Interest-producing investments
Agency Bonds
Debt issued by government-sponsored enterprises and federal agencies — close to Treasury credit, usually a little more yield, often callable.
Agency bonds are debt securities issued by government-sponsored enterprises such as the Federal Home Loan Banks, Fannie Mae, Freddie Mac and the Farm Credit System, or by federal agencies like Ginnie Mae. Most GSE debt carries an implied rather than explicit federal guarantee, so it yields slightly more than Treasuries. Many are callable or step-up structures, and interest from certain issuers is exempt from state and local income tax.
Interest from lending Truly passive
The labels above place this income type before you read a word. The first is the mechanism — how the money actually reaches you, whether by lending it out, owning a slice of something, renting an asset, licensing a right, selling an option or owning a business somebody else runs. The second says whether the income keeps arriving on its own once it is running, or whether it needs work from you to keep coming. Both are descriptions of how the thing is built, not verdicts on it.
How it works
Government-sponsored enterprises are chartered by Congress to support specific credit markets — housing through Fannie Mae and Freddie Mac, farming through the Farm Credit System, regional bank funding through the Federal Home Loan Banks. They fund their lending by issuing debentures to investors rather than taking deposits.
The guarantee behind that debt is not uniform. Ginnie Mae securities carry the explicit full faith and credit of the United States. Fannie Mae and Freddie Mac debentures do not; they rest on an implied backstop that markets have priced as nearly as good as a Treasury guarantee, without the contract to prove it. That implied backstop was tested in 2008, when both enterprises were placed into federal conservatorship and their debt was supported — an outcome of policy choice, not a promise in the bond documents.
Agency debentures pay a fixed semiannual coupon and return principal at maturity, structured like a corporate bond. They are distinct from agency mortgage-backed securities, which pass through monthly principal and interest from underlying mortgages instead.
A large share of the debenture market is callable, letting the issuer redeem on stated dates after a short lockout, and step-up notes raise the coupon on a schedule but are almost always callable too, so the higher later coupons are rarely reached.
What it pays
Yield is quoted as yield to maturity and, for callable paper, as yield to call and yield to worst — the worst-case number is the one that reflects reality. It sits above the matching Treasury by a spread that compensates for the implied-guarantee gap, thinner secondary liquidity, and, on callable structures, the value of the call option sold to the issuer.
Most of that extra spread on a callable agency bond is payment for the option, not for credit risk, a distinction that a simple yield table does not show. Spreads widen when agency funding markets come under stress and narrow when they do not, often independent of how the issuers themselves are performing.
State tax treatment depends on the issuer: interest from the Federal Home Loan Banks, the Farm Credit System, and the Tennessee Valley Authority is generally exempt from state and local income tax, while Fannie Mae and Freddie Mac debenture interest is not.
Longer maturities and shorter call lockouts both push the quoted yield higher, which is why the highest-yielding name on a screen is usually the one most likely to be called away early.
Costs and taxes
New-issue agency bonds are commonly sold through brokers without an explicit commission, though secondary-market purchases carry a dealer markup embedded in the price rather than itemized separately.
Interest is fully taxable at the federal level and reported on Form 1099-INT. Whether it escapes state and local tax depends entirely on the issuer, so a single account statement listing several agency bonds can mix state-exempt and state-taxable interest side by side.
Original issue discount and bond premium amortization rules apply as with any other bond, and step-up notes require extra care because the coupon itself changes over the life of the bond, complicating yield calculations.
A bond purchased at a premium and then called at par produces a loss on the unamortized premium unless that premium has been amortized against income, which makes the call schedule on premium callable agencies worth checking before purchase. Gains and losses on sale are capital in character.
Liquidity and time commitment
Large benchmark agency issues trade with reasonable depth; small structured callable notes can be difficult to exit at a fair price, sometimes trading only by appointment with the original dealer.
The market is over-the-counter and dealer-driven, so retail-sized lots typically transact at a wider spread, or concession, than institutional blocks.
Holding to maturity removes price risk from the equation, but the issuer's call right means the effective holding period is not actually within the investor's control.
Callable positions require a light touch of monitoring: a call notice arrives with a short window and the principal returns whether or not that timing suits the holder. Beyond that, effort is minimal — coupons post automatically and there is no ongoing reporting beyond the annual 1099.
How it goes wrong
Call risk dominates the downside. Rates fall, the issuer refinances at a lower cost, and principal is returned exactly when reinvestment options have gotten worse. The attractive headline yield never materializes over the horizon originally assumed.
The mirror image is extension risk: if rates rise, the bond is not called, and the holder is left with a below-market coupon for the full remaining maturity while the bond's price falls to reflect current rates.
The implied guarantee behind Fannie Mae and Freddie Mac debt is not a contract. Conservatorship in 2008 protected debt holders, but preferred shareholders in the same enterprises were largely wiped out — a reminder that debt and equity in the same issuer can have very different outcomes under stress.
Structured agency notes with unusual features can be difficult to value and considerably harder to sell than a plain debenture from the same issuer, and buying a step-up at a premium only to see it called at the first date can turn an appealing coupon into a negative total return. Assuming state-tax exemption applies to all agency paper is a common and avoidable mistake.
What to remember
- Agency bonds are debentures issued by GSEs and federal agencies; only Ginnie Mae carries an explicit federal guarantee, while Fannie Mae and Freddie Mac rely on an implied one.
- Most of the extra yield over Treasuries on callable agency debt pays for the call option sold to the issuer, not for credit risk.
- Call risk and extension risk work in opposite directions: falling rates trigger calls that return cash early, rising rates leave the bond outstanding at a stale coupon.
- State tax exemption applies to FHLB, Farm Credit, and TVA debt, but not to Fannie Mae or Freddie Mac debentures.
- Benchmark issues are liquid; small structured or step-up notes can be hard to sell at a fair price.
- The 2008 conservatorship showed the implied guarantee can hold for debt holders even while it fails for equity holders in the same enterprise.
This page explains how the income type works, which does not change from week to week, so it deliberately carries no rate and no price. The links below go to the pages that hold the current figures for it, each one stamped with the date the data was pulled. Read the mechanism here first: the numbers there are far easier to judge once you know what they are measuring.
See the live numbers: Bonds.
Frequently asked
Are agency bonds guaranteed by the US government?
Why do callable agency bonds show higher yields?
Is agency interest exempt from state tax?
How are agency bonds different from agency mortgage-backed securities?
Written for information only. Nothing here is investment, tax or legal advice, and no page on this site recommends buying or selling anything. Rules and tax treatment change; verify anything that matters with a professional who knows your situation. This explainer was drafted by a language model (claude-sonnet-5) from an editor-approved outline and fact sheet, under the rules set out in our editorial policy, and carries no market figures. Last updated Jul 29, 2026.