT

ONE OF THE lasting legacies of the Great Depression is the increased use of U.S. federal agencies to aid a wide variety of consumers including homeowners, farmers, agricultural interests, and students. One way that the agencies assist consumers is by reducing borrowing costs. Since 2000, there has been a tremendous increase in the issuance of agency debt. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks have issued most of the new agency debt.

The agencies issue debt securities in the form of discount notes, which come due in less than one year; notes, which come due between one year and ten years; and bonds, which come due in more than ten years. If this sounds familiar, it's because Treasuries are issued in the same way. For clarity, we'll call all the debt securities issued by the agencies "agency bonds." This chapter discusses only agency bonds. The agencies also issue mortgage pass-through securities, which we'll discuss in the next chapter. The major agencies we'll discuss in this chapter are federal government owned or government-sponsored enterprises, popularly know as GSEs. GSEs are shareholder-owned corporations that the U.S. government regulates.

Agency bonds are extremely safe because they are either owned by the federal government, by agencies financially supported by the federal government, or agencies engaged in financial activities vital to the health of the country. Agency bonds are the safest bond investment after Treasury bonds. ...