Being devoted to investing for current income with maximum safety, I’m a firm believer in federally insured CDs.
But I’ve also acquired a taste for 3%-plus yields, having participated in Pentagon Federal Credit Union’s ongoing 3.04% APY 5-year CD promotion.
Unfortunately, I’ve hit my NCUA insurance limit at PenFed and expect no one else to offer a 5-year CD yielding 3% or more anytime soon.
So, I’ve been seriously looking at investments a notch or two higher on the risk scale: federal agency bonds.
Agencies include the obligations of four so-called government-sponsored enterprises — the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal Home Loan Banks (FHLBs) and the Federal Farm Credit Banks (FFCBs).
These issuers are treated by rating agencies as “directly linked to the rating of the U.S. government,” and their senior long-term debt is accorded the same credit rating as Treasuries — Aaa by Moody’s and AA+ by Standard & Poor’s.
They present greater credit risk, however, than Treasurys and insured CDs because bonds of these GSEs are not backed by the full faith and credit of the United States.
Further, there’s significant interest rate risk posed by longer maturities, which, in the case of 3%-plus yields, means something like 10 years.
The market here is vast and deep.
For example, both new-issue and secondary-market agencies can be readily bought and sold online through Fidelity Investments and Vanguard Brokerage.
But there’s substantial market value risk, because they can only be liquidated before maturity by selling them.
(Unlike most CDs — even brokered CDs — they don’t carry a “survivor option” permitting repayment at face value when the owner dies.)
Given my innate aversion to risk, I’m only experimenting with agencies on a small scale, with strict guidelines.
First, because of their political radioactivity, I won’t touch Fannie Mae or Freddie Mac, the two government-owned companies that finance most of today’s mortgage market.
Second, I’m limiting purchases to bonds protected from early call by the issuer.
Third, with my current income objective and hold-to-maturity philosophy, I’m restricting myself to securities offered at or just below par, or face value, never above par.
This pretty much means new-issue, or at least recently issued, securities.
Thus, I just purchased online, through Fidelity, a non-callable FFCB Bond maturing in August 2024, with a coupon of 3.60% and a current yield of 3.61%.
The highest-yielding new-issue, 10-year, non-callable CD then being offered on Fidelity (CIT Bank) was at 3.30%.
To repeat, I’m only testing the waters and proceeding with caution.
But I am proceeding.