24 mei 2023 Colin Martin
Bonds issued by government-sponsored companies can offer slightly higher yields than U.S. Treasury bonds without assuming too much additional risk for investors.
U.S. government bonds are high-quality bond investments that allow investors to earn slightly higher returns than U.S. Treasury bonds without taking on too much additional risk. We continue to advise investorsFocus on quality investing today, and the setting belongs to the directive.
Agency bonds are issued by government-sponsored corporations (GSEs). Some of the most common institutional debt issuers include, but are not limited to:
- Federal National Mortgage Association, or Fannie Mae (FNMA)
- Federal Mortgage Home Loan Corporation, of Freddie Mac (FHLMC)
- Federal Home Loan Bank (FHLB)
- Federal Agricultural Credit Bank (FFCB)
- Tennessee Valley Authority (TVA)1
For this article, we will focus only on agency-issued bonds and not mortgage-backed securities. Mortgage-backed securities are issued and backed by Fannie Mae, Freddie Mac, and the National Government Mortgage Association, or Ginnie Mae (not named in this article), but they are not the same as the traditional bonds discussed in this article.
Government-sponsored companies are not explicitly endorsed by the US government. While GSEs are believed to enjoy implicit government support, they do not enjoy the full confidence and credit support of the US government. Because agency bonds carry more credit risk (i.e., the risk that interest will not be paid on time, or, in the worst case, principal will not be paid) than government bonds, there is usually more risk if one of the issuers gets into financial difficulties. of standard.
However, the current and historically recurring debate over the debt ceiling and the risk of a US default does not necessarily affect agency bonds. They are not considered a direct obligation of the US government because the institutions and GSEs that issue them are usually self-funded. However, if one of the agencies seeks US assistance in the event of a US default (which we believe is unlikely), this could put investors in agency bonds at risk. Because the government may not be able to provide timely assistance. Way.
Given this implied support, agency bonds typically have the same credit rating as the US government, currently rated Aaa/AA+/AAA by Moody's Investors Service, S&P and Fitch Ratings, respectively.2If one or more credit rating agencies downgrade the U.S. government because of political disputes over the debt ceiling, it's likely to result in a downgrade by those agencies as well.
Despite some concerns over the years, agency bonds continue to make timely principal and interest payments. For example, Fannie Mae and Freddie Mac were taken over by the US government in 2008. Both GSEs are public companies, and the acquisition means that FHFA (their regulator) has "board, director, and shareholder powers. Merger of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac will continue to operate as commercial companies."3
Here are a few things you should know before considering agency bonds.
1. Low yield advantage over government bonds
Because these institutions are not explicitly backed by the US government, they typically offer higher yields than US government bonds. This additional yield is called a "spread" and fluctuates with market conditions.
During the financial crisis of 2008-2009, spreads widened, especially when Fannie and Freddie were acquired. While these institutions continued to pay principal and interest on time, this was not well known in 2008 and investors were understandably nervous, with the average spread as high as 1.75%. Spreads peaked again in March 2020, but quickly narrowed due to swift government intervention.
The average spread on the Bloomberg U.S. Institutional Index is only 29 basis points, or 0.29%, meaning investors aren't getting much higher returns than US Treasuries compared to history. The chart below shows that average index spreads have rarely dropped below 0.25% until recently. While the average spread on the index is above recent lows, it is below its 20-year average of 0.42%.
However, that doesn't mean investors should ignore these settings. As we'll see below, it may make more sense to focus on specific maturities with more attractive yield benefits.
The advantages of the returns offered by institutions over government bonds are relatively low
Source: Bloomberg, based on weekly data through May 23, 2023
Bloomberg US Institutional Index (I09459 Index). The option-adjusted spread (OAS) is a measure of the spread between a fixed income security and its risk-free rate (for example, US Treasury corporate bonds). at the options.Past performance is no guarantee of future results.
2. The relative attractiveness of government debt varies by maturity
Short-dated agencies offer relatively similar yields to US Treasuries, only beginning to provide a significant yield advantage after about 2 years, as shown in the yield curve chart below.
Note that the proxy returns below are averages. There are many different institutional issuers, each of which may have a maturity around the same date; in other words, there is not necessarily a two-year or five-year "benchmark" institutional bond. On average, however, institutions with a term of less than two years do not appear to have much value.
For investors considering ultra-short-term investments, certificates of deposit (CDs) often offer higher yields than government and agency bonds. While agencies are government-sponsored companies, they do not enjoy the full trust and credit of the United States government. CDs are issued by banks but are covered by FDIC insurance (with a limit, of course) and are therefore considered high quality.4
Institutions typically offer a more pronounced return advantage for medium to long maturities.
Fuente: Bloomberg, al 23/05/2023
US Treasury asset curve (YCGT0025 index) and US agency BVAL yield curve (BVSC0131 index). The Treasury Curve consists of active U.S. Treasuries denominated in US dollars. The curve is updated each auction day with an effective date for the following trading day. The institutional yield curve is constructed daily using bonds with BVAL prices at market close. The BVAL curve is completed by US dollar denominated fixed rate senior unsecured bonds issued by US agencies.Past performance is no guarantee of future results.
3. “Tradeable” institutions typically offer higher returns but carry bullish risk
A callable bond allows the issuer to "call back" or redeem it before a certain maturity date. Call dates and prices are usually known in advance, but can vary.
Publishers often include calling functionality for added flexibility. If interest rates fall after a bond is issued, it may allow the issuer to issue new lower-yielding bonds and use the proceeds to "buy back" higher-yielding bonds.
Investors typically face reinvestment risk when callable bonds are repossessed, as they may need to reinvest those funds in lower-yielding bonds. Callable agency bonds generally issue slightly higher yields than non-callable bonds to offset the surrender and reinvestment risks.
Callable institutions tend to issue in smaller transactions compared to non-callable institutions, often resulting in lower liquidity. This can pose a risk if an investor needs to sell a callable bond before maturity, as there may not be as many potential buyers as the larger non-callable bond.
Callable bonds can have some advantages, such as the higher yields they usually offer. If the return does not fall after investing, you may end up earning a higher return than if you invested in a bad bond. Even if a bond is redeemed early due to falling interest rates, the returns achieved during that period may exceed those of other investments of the same short duration.
When considering redeemable bonuses, be prepared for any outcome. In other words, it may be paid off, and then you have to replace the so-called bond with a new investment. It's also important to be prepared to hold a callable bond to maturity, as you don't know in advance if or when the issuer can walk away from it.
4. Consider taxes
There may be tax benefits for investing in some agency bonds, but not all. Agency bond income is subject to federal income tax when held in a taxable account, but some agency income is exempt from state and local income taxes:
- Not exempt from state and local income taxes: Fannie Mae and Freddie Mac
- Exempt from state and local income taxes: FHLB, FFCB and TVA
Keep in mind that interest on U.S. Treasury bonds is exempt from state and local taxes, so when considering Treasury billing agencies, the U.S. Treasury may offer higher after-tax returns based on agency issuance and state and local tax rates. As always, we recommend that investors consult a tax professional when considering the tax implications of any particular investment.
what should you think about now
Investors looking for slightly higher returns without taking on too much additional credit risk should consider US government bonds. While these agencies are government-sponsored enterprises, they do not enjoy the full trust and credit backing of the US government.
Callable settings can make sense for investors looking for higher returns, but investors should always be aware of the risk of calling options before expiration, which can lead to reinvestment risk. Similarly, investors should not assume that an issue will be redeemed on the first redemption date; always consider the maturity date of a callable bond and be prepared to hold it over its term.
Finally, consider the tax implications of government bonds, as some bonds may be more attractive after tax than others, especially for investors in high-tax countries.
1The Tennessee Valley Authority is a federal agency, not a government-sponsored corporation. However, your debt securities are not considered US government debt and are not guaranteed by the government. Source: Tennessee Valley Authority.
2Moody's investment grade ratings are Aaa, Aa, A, and Baa, and sub-investment grade ratings are Ba, B, Caa, Ca, and C. The S&P investment grade ratings are AAA, AA, A, and BBB, and the subgrade ratings are for investments are BB, B, CCC, CC, and C. Ratings from AA to CCC can be changed by adding a plus sign (+) or minus sign (-) to indicate relative position in the main rating. rating category. Fitch's investment grade ratings range from AAA, AA, A and BBB, and sub-investment grade ratings range from BB, B, CCC, CC and C.
3Bron: Federal Housing Finance Agency, "Fannie Mae and Freddie Mac Conservatorship History", 17 oktober 2022.
4The Federal Deposit Insurance Corporation (FDIC) is an independent agency that maintains a deposit insurance fund backed by the full faith and credit of the United States government. The aim is to protect depositors' assets deposited with banks and savings banks. The FDIC insures accounts with member banks for up to $250,000, depending on the type of property. However, all deposits held with the same FDIC-insured bank in the same capacity of owner are added together to determine the total amount of the depositor's FDIC-insured coverage with that bank.
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