Investors looking for a way to combine investment growth with the support of local economic development may be interested in learning more about FHLB bonds. FHLB is an acronym for the Federal Home Loan Bank, a government-sponsored enterprise devoted to fostering affordable housing across the U.S. Bonds purchased through an FHLB underwriter are available for individual purchase.
Federal Home Loan Bank
The Federal Home Loan Bank is a system of regional member banking institutions that loan funds to local lenders. These funds are, in turn, used specifically to finance local economic development, home building, job creation and infrastructure. Each member institution is a shareholder of one of the 12 regional Federal Home Loan Banks. These regional banks are privately capitalized and not taxpayer supported.
FHLB bonds are issued by member institutions and guaranteed by the Federal Home Loan Bank. FHLB bonds are called agency bonds, while government issued bonds are referred to as municipal bonds. The Federal Home Loan Bank issues FHLB bonds for the purpose of increasing the amount of available funds for home mortgages and housing development. These available funds are then tapped by local lenders and sold to individuals as agency or FHLB bonds.
Agency bonds tend to pay higher interest rates than the rates attached to municipal bonds. All interest earned from FHLB bonds are exempt from state and local income-tax, but are subject to federal income tax. The bonds are sold to individuals through a network of securities dealers known as underwriters. These underwriters include well-known financial institutions that many investors may already have banking or retirement accounts with. A current list of underwriters is available through the link in the Resource section of this article.
Bonds issued through government-sponsored enterprises, such as the FHLB, are not guaranteed in the same way as bonds issued by federal government agencies. This is because these sponsored agencies are owned by shareholders and are not actual government agencies. As such, FHLB bonds carry risk of investment loss that a government-backed bond would not.
Agency bonds are issued in a wide range of structures each defined by the originating institution. Structures might include a zero-coupon note that has a maturity date ranging from overnight up to 360 days, as well as other bonds with maturity dates of a year or more. Agency bonds may be issued as non-callable or as callable. Callable bonds, also referred to as redeemable bonds, allow the bond issuer to redeem the bond before the maturity date.