An agency security is a type of low-risk debt obligation that is issued by a federal government. Most often, the term is used to apply to obligations of this type that are issued by the United States government. There are also situations where these types of securities are issued by government-recognized entities, such as the Farm Credit system in the USA.
In terms of the types of debt obligations that may be classed as an agency security, mortgage-backed securities issued by entities like Ginnie Mae, Freddie Mac, and Fannie Mae are among the most common. Since these entities do have the active sponsorship of the US federal government, they are considered safe investments, with that safety based in the guarantees provided by the degree of backing provided by the government. It is important to note that the backing may be in the form of an explicit guarantee, as is the case with Ginnie Mae, or as an implicit guarantee. Both Freddie Mac and Fannie Mae are backed with implicit guarantees.
In the broadest application, an agency security may be in the form of a bond, a note, or a bill. In addition to the guaranteed backing by the government, securities of this type are usually exempt from state and local taxes, a factor that makes them an even more attractive investment option. This type of government backing also provides an agency security with a high and relatively stable credit rating. The end result is that the level of volatility associated with these types of investments is usually low in comparison to the projected return.
In terms of how the return is provided, an agency security is somewhat like a US Treasury Bill. Both types of investments provide a return in the form of interest. There are also some important differences between the two investments, in that the way that the interest income generated by each investment is calculated in a different manner. In addition, while an agency security does have backing from the US government, that backing is not as complete as the backing provided for a t-bill.
While the rate of return may not be spectacular in comparison to other investment options, the reliability and low risk level associated with an agency security of any type makes them ideal for investors that prefer to go with more conservative investment opportunities. Providing a return that is higher than many other investments carrying similar amounts of risk, securities of this type can help provide a solid foundation for an investment portfolio, returning modest but consistent returns. The stability provided by investment in agency securities can allow investors to more easily take on riskier investments and be able to absorb losses should those other investments fail to perform as anticipated.
