It may sound like a term dripping with intrigue and danger, maybe referring to a project that guarantees the security of highly trained special agents as they work deep under cover in some volatile overseas terrorist cell.
But, nah...it's really about bonds.
An "agency security" is a security, like a bond or a note, issued by one of the so-called government-sponsored enterprises, or GSEs. These companies were created by Congress to help foster home ownership. But while they were government-created, they don't fall directly under government control.
There aren't many of these firms, just three in fact: the Government National Mortgage Association, also known as Ginnie Mae; the Federal Home Loan Mortgage Corporation, or Freddie Mac as it's known on the street; and the Federal National Mortgage Association, which goes by the nom de guerre Fannie Mae.
The government has made no explicit promise to back the bonds issued by these organizations. But because of their history as government creations, Wall Street assumes the government would step in if needed. (This took place in some degree during 2009 and 2010, in the aftermath of the financial crisis. See: Agency MBS Purchase.)
This not-actually-but-sort-of-anyway government backing allows the agency securities to have an extremely high credit rating.
Related or Semi-related Video
Finance: What is an Agency Bond?2 Views
Finance allah shmoop What is an agency bond Okay the
federal government sells a lot of paper all the time
That is it exchanges a promise to pay investors of
thousand bucks in a year in return for nine hundred
seventy two dollars today those federally backed pieces of paper
are back or guaranteed by the full faith and credit
of the us government's ability to tax it's poor hard
working and taxpaying citizens But inside of our massive government
exists all kinds of agencies particularly home and student and
you know other loan agencies who dole out money to
us citizens all the time Well fannie mae in her
brethren and while sister in is that a thing system
anyway her family of agencies while they issue paper as
well and they issue it separately from the federal government
And for the most part they're agency bonds look a
whole lot like federal bonds with one key exception They
are not backed by the federal government's full faith and
credit directly Rather they're just backed by the credit worthiness
of the agency itself backing them that is fannie mae
wants to raise cash for whatever more homes more loans
Blah blah blah It sells paper to the public and
institutions and whomever and promises to pay well basically with
a handshake That shake is based on its ability to
raise more money in the future or wine loudly enough
so that the federal government steps in and bails them
out If some one in a million crisis happens and
hello two thousand eight financial crisis we're looking at you
All right Well the basic idea here is that agency
bonds are backed by the agency itself not by the
full whammy of the full federal government so they generally
yield a skosh more interest to account for that scootch
more risk that investors take in buying them No Should
some other one in a million crisis ever happen again
So that's an agency bond not to be confused with
a bond agency which you know is the british secret 00:01:58.357 --> [endTime] service
Up Next
What are Freddie Mac and Fannie Mae? They sound like snack cakes to us, so, uh...maybe we should watch this video.
What is an Agency Relationship? An agency relationship allows an agent to act on behalf of the individual or company who hires them. This type of r...
What are Bonds? The simplest explanation is that a bond is essentially an I.O.U. that is issued by a corporate or government institution to borrow...
What are Bond Anticipation Notes (BANS), Revenue Anticipation Notes (RANS), and Tax Anticipation Notes (TANS)? BANS, RANS and TANS are all short-te...