Agency Securities

<body onLoad="MM_checkPlugin('Shockwave Flash','','http://www.riskglossary.com/default_nofl.htm',false);return document.MM_returnValue" stylesrc="../_private/template.htm" bgcolor="#FFFFFF" link="#669933" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table2"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table3"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table4"> <tr> <td width="100%" align="left" valign="top"> <p class="header_gold">Agency Securities</td> <td width="45" align="right" valign="bottom"> <map name="FPMap6"> <area href="http://www.contingencyanalysis.com" shape="rect" coords="1, 0, 44, 11" target="_top"> </map> <img border="0" src="../images/home.gif" usemap="#FPMap6" width="45" height="12"></td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table5"> <tr> <td width="0%" align="left" valign="top"> <p class="header2_black">Explained:<br> <img border="0" src="../images/blank_1x100.gif" width="100" height="1"></td> <td width="95%" align="left" valign="top"><p class="word_list"> <a href="#agencies">agency</a><p class="word_list"> <a href="#agency securities">agency security</a><p class="word_list"> <a href="#Federal Financing Bank">Federal Financing Bank</a><p class="word_list"> <a href="#Government sponsored enterprises">government sponsored enterprise</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111" width="310" align="right" id="table6"> <tr> <td align="right" width="9" height="14"></td> <td width="300" height="14"> <font size="2"> </font><font size="4"> </font></td> </tr> <tr> <td align="right" width="9"> </td> <td width="300"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table> <p class="body">Historically, debt financing of the US Federal Government has occurred at two levels. Direct spending authorized by Congress was financed by the US Treasury through the issuance of <a href="../articles/treasury_securities.htm">Treasury securities</a>. Entities formed by Congress might also issue debt. These entities fall into two categories:</p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10">Federal agencies are a part of the Federal Government and include entities like the Federal Housing Administration, Export-Import Bank and Small Business Administration.</p> <p class="body"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="Government sponsored enterprises">Government sponsored enterprises</a></b> (GSE) are private <a href="../articles/corporation.htm">corporations</a> chartered by the Federal Government and granted privileges so they can advance specific purposes. </p> <p class="body">Debt obligations of these entities are collectively called <a name="agency securities"> <b>agency securities</b></a> or simply <b><a name="agencies">agencies</a></b>. </p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="left" id="table7"> <tr> <td width="336"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> <td width="9"> </td> </tr> </table> <p class="body">Having federal agencies competing with the US Treasury for investors' funds drove up the government's cost of financing. It also imposed incremental costs due to the redundancy of each agency maintaining a separate debt issuance program. In 1973, Congress formed the <b> <a name="Federal Financing Bank">Federal Financing Bank</a></b>. Under the general supervision of the Secretary of the Treasury, it consolidated the debt issuances of federal agencies. Since then, the Tennessee Valley Authority has been the only federal agency to issue significant amounts of its own <a href="../articles/security.htm">securities</a>.</p> <p class="body">As private corporations, GSEs still issue their own debt. The vast majority of issuances are by <a href="../articles/mortgage_backed_security.htm">Fannie Mae</a>, <a href="../articles/mortgage_backed_security.htm">Freddie Mac</a> and the Federal <img border="0" src="../word/agency_securities_home_loan.gif" align="absbottom" width="72" height="15"> Banks. Agency securities are less standardized than are Treasuries. There are discount notes, which are comparable with <a href="../articles/treasury_bill.htm">Treasury bills</a>, as well as fixed and <a href="../articles/floater.htm">floating</a> rate medium term notes. Agencies directly issue some <a href="../articles/zero_coupon_bond.htm">zero-coupon</a> securities. Like corporate bonds, many longer-term issues are <a href="../articles/callable_bond.htm"> callable</a>. </p> <p class="body">Agencies are <a href="../articles/security.htm">exempt</a> securities, and interest on many are exempt from state and local taxes. Securities are publicly offered in various ways through investment banks or direct sales to investors. In the late 1990s, Fannie Mae started auctioning standardized bills and notes to the public in much the same way that the Treasury auctions its securities. The goal was to increase <a href="../articles/liquidity.htm">liquidity</a> and to establish agency <a href="../articles/yield.htm">yields</a> as somewhat of a benchmark comparable to Treasury yields or <a href="../articles/interest_rate_swap.htm">swap rates</a>. Freddie Mac and the Federal <img border="0" src="../word/agency_securities_home_loan.gif" align="absbottom" width="72" height="15"> Banks launched similar benchmark securities programs. </p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="right" id="table8"> <tr> <td align="right" width="9"> </td> <td width="336"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table> <p class="body">As with most debt instruments, the secondary market for agencies is entirely <a href="../articles/exchange_traded.htm">over the counter</a>. There are several trillion dollars of agencies outstanding. The liquidity of issues varies. Agencies are generally not as liquid as Treasuries, but most are more liquid than <a href="../articles/corporate_bond.htm">corporate bonds</a>.</p> <p class="body" style="margin-bottom: 36">Agencies pose <a href="../articles/credit_risk.htm">credit risk</a>, but this is considered minimal. All GSEs have stable businesses, and several have authority to borrow from the US Treasury. While there may be no explicit government guarantees, there is a widespread belief that the Federal Government will intervene to prevent any GSE from defaulting on its debt.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table9"> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Books</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table10"> <tr> <td width="25%" align="center" valign="top"> <iframe src="http://rcm.amazon.com/e/cm?t=contingencyanaly&o=1&p=8&l=as1&asins=0071440992&fc1=000000&IS2=1&lt1=_blank&lc1=669933&bc1=FFFFCC&bg1=FFFFCC&f=ifr" style="width:120px;height:240px;" scrolling="no" marginwidth="0" 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border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/coupon_bond.htm">bond</a> Securitized debt.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/callable_bond.htm">callable bond</a> </strong>A bond that can be retired ("called" or redeemed") early.<p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/corporate_bond.htm">corporate bond</a> A bond issued by a corporation.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/discount_instrument.htm">discount instrument</a> A money market instrument that pays no coupons, matures for its face value, and is issued at a discount to its face value.</strong><p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/floater.htm">floater</a> A fixed income instrument whose coupon fluctuates with some designated reference rate.</strong><p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/interest_rate_swap.htm">interest rate swap</a> A swap under which both cash flow streams are in the same currency and are of a nature that might be associated with some fixed income obligation.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/international_bonds.htm">international bond</a> Any bond issued or invested in across national boarders.<p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><span class="verdana10"><a href="../articles/mortgage_backed_security.htm"><strong style="font-weight: 400">mortgage backed security</strong></a></span><strong style="font-weight: 400"> A security interest in mortgage collateral.</strong></p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/municipal_securities.htm">municipal security</a> A debt security issued by a local government or its agencies or authorities in the United States or its territories.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/securitization.htm">securitization</a> The process of pooling assets and selling interests in the pool to investors.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/treasury_bill.htm">Treasury bill</a> US Treasury security with with a maturity of a year or less at the time of issue.<p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/treasury_tips.htm">Treasury Inflation-Protected Securities</a> Inflation-indexed bonds issued by the US Treasury.</p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/treasury_note_and_bond.htm">Treasury note or bond</a> A coupon-bearing Treasury security with an initial maturity greater than a year.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/treasury_strips.htm">Treasury strip</a> A zero-coupon bond "stripped" from the cash flows of a Treasury security.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/treasury_securities.htm">Treasury security</a> US Federal Government debt obligation issued by the Department of Treasury.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/united_states_financial_regulation.htm">United States financial regulation</a> An overview.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/zero_coupon_bond.htm">zero-coupon bond</a> A bond that pays no coupons, pays its par value at maturity and is issued at a discount.</strong></td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Sponsored Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> 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