Buying Agencies

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NavyIC3
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Buying Agencies

Post by NavyIC3 »

Pros and cons of buying agencies. Your thoughts?
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David Jay
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Re: Buying Agencies

Post by David Jay »

"Agencies" probably has a specific meaning to you, but it's not specific for me. Please expand on your thoughts.
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Weathering
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Re: Buying Agencies

Post by Weathering »

If you are referring to agency bonds (GSEs), there are many threads on them. A few weeks ago, they paid as high as 6.9% YTM (Federal Farm Banks) but with a call date in early-to-mid 2023. The expectation is these bonds are as safe (or safer) than investment-grade corporate bonds but will be called as soon as the prevailing interest rate is below the rate paid on the outstanding bond. Therefore, the 6.9% bond mentioned earlier will probably be called in 2023 instead of its maturity date of 2037. The agency bonds with YTM in the 4.5% to 5.5% range seem to be the most popularly discussed in past threads.

Many agency bonds are tax-free at the state level but not at the federal level. Some research is needed in order to confirm this for the specific issuer.

I've considered switching from buying more muni bonds to buying agency bonds within my bond allocation of taxable. This is because I'm 5-7 years away from a drop in income when I retire, so muni bonds won't be as advantageous to me after that point. Additionally, I'm in a high income-tax state (and will remain so in retirement), so the state tax benefits of agencies benefit me.
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NavyIC3
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Re: Buying Agencies

Post by NavyIC3 »

US government and federal agency securities.
chinchin
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Re: Buying Agencies

Post by chinchin »

They let Fannie Mae and Freddie Mac go bust.
not financial advice
Valuethinker
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Re: Buying Agencies

Post by Valuethinker »

chinchin wrote: Tue Nov 22, 2022 1:44 pm They let Fannie Mae and Freddie Mac go bust.
I do not believe that to be true.

In fact, they took them into conservatorship.

Equity holders were heavily diluted (the preference share holders had a big lawsuit about this but I am not sure of the outcome?).

Bondholders took no losses, as far as I am aware.
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Re: Buying Agencies

Post by Valuethinker »

NavyIC3 wrote: Tue Nov 22, 2022 1:09 pm Pros and cons of buying agencies. Your thoughts?
Search on the Vanguard GNMA fund here and you will find many interesting discussions.

Larry Swedroe has a very useful chapter on Mortgage Backed Securities, extension/ prepayment risk ("negative convexity").

It's also worth reading (old book) Michael Lewis Liar's Poker for quite a bit of explanation on them.
MikeG62
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Re: Buying Agencies

Post by MikeG62 »

NavyIC3 wrote: Tue Nov 22, 2022 1:09 pm Pros and cons of buying agencies. Your thoughts?
Yup, I have bought and own a few different issues. Interest rates were well above comparable term Treasuries at the time they were purchased, thus the reason I bought them. All are callable - roughly 12 months from the time I bought them. Maturities were 5-10 years depending on the issue. I plan to hold these till they are called or to maturity. I have near zero concern about the theoretically higher risk over Treasuries (some others on this board think this more an issue than I do).
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JayB
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Re: Buying Agencies

Post by JayB »

NavyIC3 wrote: Tue Nov 22, 2022 1:09 pm Pros and cons of buying agencies. Your thoughts?
I own lots of zero coupon non-callable Agency bonds issued by Resolution Trust Company (RTC) and Tennessee Valley Authority (TVA). I have a lot of confidence that both issuers will pay back their bond holders as scheduled. If one holds these bonds to maturity, mark-to-market value fluctuations are of no concern. Upsides: Better yields than Treasury bonds or STRIPS (on the order of +20 to +80 basis points), imputed interest is non-taxable in most states. Downsides: Hard to sell prior to maturity at a decent price (these are best for hold-to-maturity investors), purchase quantities may be quite limited.
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