Agency Debentures

"Agency debentures" is another way to say "government bonds."

"Agency" just refers to an agency of the government, such as the Treasury Department. "Debentures" is the lowest rung of bond on the debt stack of priority payback should the B word be introduced (rhymes with shmankruptcy). A debenture typically has no specific asset backing it. Rather, it's a handshake on paper that just says, "I promise to pay." So investors evaluate how much that promise is worth and/or how much it hurts the promisor, should they ever break it.

To understand how agency debentures are different from typical bonds, we'll break things down a bit more.

Bonds are a type of loan. Rather than negotiating with a bank, an organization will issue a set of bonds with set terms, like a maturity date and an interest rate, and make them available for people to purchase. Unlike stock, bond buyers don't own part of the company. Instead, they are owed money as a creditor, the same way a bank would if it issued a loan.

When a company issues a bond, that bond is backed by company assets. If the company files for bankruptcy or otherwise defaults on the bond, creditors have a course of action. In the worst case scenario, company assets are sold off and bond holders are repaid as best they can from that money.

Things are different for government bonds. Government bonds aren't backed by assets the same way a corporate bond is. If the U.S. government defaults, creditors can't just sell off the White House and Yellowstone National Park and call it even. Instead, government bonds are backed by the "full faith and credit" of the government, which is another way of saying, "we super promise to pay you back, but if not, we own a bunch of tanks, sooooo..."

Agency bonds sit somewhere in between all of this government paper and priority stack. They aren't quite the full faith and credit safety of Uncle Sam's ability to tax us. They are backed by the agency issuing them inside of the protected tent of Uncle Sam.