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Types of Bonds

The Secondary Market for GSE Debt

A liquid and active secondary market in most of the GSEs’ programmatic debt issues has developed over the last few years. The enhanced liquidity of GSE programmatic debt issues, with regular and broad investor distribution, has been accompanied by an active repo and securities lending market in many of these issues.

Almost all of the programmatic issues and many of the MTNs are quoted through electronic information systems, and secondary market prices are provided by many domestic and foreign dealers. Further, a number of electronic exchanges have listed programmatic GSE debt in their systems.

It is important for investors to understand that GSE-issued MTNs are often tailored to the needs of a particular investor or class of investors. As a result, they are generally intended to be held until maturity.

The underwriter of a GSE-issued structured debt security will usually agree to make a market for a customer who wants to sell the security prior to maturity; in fact, some issuers have obligated their underwriting dealers to do so. However, the high level of customization in this market can make it difficult to find another buyer.

Still, as stated earlier, investors need to understand the characteristics of structured securities before they invest in them, particularly the ways in which their value will be affected by different interest rate scenarios and other market conditions.

In most cases, they should be prepared to hold the investment to maturity or to risk a loss of principal due to both interest rate movements and illiquid markets if they need to sell before maturity. They should also consider the potential impact of changing values if they have to mark the securities to market for financial reporting purposes.

 

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.