Government Agency and Pass-through Securities

ncies. The government pass-through securities are debt securities issued by government agencies that turn to investors the received payments from borrowers.

Certain government agencies and federal sponsored corporations issue debt. Agency bonds are issued by major federal sponsored agencies such as the Federal Home Loan Mortgage Corporation (FALMC), the Federal National Mortgage Association (FNMA), the Federal Home Loan Bank (FHLB) system, Farm Credit Banks, and the Student Loan Marketing Association (SLMA).

The first three of these agencies (FALMC, FNMA, and FHLB) provide funds to the mortgage and housing sectors of the economy. The Farm Credit Banks provide funds for the agricultural sector, and SLMA (“Sally Mae”) provides funds for higher education.

Agencies of the government issue traditional debt securities (agency bonds) additionally to mortgage pass-through securities. Government mortgage backed securities (pass-through) are debt issues whose interest and principal payments made by borrowers are passed through to investors after a fee is deducted.

Government agency bonds and pass through securities appeal to investors who are interested in investing in high-quality bonds with higher yields than Treasury securities.

Government agency securities
Many different government agencies issue securities and their characteristics can vary considerably, however, they also carry many common risks:

  • New issues of agency securities are sold through a dealer syndicate. These dealers also buy and sell these securities in the secondary markets.
  • Large agency issues are marketable and fairly liquid.
  • The agency securities are exempt  from registering in the securities and exchange commission (SEC)
  • Some agency issues have the advantage in which incomes for interests are exempt of local and state taxes.
  • Agency securities have either of fact or de jure (actual or by right) backing from the federal government, making them safer than corporate bonds.

The security agencies tend to offer higher yields than treasuries, with comparative maturities but with lower yields than the majority of AA-or-AAA-rated corporate bonds. The different agency securities with their wide range of offerings and maturities appeal to investors who like slightly higher yields than those offered by treasuries without sacrificing much credit risk. The Federal government does not guarantee agency bonds, but it is not likely to allow any of its agencies to default on their interest and principal obligations.