An agency bond is a type of debt security issued by government-sponsored enterprises (GSEs) or federal government agencies. These bonds are typically used to raise capital for specific purposes, such as financing housing or promoting agriculture. Common examples of issuers include the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
In finance, agency bonds are considered to have a low credit risk because they are backed by the financial resources of the issuing agency or GSE. Although they are not explicitly guaranteed by the U.S. government, the market generally perceives them as being very secure due to their connection to governmental objectives.
Investors are attracted to agency bonds for their relatively higher yields compared to U.S. Treasury securities, while still maintaining a favorable risk profile. Additionally, they play an essential role in providing liquidity to the capital markets and facilitating borrowing for sectors that contribute to economic growth.
