Fed farm Bonds 4.8% callable- Disclosure Question

newgirl

FFCB 4.8% 07/23/2029 Callable- cusip 3133ETDT1. ( at Schwab)
this is the disclosure - Disclosure Note for CUSIP - 3133ETDT1
Date Type Note
04/23/2025 Secured Text The Bonds are the general unsecured joint and several obligations of the Banks.
04/23/2025 Guaranteed Text The Bonds are not obligations of and are not guaranteed by the United States or any Federal Agency or instrumentality other than the Banks.
04/15/2025 New Issues on IDN information CONTINUOUS CALL BEGINNING ON 7/23/2025 @ 100%.

I understand these are likely to get called unless rates shoot up quickly - I do not quite understand the risk . I am considering this as a parking place for some cash . Is the risk worth the extra .50 basis points over treasuries ?

msf

Here's the term sheet: https://www.farmcreditfunding.com/ffcb_live/termsheet/3133ETDT1.pdf

and the complete (64 page) offering circular including risk factors:
https://www.farmcreditfunding.com/ffcb_live/pdfs/offcirc/BondAndDNOfferingCircular2024.pdf

I'm guessing that you're expecting these to get called in a month since (a) you write about parking cash, and (b) 50 basis points is the spread between 4.3% 1 month T-bills and this 4.8% bond. (Fidelity reports the spread to Treasuries (4 years) as 0.855%.) So one risk you may be facing is the possibility of being "stuck" with these bonds for a few years or selling at a loss.

The issuer has an interesting structure. It is a corporation formed by the issuing banks in order to issue bonds. Should some underlying banks fail (and the other banks be unable to service the bonds), these bonds would be junior to bonds issued by the banks individually.

The banks in turn have an interesting structure. They are ultimately owned by cooperatives of borrowers (think farms borrowing from these banks). "The [Farm Credit] System’s mission is to support rural communities and agriculture with reliable, consistent credit and financial services."

This in turn suggests a sector concentration risk that could be aggravated by government policy. This is not a tangential political statement. Rather it is written into the offering circular:

These risks depend on a number of factors, including financial, economic and political events, over which the Banks have no control, including trade policy agenda, such as retaliatory actions by other countries.

When issuers are under financial stress, they often are unable to refinance higher interest debt at market rates. Consequently, even without defaulting, stress increases the likelihood that they don't call their outstanding debt as you expect.

Do I think that all of this to blow up within a month or so (to first call date)? Probably not. Will the bonds get called "on schedule"? Don't know. Not trying to scare you here. Just taking a quick look at the risks stated in the circular.

Old_Joe

Lots of moving parts. Major sandstorm in progress. Gears may be vulnerable.