AGENCY DEBT: ISSUED BY GOVERNMENT SPONSORED ENTERPRISES

2007-03-08 10:33:40

( Financial )



Congress created federal agencies and government sponsored enterprises to lend to sectors involved in housing, agriculture, export and small businesses. These agencies are the main issuers of agency debt, a type of bond which is technically independent from the government.

Investors consider agency debt as guaranteed by the government with the logic that the institutions that issue it are created by the government. They believed that the government will not allow these agencies to default on its debt obligations on the agency debts they issued. But the federal government explicitly informed the market that it has no legal obligation to guarantee obligations of these agencies in the event of default or insolvency.

Federal agencies and government sponsored enterprises can borrow funds at cheaper rates. It also has different capital requirements from other financial institutions while enjoying exemptions from taxes. These financial advantages indicate a good measure for these institutions to generate funds to pay off its agency debt.

Banks, pension funds, mutual funds, hedge funds, insurance companies, foundations, state governments, foreign central banks, and individual investors are the usual buyers of agency debt. These institutions are sometimes referred to as debt agencies. Agency debt forms part of their investment portfolio which usually is considered as stable investments throughout the years. Agency debt is considered by credit rating agencies as high quality investments that the market should buy.

Agency debt is long term investments. Like other investment instruments in the market, agency debt is also price sensitive. Investors should be aware of the risk of their investments with regards to market movements. They should monitor the performance of this bond regularly to be able to determine whether to sell it or keep it as the market unfolds.

It is better not to put all your money on agency debt and instead diversify your investments to ensure higher earnings and mitigate risk on losing all your money.


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