Historically, debt financing of the US Federal Government has occurred at two levels. Direct spending authorized by Congress was financed by the US Treasury through the issuance of Treasury securities. Entities formed by Congress might also issue debt. These entities fall into two categories:
- Federal agencies are a part of the Federal Government and include entities like the Federal Housing Administration, Export-Import Bank and Small Business Administration.
- Government sponsored enterprises (GSE) are private corporations chartered by the Federal Government and granted privileges so they can advance specific purposes.
Debt obligations of these entities are collectively called agency securities or simply agencies.
Having federal agencies competing with the US Treasury for investors’ funds drove up the government’s cost of financing. It also imposed incremental costs due to the redundancy of each agency maintaining a separate debt issuance program. In 1973, Congress formed the Federal Financing Bank. Under the general supervision of the Secretary of the Treasury, it consolidated the debt issuances of federal agencies. Since then, the Tennessee Valley Authority has been the only federal agency to issue significant amounts of its own securities.
As private corporations, GSEs still issue their own debt, but their future is uncertain. In the past, most issuances were by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. In the wake of the 2008 financial crisis and the federal government’s massive bailout of Fannie and Freddie, the future of GSEs is uncertain.
Agency securities are less standardized than are Treasuries. There are discount notes, which are comparable with Treasury bills, as well as fixed and floating rate medium term notes. Agencies directly issue some zero-coupon securities. Like corporate bonds, many longer-term issues are callable. Agencies are exempt securities, and interest on many are exempt from state and local taxes. Securities are publicly offered in various ways through investment banks or direct sales to investors. In the late 1990s, Fannie Mae started auctioning standardized bills and notes to the public in much the same way that the Treasury auctions its securities. The goal was to increase liquidity and to establish agency yields as somewhat of a benchmark comparable to Treasury yields orswap rates. Freddie Mac and the Federal Home Loan Banks launched similar benchmark securities programs.
As with most debt instruments, the secondary market for agencies is entirely over the counter. There are several trillion dollars of agencies outstanding. The liquidity of issues varies. Agencies are generally not as liquid as Treasuries, but most are more liquid than corporate bonds.
Agencies pose credit risk, but this is considered minimal. While there may be no explicit government guarantees, there traditionally was a widespread belief that the Federal Government would intervene to prevent any GSE from defaulting on its debt. This proved true in the wake of the 2008 sub-prime meltdown, but today the future of GSEs is uncertain.