Is the Bright Line between Agency and Corporate Debt Dim?

Investors and regulators often treat agency and Treasury debt as substitutes. To evaluate the extent to which this is appropriate, we study the portion of offering yield spreads over Treasury yields not explained by standard issue and issuer characteristics for Government Sponsored Enterprise (GSE) and financial corporation debt floated during 1994-2004. GSE and corporate residual yield spreads strongly correlate, appear to reflect macroeconomic risk, and respond similarly during the Long Term Capital Management Crisis. Agency debt is surprisingly comparable to corporate debt in its response to macroeconomic risk and, on this dimension, is not a good substitute for Treasury debt.