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Treasury And Agency Bonds – US Government Bonds

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Introduction

 

 

Treasury and agency bonds are typically said in the same breath, but most investors do not fully understand the difference between the two – or may not have the slightest clue of what these assets are and what they have to offer you as an investor. In this lesson, I will be discussing the difference between these bonds as will as their similarities, benefits and risks involved in each – along with where you can find government bonds available to purchase so the government will be in debt to YOU.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

 

US Treasuries

 

 

US Department Of Treasury

 

 

Government bonds are popular investments because of their safety; however, not all government bonds are the same.

The US Treasury was first established by congress in 1789.

The treasury performs a number of duties, but in a nutshell, the treasury’s job is to raise money for government expenses and pay the nations bills. The treasury typically raises money in one of two ways : through taxes and by issuing bonds to investors.

 

 

In the investing world, bonds issued by the US Treasury are typically referred to as treasuries. Treasuries
are one of the most common fixed income investments – and might play an important role in your own portfolio.

Treasuries are a loan investment, which means investors loan money to the US Government for a said period of time in exchange for a defined rate of return, known as a yield.

 

Treasuries are classified into three types based on their length to maturity

  • Treasury Bills (T-Bills) have a maturity of less than a year
  • Treasury Notes have a maturity of 1-10 years
  • Treasury Bonds have a maturity greater than 10 years

 

Typically, the longer the maturity rate, the higher the yield

Investors normally purchase treasuries because they are considered to be safe investments. They have this reputation because the Treasury’s interest payments and return of investment principal is guaranteed by the full faith and credit of the US Government.

 

 

In fact, treasuries are considered to be so safe that they are commonly referred to as “the risk free investment” – but this isn’t quite true since no investment is without risk

For example, some countries have had trouble paying their bills at times – this is called default risk

There are additional risks that investors should be aware of, such as interest rate risk.

Interest rate risk comes into play if you want to purchase a treasury bond and want your money back before maturity. To do this, you will need to sell the treasury at its current market price, which means you may get less than what you invested in the bond. This is especially likely if interest rates have gone up since you purchased the bond.

 

 

Agency Bonds

 

 

 

Federal Agency Bonds work the same as treasuries, but are issued by government agencies like the Federal Home Loan Bank (FHLBank), Fannie Mae, Freddie Mac, and Sallie Mae.

Despite being government sponsored agencies, they aren’t guaranteed by the US Treasury, therefore, they aren’t considered as safe as treasuries.

For example, during the 2008 mortgage crisis, Fannie Mae and Freddie Mac fell into distress and were expected to default. However, the federal government stepped in and guaranteed the principal and interest for the bonds held by their respective shareholders.

 

 

Despite this bailout, agency bonds have a higher default risk than treasuries.

Agency bonds are also subject to the same risks as other bonds such as default and interest rate risks like I previously discussed.

But…..

Treasuries and agencies can help you fill the fixed income investment portion of your portfolio.

Treasuries can be purchased either directly from the treasury (treasurydirect.gov), or through a brokerage account. You can also invest in treasuries by buying shares of a mutual fund or ETF that invest in a more diversified group of treasuries.

Federal Agency bonds, for the most part, are more commonly purchased through your broker and can also be found in mutual funds and ETFs.

 

Quick Recap

In Review……

US Treasuries

  • Bonds issued by the US Treasury are typically referred to as treasuries.
  • Treasuries are one of the most common fixed income investments – and might play an important role in your own portfolio.
  • Treasury Bills have a maturity of less than a year
  • Treasury Notes have a maturity of 1-10 years
  • Treasury Bonds have a maturity greater than 10 years
  • Investors normally purchase treasuries because they are considered to be safe investments. They have this reputation because the Treasury’s interest payments and return of investment principal is guaranteed by the full faith and credit of the US Government
  • earned the nickname “the risk free investment” – but this isn’t quite true since no investment is without risk
  • Despite their safety and reputation, they are still prone to default, inflation and interest rate risks just as any other bond/fixed income investment.

 

 

Agency Bonds

Agency Bonds work the same as treasuries, but are issued by government agencies like……

 

  • Federal Home Loan Bank (FHLBank)
  • Fannie Mae
  • Freddie Mac
  • Sallie Mae
  • Despite being government sponsored agencies, they aren’t guaranteed by the US Treasury, therefore, they aren’t considered as safe as treasuries.
  • Agency bonds have a higher default risk than treasuries.
  • Agency bonds are also subject to the same risks as other bonds such as default risk, interest rate risks, ect. like I previously discussed.

 

And that is it for this lesson in treasury and agency bonds. You now know more about the types of government bonds that are available for purchase along with the benefits and risks involved in each. Although, there is another type of government bond, which will be discussed in another lesson in further detail.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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