What Is a Federal Agency? Definition, Purposes, and Bond Issues

Federal agencies are government organizations created to carry out specific functions that require specialized expertise or close oversight. They are typically established by Congress but can also be created or reorganized by presidential action. Agency heads are often appointed by the president and confirmed by the Senate.

Main purposes

• Regulate industries and enforce laws (financial regulation, environmental protection, consumer safety).
• Manage public resources and programs (housing, agriculture, transportation).
• Provide specialized services and support (small business assistance, mortgage insurance, disaster relief).
• Address national security and public safety concerns.

Examples of agencies and programs:
* FDIC (deposit insurance)
* Ginnie Mae / GNMA (guarantees mortgage-backed securities)
* FHA (mortgage insurance)
* SBA (small business loan programs)
* Fannie Mae and Freddie Mac (government-sponsored enterprises that support the secondary mortgage market)
* Federal Home Loan Banks and Federal Farm Credit Banks (funding for housing and agriculture)

Federal agency securities (agency bonds)

Some federal agencies issue or guarantee securities such as bonds. Agency securities generally promise periodic interest payments and return of principal at maturity. Compared with U.S. Treasury securities:
* Agency bonds are often less liquid, so they typically pay a slightly higher yield than Treasuries.
* Certain agency obligations carry an explicit government backing; others rely on an implicit government guarantee.

Agencies that guarantee or back securities include entities like Ginnie Mae (GNMA), FHA, and the SBA.

Government‑Sponsored Enterprises (GSEs) vs. Agency Bonds

Government‑sponsored enterprises are chartered by Congress to serve public policy goals but operate as separate corporations. Common GSEs:
* Fannie Mae (Federal National Mortgage Association)
* Freddie Mac (Federal Home Loan Mortgage Corporation)
* Federal Home Loan Bank system
* Federal Farm Credit Banks Funding Corporation

Key distinctions:
* GSE securities are not fully guaranteed by the U.S. government in the same way some agency obligations are. They therefore carry credit and default risk.
* Because of that risk, GSE bond yields are typically higher than Treasury yields.
* GSEs are significant players in the mortgage market and in providing liquidity to housing and agricultural finance.

How agency securities are used

• Mortgage loans are often packaged and guaranteed with agency or GSE-backed securities.
• Agency securities are used as collateral in Federal Reserve operations and in the broader financial system to supply liquidity.
• Proceeds from agency and GSE securities fund public-purpose lending (low-cost housing, small business loans, farm credit, veterans’ loans, etc.).

Key takeaways

• Federal agencies are specialized government bodies created to regulate, manage, or support specific public functions.
• Some agencies issue or guarantee securities; the level of government backing varies (explicit vs. implicit).
• Agency bonds tend to offer slightly higher yields than Treasuries due to lower liquidity; GSE bonds typically offer higher yields because they carry credit risk.
• Agency and GSE securities play a central role in housing finance and in the collateral framework of the banking and Federal Reserve systems.