What Is Agency Debt?
Agency debt refers to debt securities issued by agencies of, or backed by, the U.S. government. Agency bonds provide another type of investment for bond and income investors. Investors buying government bonds funds should be interested in the types of agency debt the fund owns for investors.
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Treasury vs. Agencies
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The U.S. government borrows money by issuing debt through the Treasury Department. Treasury debt is a direct obligation of the federal government, and the Treasury issues bills, notes and bonds. Agencies are parts of the federal government or corporations set up by the government that issue debt to obtain funds to fulfill the obligations of those agencies. Agency debt usually is sold to provide funding for a specific purpose, such as home loans, farm loans or small business loans.
Benefits of Agency Debt
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Investors often choose agency debt because of the high level of safety provided by the actual or implied federal government backing. As a result, these bonds have the highest, AAA, credit rating. At the same time, agency debt pays a higher rate of interest than comparable Treasury bonds. For investors, the combination of federal government backing plus a higher yield makes agency debt a popular bond investment option.
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Agency Debt Considerations
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Agency debt can be dividend into two categories. Some debt is from agencies that are part of the government, and the debt is a direct obligation of the federal government. The Government National Mortgage Association (Ginnie Mae), Federal Home Loan Banks and the Federal Housing Administration (FHA) are government agencies. Other agencies are independent corporations set up by the government but do not have a direct government guarantee for their debt. These government-sponsored entities include the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal Farm Credit Banks.
Government Bond Funds
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The investment objectives of many government bond funds allow the funds to include agency debt in the fund portfolios. An investor researching a particular bond fund should review the portfolio breakdown for the percentages of Treasury and agency debt. The majority of agency debt is mortgage pass-through securities. Mortgage securities pay a higher rate of interest but are less predictable in changing rate environments than straight Treasuries. An investor who wants a fund that owns Treasury debt should select a fund that includes Treasury in its name and investment objectives. If the fund is just a government bond fund, a high proportion of the securities in the fund may be agency debt.
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