Federal agencies are specialized government organizations set up for specific purposes such as managing resources, overseeing industries, tackling national security issues, and more. These organizations are often born of legislative action or presidential order, with their directors appointed directly by the president.
Key Insights
- Purpose-Driven Organizations: Federal agencies are established to manage resources, oversee industries, and address national security issues.
- Close Regulation and Expertise: They regulate sectors that demand specialized knowledge and intense scrutiny.
- Financial Instruments: Many agencies issue or guarantee securities like stocks and bonds, offering unique investment opportunities.
- Higher Interest Rates: Due to lower liquidity compared to Treasury bonds, agency bonds offer slightly higher interest rates.
Unpacking Federal Agencies
Federal agencies regulate specific industries and practices requiring specialized oversight or expertise. Organizations including the Federal Deposit Insurance Corporation (FDIC) and the Government National Mortgage Association (GNMA, or Ginnie Mae) have their operations explicitly backed by the U.S. Treasury. Others, such as Fannie Mae, Freddie Mac, and Sallie Mae, receive implicit guarantees from the Treasury.
Many of these entities issue securities to attract investors. Agency bonds are backed by the full faith and credit of the federal government, making them attractive options for investors seeking regular interest payments. Upon maturity, the bondholder is refunded the bond’s full face value. Although these bonds are less liquid than Treasury bonds, they offer higher interest rates. Examples of specific agencies issuing these bonds include the Federal Housing Administration (FHA) and the Small Business Administration (SBA).
Exploring Government-Sponsored Enterprise (GSE) Bonds
Another category of bonds involves the Government-Sponsored Enterprise (GSE) bonds. These are issued by corporations also set up by Congress for public benefit but function independently and are publicly traded. Examples include the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Banking System (FHLBS). Unlike agency bonds, GSE bonds lack a government guarantee, presenting credit and default risks. Consequently, they typically offer higher yields than Treasury bonds.
The Backbone of Mortgage Loans and Economic Input
Mortgage loans often rely on federal agency securities from Ginnie Mae, Fannie Mae, Freddie Mac, or FHLBS, boasting stellar credit ratings. These securities also serve as collateral for the Federal Reserve’s monetary policies. Sold by banks and dealers nationwide, they finance public initiatives such as infrastructure, low-cost housing, and small business loans. Additionally, they extend affordable loan options to farmers, veterans, and underserved communities.
Related Terms: FDIC, GNMA, Fannie Mae, Freddie Mac, Sallie Mae, Treasury Bonds, Full Faith and Credit.
References
- Federal Deposit Insurance Corporation. “Full Faith and Credit of U.S. Government Behind the FDIC Deposit Insurance Fund”.
- Ginnie Mae. “Our History”.
- Freddie Mac. “GSE Debt Securities”, Page 1.
- The Federal Reserve. “Is U.S. Currency Still Backed By Gold?”
