Agency bills?

Agency bills are short-term debt securities issued by government-sponsored enterprises (GSEs) or federal agencies to raise funds for various financial operations.
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Updated on May 28, 2024
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3 key takeaways

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  • Agency bills are short-term debt securities issued by government-sponsored enterprises or federal agencies.
  • They are used to raise funds for the financial operations of these entities.
  • Agency bills are considered low-risk investments due to their backing by government-related institutions.

What are agency bills?

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Agency bills are short-term financial instruments issued by government-sponsored enterprises (GSEs) or federal agencies. These bills are used to raise funds for the operational needs of the issuing entities. They typically have maturities ranging from a few days to one year, making them similar to Treasury bills in terms of their duration and purpose.

Importance of agency bills

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Agency bills play a crucial role in the financial markets by providing a low-risk investment option for investors. They help government-sponsored enterprises and federal agencies manage their short-term funding needs efficiently. Due to their association with government entities, agency bills are generally considered safe investments with relatively low credit risk.

How agency bills work

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Issuance: Government-sponsored enterprises or federal agencies issue agency bills to raise short-term funds. These entities might include organizations like Fannie Mae, Freddie Mac, or the Federal Home Loan Banks.

Investment: Investors purchase agency bills, providing the issuing entity with immediate funds. In return, investors receive a promise of repayment with interest at a later date.

Maturity: Agency bills typically have short maturities, ranging from a few days to one year. Upon maturity, the issuing entity repays the principal amount along with any accrued interest.

Examples of agency bills

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  • Fannie Mae and Freddie Mac: These GSEs issue agency bills to support their mortgage financing activities. The funds raised help them purchase and guarantee home loans, thereby promoting homeownership.
  • Federal Home Loan Banks: These banks issue agency bills to provide liquidity to member financial institutions, supporting housing finance and community development.

Real-world application

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Consider an investor looking for a low-risk, short-term investment option. They might purchase agency bills issued by Fannie Mae, confident in the security of their investment due to the backing of a government-sponsored enterprise. These bills provide the investor with a stable return and the issuing entity with necessary operational funds.

Understanding agency bills is important for investors seeking secure, short-term investments and for entities needing to manage short-term funding requirements. They play a vital role in maintaining liquidity and stability within financial markets.

You might also want to learn about Treasury bills, government-sponsored enterprises, and money market instruments. These topics provide further insights into the different types of short-term investment options and their roles in the financial system.


Sources & references

Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...