U.S. Government Agency Securities

While these types of securities are not issued directly from the U.S. government, they do carry some federal guarantees. Some of the agencies that issue these securities are the Federal National Mortgage Association (commonly referred to as Fannie Mae), the Government National Mortgage Association (Ginnie Mae), Federal Farm Credit Bank, Federal Home Loan Mortgage Corporation (Freddie Mac), and the International Bank for Reconstruction and Development (World Bank). Typically, the yields on these securities are greater than regular U.S. government securities.

PASS-THROUGH SECURITIES. These securities, also known as participation securities, are characterized by participation in a pool of assets from which investors receive certificates documenting their claims in the underlying assets. The most common of these are the Ginnie Mae pass-throughs. These certificates entitle investors to acquire high mortgage yields with both the principal and interest payments guaranteed by the federal government.

An important characteristic of these securities is that, unlike corporate or muni bonds, T-notes, and T-bonds, a portion of the principal is repaid with every interest payment as the underlying mortgages in the asset pool are amortized by the borrowers. This way, the investor is receiving a higher level of secure income. However, pass-through securities are highly susceptible to interest rate risk. As the interest rate drops, borrowers are more likely to refinance their debt, thus paying off the mortgages and returning the principal to the participation investors. The investors would then have to reinvest this money at a lower interest rate.

There is a number of different types of pass-through securities. Participation in pools of mortgages is called mortgage-based securities and participation in pools of consumer loans is called assetbacked securities. Collateralized mortgage obligations are a type of mortgage-based securities, but they may have some different investment characteristics.