Agency Bond
Quick Definition
A bond issued by a government-sponsored enterprise (GSE) or federal agency, offering higher yields than Treasuries with near-government credit quality.
What Is Agency Bond?
Agency bonds are debt securities issued by government-sponsored enterprises (GSEs) like Fannie Mae (FNMA), Freddie Mac (FHLMC), and the Federal Home Loan Banks, or by actual federal agencies like Ginnie Mae (GNMA). While most agency bonds are not directly backed by the full faith and credit of the U.S. government (Ginnie Mae is the exception), they carry an implied government guarantee that keeps their credit risk very low. Agency bonds typically offer yields 10-50 basis points above comparable Treasury securities, providing a modest yield premium for minimal additional risk. They are popular with institutional investors and conservative portfolios seeking slightly higher income without significant credit risk. Agency bonds are exempt from state and local taxes in most cases, adding to their appeal.
Agency Bond Example
- 1A Fannie Mae 10-year bond yielding 4.2% vs a Treasury 10-year at 4.0% — offering 20 basis points extra yield
- 2Federal Home Loan Bank bonds are commonly used by banks for portfolio liquidity management
Related Terms
Treasury Bond (T-Bond)
A long-term U.S. government debt security with a maturity of 20 or 30 years, paying semiannual coupon interest.
Mortgage-Backed Security (MBS)
A bond-like investment created by pooling mortgage loans and selling shares of the cash flows to investors.
Sovereign Bond
A debt security issued by a national government, considered the benchmark for credit risk and interest rates in that country.
Investment Grade
A bond rating of BBB-/Baa3 or higher, indicating relatively low credit risk and suitability for conservative investors.
Bond
A fixed-income debt security where investors loan money to an issuer in exchange for regular interest payments and return of principal at maturity.
Yield Curve
A graphical representation of interest rates across different maturities for bonds of similar credit quality, typically U.S. Treasuries.
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