What Is an Agency Debenture?

An agency debenture is debt (bonds) issued at a fixed, or variable, interest rate by a United States federal agency or a 澳洲幸运5开奖号码历史查询:government-sponsored enterprise (GSE), for the purposes of procuring funds to finance their𒊎 activities, which usually entails purchasing m✅ortgages from various lenders.

Understanding an Agency Debenture

Rather than being backed by 澳洲幸运5开奖号码历史查询:collateral, agency debentures rely on the 澳洲幸运5开奖号码历史查询:creditworthiness and integrity of the debt’s issuer. The minimum level of investment for agency debentures is generally $10,000, with the ability to increase that amount in increments of $5,000. Interജest payments from federal agency debentures🅰 are usually tax-exempt while those from GSEs tend to be fully taxable.

Debentures issued by an actual federal agency, such as the Department of Agriculture, are backed by “the 澳洲幸运5开奖号码历史查询:full faith and credit of the U.S. government.” This means that the U.S. government promises to honor the interest payments and the return of principal at maturity, even if the underlyi🍌ng♑ agency is not able to honor their commitments.

Agency debentures issued by GSEs, on the other hand, are only implicitly guaranteed, which raises the risk of loss to the investor. That said, GSEs may borrow money directly from the 澳洲幸运5开奖号码历史查询:U.S. Treasury if they are unable to repay their debts. The uncertainty, brought on by the fact that the U.S. Treasury is not obligated to lend them money, is the reason why agency debentures issued by GSEs are considered to have some 澳洲幸运5开奖号码历史查询:credit risk.

It is also possible to purchase agency debentures as an investment strategy. This strategy can be a low-risk form of investing. Bonds issued directly through a government agency, not through a GSE, are guaranteed (backed by the U.S. government) to pay a 澳洲幸运5开奖号码历史查询:fixed rate of interest and the bond’s full 澳洲幸运5开奖号码历史查询:principal when the bond matures.

The most common government-sponsored entities (GSEs) that issue agency debentures are 澳洲幸运5开奖号码历史查询:Fannie Mae, 澳洲幸运5开奖号码历史查询:Freddie Mac, 澳洲幸运5开奖号码历史查询:Farmer Mac, and 澳洲幸运5开奖号码历史查询:Ginnie Mae.

Agency Debentures During the 2008 Financial 🃏Crꦐisis

Agency debentures drew widespread attention during the mortgage and credit 澳洲幸运5开奖号码历史查询:crisis of 2008. The crisis brought into focus problems inherent in GSEs. The problem was that GSEs were using th♊e implicit guarantee of🅺 a bailout by the U.S. Treasury while operating as private enterprises.

The two most commonly referenced examples were Fannie Mae, also known as Federal National Mortgage Association Corporation (FNMA), and Fred𓃲die Mac, also known as Federal Home Loan Mortgage Corporation (FHLMC).

Leading up to the financial crisis, these two entities made enormous profits by borrowing money at low rates, thanks to the implicit backing of the U.S. Treasury, and dealing in the 澳洲幸运5开奖号码历史查询:secondary mortgage market. When the mortgage market collapsed, Fannie Mae and Freddie Mac both faced potential 澳洲幸运5开奖号码历史查询:bankruptcy. Both entities held an eꦿnormous share of mortgages at the time. 

The collapse of Freddie and Fannie would have led to the collapse of the housing market. The U.S. Treasury decided they were 澳洲幸运5开奖号码历史查询:"too big to fail" and stepped in with a bailout worth $187 billion as a way to keep the entities from going bankrupt. The federal government has since taken over both of these entities to prevent a similar future occurrence.