Why Agency Bonds Were Considered Treasury Benchmark Substitutes
Summary
Fannie Mae and Freddie Mac debt attracted attention as a possible substitute benchmark for long-dated US Treasury bonds when Treasury supply was shrinking. As government-sponsored enterprises, the two agencies were widely believed before the financial crisis to have an implicit government backstop, giving their debt credit quality thought to be close to that of Treasuries. The crisis led to their conservatorship, and their debt later received an explicit government guarantee.
The answer links the agencies’ benchmark appeal to Treasury buybacks and a pause in issuance of 30-year bonds during part of the early 2000s. Agency debt continued to be issued, providing more observable prices at the long end of the yield curve. Dealers developed agency curves, and exchange-traded futures contracts were introduced. The episode was temporary: agency debt never achieved lasting benchmark status, and later growth in Treasury issuance reduced the pressure that had prompted interest in alternatives. The account describes historical market structure and perceived credit support, not a general claim that agency bonds and Treasuries are interchangeable.
Key ideas
- Government-sponsored status led investors to expect an implicit government backstop for agency debt before the crisis.
- Fannie Mae and Freddie Mac entered conservatorship during the crisis, after which their debt was explicitly guaranteed.
- Reduced long-dated Treasury supply increased interest in agency debt as a benchmark reference.
- Agency issuance supported curve construction and futures trading, but the debt did not become a lasting benchmark substitute.
- The comparison reflects historical conditions and does not make agency debt identical to Treasury securities.
Tags
Full text
# Fannie Mae and Freddie Mac as substitute benchmark bonds # Fannie Mae and Freddie Mac as substitute benchmark bonds > "The reduction seen in US government debt in the late 1990s has led to a redution in the supply of intermediate and long-term government bonds, and some concern has arisen over this fact. In the United States, some efforts have been made to promote the long-term debt of Fannie Mae and Freddie Mac as substitute benchmark bonds." This comes from a passage connected to US treasury bond futures. I cannot understand why Freddie Mac and Fannie Mae have been chosen as closest to government debt? Didnt one of them go bust in the recession making them not quite default free (as one usually assumes in US debt)? ## Answer by Helin (score 2, accepted) https://quant.stackexchange.com/a/22419 Since Freddie Mac and Fannie Mae are government sponsored enterprises (GSEs), the government guarantee was considered "implicit" before the financial crisis. As such, the credit quality of their papers was believed to be almost as high as US Treasuries. This assumption pretty much turned out to be true. Both Fannie and Freddie were taken into conservatorship during the financial crisis, and now their debts are explicitly guaranteed by the US government. The reason why people were so excited about agencies back in the early 2000s was because of the Treasury buyback, which was reducing Treasury supplies. In fact, the US Treasury didn't issue any 30-year bonds between 2002 and 2006. By early 2006, the longest Treasury bond had only 24 years to maturity. By contrast, there was a steady supply of agency debt, providing more pricing information at the long end of the yield curve. So agencies got a lot of attention as a potential benchmark. Dealers began to build agency curves. CBOT even had futures contracts on agencies. Of course, agency papers never really reached the benchmark status. The US government soon began to run deficits again and Treasury issuance grew substantially in the ensuing years. Today, agency debt is a shell of its former self....
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