Government Agencies (Bonds)

[lawman]

Government Agencies often offer slightly better yields than C.D.'s or Treasuries. What are they and how safe are they?

 

[Spock]

Government Agencies often offer slightly better yields than C.D.'s or Treasuries. What are they and how safe are they?

Over simplification warning:
What are they are private businesses like Federal Farm lenders, Federal Housing lenders, etc. (Tennesee Valley Authority shows up in the list) that are sponsored/chartered by the US Government.

How safe is "it depends".

Some say they since they are sponsored by the gov, they are backed by the gov, so they get AAA ratings. Others say the backing is implied and not law, so the risks and thus the rates are higher.

https://www.investopedia.com/terms/g/gse.asp

 

[Spock]

Forgot to add another difference: GSE bonds are sometimes callable, while Treasuries are not.

 

[disneysteve]

For what it’s worth, my mom has had a huge chunk of her portfolio in agency bonds for the past 30 years and has never had a moment’s trouble.

I just finally got the last of my inheritance this week and I’m planning to put some of it into agency bonds to get the 4+% rate on those.

 

[pb4uski]

Yeah, I just bought some 4% FHLB 3-year bonds today. I view them as parhaps a half a notch lower than UST from a credit risk perspective but still Aaa.

 

[lawman]

Yeah, I just bought some 4% FHLB 3-year bonds today. I view them as parhaps a half a notch lower than UST from a credit risk perspective but still Aaa.

Looks good to me but when I realize I have some bonds and c.d.'s paying less than 1% that I bought just a few months ago I am hesitant to go out 3 years...

 

[disneysteve]

Looks good to me but when I realize I have some bonds and c.d.'s paying less than 1% that I bought just a few months ago I am hesitant to go out 3 years...

That's where laddering comes into play. If you buy bonds and CDs with varying maturities, you can have one maturing every few months or even every month that you then get to reinvest at the prevailing rates at the time. Personally, since the spring, I've been building a monthly ladder that currently runs through 9/23. With the money I just got, I'm going to extend it out to 2025, possibly longer.

 

[COcheesehead]

Agency bonds are fully taxable unlike Treasuries which are state tax free.

 

[pb4uski]

Looks good to me but when I realize I have some bonds and c.d.'s paying less than 1% that I bought just a few months ago I am hesitant to go out 3 years...

That's where laddering comes into play. If you buy bonds and CDs with varying maturities, you can have one maturing every few months or even every month that you then get to reinvest at the prevailing rates at the time. Personally, since the spring, I've been building a monthly ladder that currently runs through 9/23. With the money I just got, I'm going to extend it out to 2025, possibly longer.

The 4%/3 year is the longest rung of the ladder and is only 10% of the total ladder principal. Most of the rungs mature quarterly over the next 8 quarters, but for 4% for a GSE... 70bps more than a 3 year CD/UST... I decided that it was worth going out 3 years.

 

[Spock]

Agency bonds are fully taxable unlike Treasuries which are state tax free.

This made for an interesting twist. Unless I'm missing something, Fidelity's fixed income screener lumps "agencies" and GSEs together when they are distinctly different.
Even these links call all of them "agencies", but then lists some as being state tax exempt and some not.

I'm still digging for an IRS source.

https://www.rbcwm-usa.com/resources/file-687493.pdf
https://www.raymondjames.com/wealth...vernment-sponsored-enterprise-debt-securities