This guide explains agency bonds and treasuries.
Together, well study the differences between the two.
Key Differences
| Difference | Treasury Bond | Agency Bond |
|---|---|---|
| Issuer | U.S. Treasury Department | U.S. Government Agencies/GSEs |
| Explicit Guarantee | Yes | No |
| Credit Risk | Lowest | Slightly Higher |
| Return (Yield) | Lowest | Potentially Higher |
| Liquidity | High | Generally Lower |
| Tax Exemption | Federal | State and Local (most cases) |
Let’s go in-depth on this.
All Differences: Treasury vs Agency Bonds
1. Issuer
- Treasury Bonds: Issued by the U.S. government itself, considered the safest investment in the U.S.
- Agency Bonds: Issued by U.S. government agencies or government-sponsored enterprises (GSEs) like Fannie Mae or Freddie Mac. These agencies play an important role in the economy, but they are not the U.S. government.
2. Risk & Return
- Treasury Bonds: Because they are seen as the safest investment, they offer a lower interest rate (yield).
- Agency Bonds: Carry slightly more risk than Treasuries since they’re not directly backed by the government. However, this extra risk is usually considered minimal, and in return, agency bonds typically offer a slightly higher yield than Treasuries.
3. Call Risk
- Treasury Bonds: Generally not callable, meaning you’ll receive the full interest payments until the maturity date.
- Agency Bonds: May be callable. This means the issuing agency can redeem the bond before maturity, typically if interest rates fall and they can reissue debt at a lower cost. This can be disruptive for investors who were expecting to hold the bond until maturity.
4. Minimum Investment
- Treasury Bonds: You can often purchase Treasuries with a minimum investment of just $100.
- Agency Bonds: May have higher minimum investment requirements, ranging from $1,000 to $25,000 or more, depending on the issuer.
5. Variety
- Treasury Bonds: Offered in a variety of maturities, ranging from a few months to 30 years.
- Agency Bonds: May have a more limited range of maturities compared to Treasuries.
6. Interest Rate Risk
- Both: Both agency and treasury bonds are susceptible to interest rate risk. If interest rates rise, the value of your existing bond can decrease. However, this risk is generally lower for Treasuries due to their higher creditworthiness.
Conclusion
There you have it — all the main differences between agency bonds and treasuries!
Thank you for reading this,
Team AgencyReviews
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