Agency debentures, also known as agency securities or simply "agencies," are bonds issued or guaranteed by U.S. federal government agencies or government-sponsored enterprises. A common type of agency debenture is debt issued by Fannie Mae and Freddie Mac, which is then used to fund the agencies' purchase of mortgages from lenders.
Definition of agency debentures
An agency debenture is a debt issuance from a U.S. federal government agency or government-sponsored enterprise (GSE) to meet their funding requirements. Investors can buy agency debentures through a broker, who can discuss the current interest rates and various structures of agency debentures available currently.
Agency debentures can be sold in a variety of increments, but the common minimum investment is $10,000, and then in multiples of $5,000 for additional investment. They can have a fixed or variable interest rate and generally make interest payments semiannually.
Depending on the issuing agency, these securities can be taxable or tax-exempt. For example, debentures issued by Fannie Mae are fully taxable, meaning the interest paid will be counted as income for tax purposes. On the other hand, debentures issued by the Tennessee Valley Authority, for instance, are exempt from state and local taxes.
Common issuers of agency debentures
There are several government agencies or GSEs that issue agency debentures, and these are some of the most common:
- Government National Mortgage Association (Ginnie Mae).
- Federal National Mortgage Association (Fannie Mae).
- Federal Home Loan Mortgage Corporation (Freddie Mac).
- Federal Agricultural Mortgage Corporation (Farmer Mac).
- Federal Farm Credit Banks Funding Corporation.
- Federal Home Loan Banks.
This is not an exhaustive list, and there are many other agencies that issue debt securities.
Some are guaranteed by the government, but some aren't
It's important to mention that there are two distinct types of agency debentures, both with different guarantee structures.
First, bonds issued by actual federal agencies, such as Ginnie Mae, are guaranteed and backed by the "full faith and credit of the United States government." In other words, the government guarantees the interest payments, as well as the return of your principal upon maturity, regardless of the financial condition of the underlying agency.
On the other hand, bonds issued from GSEs, most notably Fannie Mae and Freddie Mac, have an implicit guarantee, but it's not quite the same guarantee that applies to actual federal government agencies.
In a nutshell, debentures issued by government agencies have virtually no credit risk, while debentures issued by GSEs do. In general, agency debentures issued by GSEs have high credit ratings, but it's important to point out that the interest payments and principal repayments of GSE-issued debentures are solely the obligation of their issuer.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in the Foolsaurus. Pop on over there to learn more about our Wiki and how you can be involved in helping the world invest, better! If you see any issues with this page, please email us.