What is Agency debt’
Agency debt is a debt, or bonds issued by the Federal United States Agency or government sponsored enterprise (GSE). Not being backed by collateral, these debts to rely on the solvency and integrity of the Issuer of the debt.
Loans actual Federal Agency, such as the Ministry of agriculture provided the “full faith and credit of the U.S. government.” Agency bonds that are issued in the GSE on the other hand, only indirectly guaranteed.
Breaking down the ‘Agency debentures’
Agency debentures issued by government enterprises (GSE) are considered unconditionally guaranteed. Even if a company is suddenly not able to repay your debts, it can borrow money directly from the U.S. Treasury. Still, the Agency debt issued by the GSEs are considered a credit risk because the U.S. Treasury is not obligated to lend that entity money.
You may also purchase by the Agency of bonds in an investment strategy. This strategy can be low risk form of investment. Bonds issued directly through the government Agency, and GSE and is guaranteed to pay a fixed interest rate and the principal amount of the bonds to repay the bonds. The minimum level of investment for the Agency bonds, usually $10,000, with the option to increase this amount in increments of $5,000.
Familiar examples of Agency debt.
The Agency debt has attracted widespread attention during the mortgage and credit crisis of 2008. The crisis has brought into focus the problems inherent in the GSEs. The problem was, GSE, using the implicit guarantee of financial assistance by the U.S. Treasury during operation as a private enterprise. The two most frequently mentioned examples of “Fanny Mae”, also known as Federal national mortgage Association, a Corporation (FNMA), and Freddie Mac, also known as the Federal mortgage loan mortgage Corporation (FHLMC).
Leading up to the financial crisis these two entities huge profits by borrowing money at low rates, because of its implicit support from the U.S. Treasury and the case in the secondary mortgage market. When the mortgage market collapsed, Fannie Mae and Freddie Mac, as it faced potential bankruptcy. Both organizations spent a huge proportion of mortgages at the time.
The collapse of Freddie and Fanny would lead to the collapse of the housing market. The U.S. Treasury has decided that they are “too big to fail” and stepped in with assistance amounting to 187 billion dollars as a way to keep individuals from bankruptcy. The Federal government took over both of these individuals to prevent something similar in the future.