What Is a FHLB Bond?

Government issued bonds are not the only type of bonds that are available nor are they necessarily the safest. Most people think because the government issues bonds that it will always make good on it but that is not always the case. There are other types of bonds that may be just as secure if not more so. One such bond is a FHLB bond.

Identification

FHLB bonds are bonds issued by the Federal Home Loan Bank. While bonds issued by the government are usually called municipal bonds, bonds from FHLB are known as agency bonds. FHLB bonds are guaranteed by the Federal Home Loan Bank and their purpose is to increase the availability of funds for home mortgages.

Agency Bonds Versus Government Bonds

Although the interest rate on agency bonds is usually higher than the interest rate on government bonds they don't have the same credit and public faith that is predominant with government bonds. Many people have the misconception that if a federal agency should falter the government will make good on the bonds but that is not guaranteed. Although the government recently covered debt that was held by investors in the insolvency of Freddie Mac and Fannie Mae, there is no guarantee they will take the same action in the future.

Another advantage to agency bonds is that many of them are tax-exempt on state and local levels. The Federal Home Loan Bank is one of the agencies that has tax-exempt status and as such can save provide the investor with a nice premium on his investment. Most agency bonds are callable, which can be a great investment during those periods when interest rates are on the rise.

The Callable Feature

The majority of agency bonds are callable, which means the buyer may choose to call in the bond for the first time in three to six months. This process will proceed every month thereafter until the purchaser agrees to surrender the bonds. Including this feature as part of the sale of the bonds provides the investor a substantial premium for his willingness to surrender his bonds early. Because of the decline in interest rates over the past several years many of these bonds have been called as early as three to six months, which has provided the investor with a return of over 5.5 percent.

In today's market, bonds that were issued at high interest rates are very likely to be called because of recent actions by the Federal government to cut rates. As a result, it is recommended not to purchase callable bonds at a higher amount than its par value. Callable agency bonds are great investments when interest rates are declining but can be risky investments when they are increasing.

Safety Features of a FHLB Bond

Though many people feel more secure with government bonds there is no guarantee the government will fulfill its obligation to its investors. Since municipal bonds tend to cover specific projects or help the government agencies pay their own debt, the government may at any time cancel the bond issue and investors may be left holding the bag for their principal investment. FHLB bonds help families buy homes by providing funds that may not be there otherwise, and for this purpose investors are paid a healthy return on their investment (ROI). Since the bonds are guaranteed by FHLB there is less risk than investing in municipal bonds.

Government Versus FHLB Bonds

There are many reasons to consider FHLB bonds instead of a government bonds, not the least of which is the purpose. FHLB will sell bonds in order to obtain additional mortgage money. The lack of funding for mortgages will prevent many people from realizing their dreams as home owners. Aside from the higher ROI of agency bonds, government or municipal bonds are geared to a specific purpose that may or may not be in the best interests of the public.

References

• More about agency bonds