Agency Bonds
Agency bonds are debt issued by US government-sponsored enterprises such as Fannie Mae and Freddie Mac, or by federal agencies such as Ginnie Mae. They usually yield a little more than Treasuries, because most GSE debt lacks an explicit government guarantee.
Between ultra-safe Treasuries and corporate bonds sits a huge middle ground: agency debt. These bonds fund housing, farm credit and other policy goals, and they are widely held by banks, funds and central banks. This entry explains the difference between GSEs and federal agencies, why agency bonds pay a small premium, and the risks to watch.
- Category
- Bonds and Interest Rates
- Reading time
- 3 min
- Also called
- Agency securities, Agencies, GSE bonds
- Updated
Agency bonds in plain words
Agency bonds, also called agency debt, are issued by a government-sponsored enterprise (GSE) or a federal agency.1
A GSE's debt is not guaranteed by the government, while a federal agency's debt is backed by a government guarantee; Fannie Mae is a GSE and Ginnie Mae is a federal agency.1
Agencies also play a big role in mortgage-backed securities, which pool home loans with similar features.2
How agency bonds reach investors
Agency needs funding
For mortgages, farm loans, etc.
Dealers underwrite
Broker-dealers buy the issue.
Bonds are resold
To funds, banks and individuals.
Coupons are paid
Often semi-annually. See Bond.
Some are callable
The issuer may repay early. See Callable and Putable Bonds.
Principal is repaid
At maturity or call.
Worked examples
Example 1 — Yield pick-up
+$250/yrA 5-year Treasury yields 4.00%; a 5-year GSE bond yields 4.25%. An investor buys $100,000.
| Extra yield | 0.25% × $100,000 = $250 a year |
The small premium reflects that a GSE's debt lacks an explicit government guarantee.1 See Treasury Bills, Notes and Bonds.
Example 2 — Called early
Lower incomeA callable agency bond paying 5% is called when rates fall to 3.5%.
| Reinvestment rate | 3.5% instead of 5% |
| Lost income on $100,000 | $1,500 a year |
Callable agency bonds expose investors to reinvestment risk when rates fall. See Reinvestment Risk.
Example 3 — Agency MBS
Pass-through incomeAn investor buys a Ginnie Mae mortgage-backed security instead of a single agency bond.
| Cash flows | Interest + principal from many mortgages |
An MBS investor is effectively lending to homebuyers and receives their interest and principal payments.2
Treasuries vs agency bonds vs corporates
| Aspect | Treasuries | Agency bonds | Corporates |
|---|---|---|---|
| Backing | Full faith of US government | Varies by issuer | The company only |
| Typical yield | Lowest | Slightly higher | Higher |
| Callable | Rarely | Often | Sometimes |
| Credit risk | Minimal | Low | Varies widely |
Who buys agency bonds
Banks
High-quality liquid assets.
Bond funds
Yield above Treasuries. See Bond Ladder and Barbell.
Central banks
Reserves and policy purchases. See Quantitative Easing and Tightening.
Individuals
Conservative income.
Advantages and disadvantages
Advantages
- Higher yield than Treasuries.
- Low credit risk.
- Deep, liquid market.
Disadvantages
- Most lack an explicit government guarantee.
- Call and prepayment risk.
- Interest rate risk like any bond.
Going deeper
Read as far as you need. Each level builds on the one before it.
GSE vs federal agency
Beginner
The key difference is the guarantee: federal agency debt carries one, GSE debt does not.1
2008 and conservatorship
Intermediate
In 2008 Fannie Mae and Freddie Mac were placed into government conservatorship, which reinforced the market's view of an implied guarantee.
Spread to Treasuries
Advanced
Agency spreads widen in stress, when investors prefer explicit guarantees, and narrow when central banks buy agency debt. See Credit Spread.
Common mistakes
Assuming all are government-guaranteed
Most GSE debt is not.
Ignoring call features
Yield to call may be lower.
Forgetting rate risk
Prices fall when rates rise. See Duration.
Confusing bonds and MBS
MBS cash flows are less predictable.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Agency bonds are issued by GSEs or federal agencies.
- Federal agency debt is guaranteed; most GSE debt is not.
- They yield slightly more than Treasuries.
- Many are callable.
- Agencies also back mortgage-backed securities.
Frequently asked questions
Are agency bonds as safe as Treasuries?
Are agency bonds tax-exempt?
How do I buy agency bonds?
Further learning
- Treasury Bills, Notes and Bonds
The benchmark comparison.
- Mortgage- and Asset-Backed Securities
Agency MBS.
- Prepayment Risk
A key MBS risk.
- Callable and Putable Bonds
Call features explained.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Agency Bonds (opens in a new tab) Checked .
- Corporate Finance Institute. Mortgage-Backed Security (MBS) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.