Agency bonds

Definition

Agency bonds are debt securities issued by government-sponsored enterprises or federal agencies in the United States.

What are agency bonds?

These bonds are typically issued to finance specific public-sector projects or to support activities that serve a public purpose. Agency bonds typically have fixed interest rates, semi-annual interest payments, and maturities ranging from a few months to several decades. They are considered relatively safe investments because they are backed by the issuing agency’s, and in some cases, by the U.S. government’s implicit or explicit guarantee.

Agency bonds are actively traded in the secondary market, allowing investors to buy and sell them on stock exchanges or over-the-counter (OTC) platforms. They are popular among investors seeking steady income and relative safety.

While agency bonds are generally considered low-risk investments due to their backing by government-sponsored entities or federal agencies, they are not risk-free. Investors should assess the creditworthiness of the issuing agency as well as the specific terms and conditions of the bond.

Example of agency bonds

ABC Corporation wants to finance its mortgage lending operations, so it issues mortgage-backed securities, a government-sponsored enterprise. Investors purchase these MBS, effectively providing funding to ABC Corporation.

Each MBS represents a share of a pool of mortgages owned by ABC Corporation. As homeowners make their mortgage payments, the cash flows are passed through to the MBS holders and provide investors with a steady stream of income in the form of interest payments.