Agency bond

An agency bond is debt issued by a US government-sponsored enterprise or a federal agency, rather than by the US Treasury itself. The most familiar issuers are Fannie Mae and Freddie Mac, which raise money in the bond market to fund mortgage lending, along with entities like the Federal Home Loan Banks.

Agency bonds sit between Treasuries and corporate bonds on the risk spectrum. They are not a direct obligation of the US government the way a Treasury bond is, but the market has long treated them as carrying very low default risk because of how closely tied these enterprises are to the government, including the conservatorship Fannie Mae and Freddie Mac have operated under since the 2008 financial crisis. That perceived safety lets agencies borrow at yields only modestly above Treasury yields, while still typically offering more yield than a Treasury of the same maturity.

Because the underlying enterprises are tied to housing finance, agency bonds are a way for a fixed income investor to gain exposure to that sector's credit profile while still owning a security that is highly liquid and rated near the top of the credit spectrum. Some agency bonds are also callable, meaning the issuer can repay them early, which adds a layer of call risk that a comparable Treasury bond does not have.