Agency Securities Explained

Agency securities are a type of investment that are issued by government-sponsored enterprises and other businesses that are backed by the federal government. These agencies can provide a number of different investment options for investors to take advantage of. There are a number of companies that are in business because they were chartered by Congress, or set up by some other federal program. These businesses are not necessarily part of the government but they are backed by the government. This means that these businesses are operating on their own merits, but if they were to ever falter, the federal government would step in and give them a hand. 

Treasury Securities Backing

The securities that are issued by these agencies are most often compared to Treasury securities. The United States Treasury is a government organization that is considered to be one of the safest sources of investment securities. Along the same lines, investors look at agency securities as a safe investment. While these agencies are not specifically a part of the government such as the United States Treasury, they do have some of the same safety associated with them.

Bonds

In most cases, the securities that are issued by these agencies are bonds. Agency bonds are considered to be very similar to T-bills or savings bonds. Bonds are rated on a scale that is developed by some of the leading credit rating agencies in the market. Companies such as Moody's, Standard & Poor's and Fitch give bonds ratings to help investors gauge the relative safety of these investments. When it comes to agency bonds, they receive the highest rating that is possible according to these agencies. 

When an investor purchases a bond from one of these agencies, they will receive regular interest payments from the agency. These payments are known as coupon payments and they are based on a specific coupon rate associated with the bond. Once the bond term is over, the investor will get back the initial investment that was made.

Safety

The biggest draw of agency securities is that they are considered to be extremely safe. For investors that do not want to put their money at risk, this could be one of the safest forms of investment that is available. Some agencies such as Ginnie Mae have an explicit guarantee from the Federal government. This means that if they were to ever get into financial trouble, the government has promised that it would step in and fix the problem.

Other government agencies may not have explicit guarantees, but rather an implicit one. This means that a guarantee is not guaranteed but it is implied because the agency was initially started with help from the federal government. With either an implicit or explicit guaranteed from the federal government, investors should feel pretty good about their chances of getting a return on their investment.

It is important to remember that the although these products are safe, they do not yield returns that can equal the returns of stocks. Stocks are risky and yield higher profits as a result.

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