This response from Andy Gilbert after my comments about community banks.
“In your commentary on small banks you mentioned that the farm credit system gets its money from selling bonds with a government guarantee. That is not true- the farm credit system does get money by selling bonds, but the government does not guarantee farm credit system securities. Please mention this and correct your error.”
Andy, while you are correct about FCS bonds not having a federal guarantee, that is not what I actually said. As they used to say, let’s go to the tape.
To be sure backing is a weasel word, with an ambiguous meaning. I used it on purpose however.
First some disclosure, I have never been a customer of farm credit, only my local bank. I have spoken often to farm credit groups and one of my best friends was the chairman of the farm credit administration board. I don’t have any issues with farm credit one way or the other.
That said, I used the word backing because the FCS is what is called a government sponsored enterprise – a GSE. While you are correct that their bonds are not government guaranteed there are other considerations. The FCS board is appointed by the president and approved by congress, congress writes their operating rules, and the FCS enjoys tax advantages banks do not – specifically no federal income tax on mortgage interest. Most of all there is clear history when the u-s government has essentially guaranteed FCS debt – in 1987 to the tune of 4 billion dollars.
All of this leads investors to presume government-quality risk. Notice this comment on a bond investment organization website: “gses benefit from a perceived tie”
Finally, look at the pricing or spread between FCS bonds compared to highly rated corporate bonds. Bonds are priced very close to treasury debt only when the risk is seen as very close to treasury debt. In short, FCS bonds are not “guaranteed”, but I think government-backed is not too far from the mark.