Agency Security

  

Categories: Bonds, Stocks, Trading, Investing

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.

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