Agency bonds

How agency bonds work

Buying a bond from a government agency is essentially like lending money to organizations such as Fannie Mae, Freddie Mac or the Tennessee Valley Authority. In return, the issuer pays you a fixed interest rate and agrees to repay the principal on a specified maturity date, which can range anywhere from one to 40 years.

Although many of these agencies were originally sponsored by the U.S. government, not all agency bonds carry a full government guarantee. Still, they are generally considered suitable for income-focused investors and often offer higher interest rates than comparable U.S. Treasury bonds.

Your financial advisor can help you determine whether agency bonds are a good fit for your portfolio and guide you on when and where to invest in them.

Types of agency bonds

Some government-sponsored enterprises (GSEs) include:

• Federal Farm Credit Banks Funding Corporation
• FHLBanks Office of Finance
• Debt Securities — Capital Markets (Freddie Mac)
• Fannie Mae Debt Securities | Fannie Mae
• Tennessee Valley Authority (TVA)

Benefits and risks of agency bonds

It’s important to weigh the benefits and risks of any investment choice to determine whether it’s the right financial move for you. Agency bonds are not backed by the U.S. government, but they typically offer relatively high liquidity, some tax advantages and the potential to earn a higher yield than with U.S. Treasury bonds.

Tax considerations

If you live in a state with its own state tax on top of federal tax, you should know that state taxability varies depending on the type of agency bonds you buy. Interest you receive on debt from the most well-known agencies (such as Fannie Mae and Freddie Mac) is taxable on the federal and state levels; interest received from other agencies is taxable only on the federal level. Be sure to check what is applicable in your state.

Decide if agency bonds are right for you

Talk with your local Edward Jones financial advisor to learn more.