Smart Bond Investing—Types of Bonds
"Agencies" is a term used to describe two types of bonds: (1) bonds issued or guaranteed by U.S. federal government agencies; and (2) bonds issued by government-sponsored enterprises (GSEs)—corporations created by Congress to foster a public purpose, such as affordable housing.
Bonds issued or guaranteed by federal agencies such as the Government National Mortgage Association (Ginnie Mae) are backed by the "full faith and credit of the U.S. government," just like Treasuries. This is an unconditional commitment to pay interest payments, and to return the principal investment in full to you when a debt security reaches maturity.
Bonds issued by GSEs such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage (Freddie Mac) are not backed by the same guarantee as federal government agencies. Bonds issued by GSEs carry credit risk.
It is also important to gather information about the enterprise that is issuing the agency bond, particularly if it is issued by a GSE. Two of the largest players in the agency bond market—Fannie Mae and Freddie Mac—are publicly traded companies who register their stock with the SEC and provide disclosures that are publicly available including annual reports, quarterly reports and reports of current events that stand to impact the company. These documents can give you insight into the economic health of the company, the challenges and opportunities it faces, and short- and long-term corporate goals. These company filings are available online on the SEC's website. It is important to learn about the issuing agency because it will affect the strength of any guarantee provided on the agency bond. Evaluating an agency's credit rating before you invest should be standard procedure.
|On September 6, 2008, both Freddie Mac and Fannie Mae were placed into conservatorship by the Federal Housing Finance Agency (FHFA), which regulates the country’s secondary mortgage markets. As conservator, FHFA has ultimate control over the two organizations.|
It takes $10,000 to invest in most agency bonds (Ginnie Maes are an exception, requiring a minimum investment of $25,000), with the majority of agency bonds paying a semiannual fixed coupon. There is a relatively active (liquid) secondary trading market for agencies, though it is important for investors to understand that many agencies are tailored to the needs of a particular investor or class of investors—with the expectation that they will be held until maturity. This is especially true of structured agency securities (agencies with special features, which are often not suitable for individual investors).
Most agency bonds pay a semiannual fixed coupon and are sold in a variety of increments, though the minimum investment level is generally $10,000 for the first increment, and $5,000 increments thereafter.
Agency Risk Report Card
Agency Bonds Snapshot