High-yield twins: agency bonds are as safe as Treasuries, yet offer more kick.

There are few things as secure as Treasury bonds. Named after the department in Washington that issues then, they're backed by the most trustworthy borrower of all time--the U.S. government. To sweeten the deal, the interest they pay has flirted with as much as 7% several times this year. So how do you beat chat?

The answer by buying government agency debt. Over the years, as the federal budget deficit has expanded, a host of bureaucratic outfits--ranging from the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), which might have helped you get your first home, to the U.S. Postal Service--have issued bonds. Like Treasuries, agency bonds pay interest every six months and have virtually no credit risk. Washington implicitly stands behind the debt obligations of various government agencies and, as you probably know, Uncle Sam has yet to default. The rating on all agency debt is virtually risk-free. "Except in inflationary times, if you want absolute safety of your principal, this is what you invest in," says Jarius DeWalt, a vice president at M.R. Beal & Co. in New York.

Wall Street pros also love the fact that agency bonds give you a bit more zip for the buck. As of late June, five-year Treasuries were yielding 6.38%, whereas non-callable five-year agency debt paid about 6.62%. Agency bonds maturing in 10 years were yielding 7.5%, while 15-year agency debt yielded 7.75%.

So how do you get your money into government agencies? There are two methods: you can buy them directly through an investment bank or brokerage firm, or you can invest in a mutual fund that targets agencies. The catch with individual agency bonds is the amount you have to scrape together--around $5,000, says George Benigno, an analyst at the Institute for Econometric Research in Deerfield Beach, Florida. Agencies are also a bit more difficult to trade than Treasury bonds because the marker for them is small.

With that in mind, it may be best to invest in individual agency bonds as a substitute for Treasuries when you're looking to preserve a certain amount of savings for a specific target, such as college or retirement Ask your broker to price both an agency bond and a comparable Treasury, and factor in the brokerage fees in both cases when comparing yields.

Also consider the tax implications of investing in government securities. "Fannie Mae and Freddie Mac are taxed at the local, state and federal levels," says Joan Rusch, a managing director and trader at Lebenthal & Co. in New York. At the same time, interest on bonds issued from other agencies--including the Federal Home Loan Bank, the Student Loan Mortgage Association (Sallie Mae), the Tennessee Valley Authority and the Federal Farm Credit Bank--is generally not subject to city and state tax. This can make a big difference in states such as New York and California where local rates are high.

If, as an individual investor, you haven't a few thousand to invest, your easiest access to agencies will be through mutual funds. For a minimum initial investment of as little as $500, you can get into a government bond fund that invests in agencies. Mutual funds spread your money across numerous government securities with a range of maturities and yields--as opposed to your purchasing just one bond with a set maturity date. Additionally, the funds you invest in a mutual fund are looked after by an experienced market professional with the expertise and research tools that will help him or her make smart choices about when it's time to buy or sell.

Bond funds are a bit trickier than stock mutual funds, however. Like bonds, government agency debt is sensitive to interest rates. If rates rise, bonds decrease in value, and the entire portfolio of a bond mutual fund will be hit. The opposite, of course, also holds true: if interest rates fall, your government bond increases in value. But your main concern will be safeguarding your principal from the ups and downs. Look for a bond fund with a low average maturity of three to five years to insulate the portfolio from shifts in interest rates.

Otherwise, it's wise to choose a no-load mutual fund, or one that doesn't charge a sales commission that's taken out of whatever gains your fund racks up over time. One no-load choice is Vanguard's GNMA (800-62-2739), which invests in Ginnie Maes or collections of home mortgages that the U.S. government packages as bonds. Banks, savings and loans and other financial institutions sell these mortgages to the GNMA, which in turn offers them to investors. Ginnie Maes pay among the highest yield of all agencies. The Vanguard GNMA Fund has a minimum initial investment of $3,000 or $l,000 for IRA accounts, and has averaged a return of 6.91% for the last five years. Another no-load choice, Fidelity Mortgage Securities (800 544-8888), has post-ed an average annual return of 7.25% over the last five years.

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DYWANE A. HALL, A BRANCH MANAGER FOR LINSCO PRIVATE LEDGER FINANCIAL SERVICES (800-514-1112) in falls Church, Virginia, says that while keeping up with the Dow Jones Industrial Average and the Standard & Poor's 500 is a good way to stay abreast of developments in the stock market, looking at other indices can give you greater insight into what's happening with different kinds of company shares. Calculated from the performance of 30 leading companies, the Dow is the oldest index, one that focuses primarily on large companies. The S&P 500 casts a broader net to include a wide range of large companies. The S&P Midcap 400 Index hones in on medium-size companies. To get a better sense of what's happening to smaller companies in technology and other up-and-coming industries, you have a choice: the Russell 2000 Index and the Nasdaq Composite Index are both good measures of smaller companies. Finally, the Wilshire 5000 Index, which blankets 5,000 stocks, gives investors the broadest overview of U.S. stocks by including almost every company traded on the New York, American and Nasdaq exchanges.