Even in the near-riskless world of government securities, you can find "junk bonds" and "junk notes." The more mannerly name is "high-yielding securities" -- but the only reason they're yielding more is to cover the cracks in their creditworthiness.
I'm talking here about the securities of the Farm Credit Banks, the bedrock of farm finance and the nation's largest holder of farm debt. They're junk, but very interesting junk.
The federal farm-credit system sells short-term notes and medium-term bonds in the open market. It uses that money to make loans to farmers, generally secured by the farmers' land.
Normally, Farm Credit securities pay no more than one-quarter of 1 percent more than U.S. Treasury securities. But because of the depression (no other word for it) now engulfing the farm belt, investors are starting to run scared. Their fears have driven the yields on these securities to about 1 full percentage point above Treasurys.
High-yield income investors have to ask themselves: Should I start to buy?
Safety is the primary issue, and by any normal standard these things are underwater. Thousands of farmers can't repay their debts, and their land may not be saleable for enough money to cover the mortgage.
Scandals are brewing about the dreadful accounting practices of Farm Credit Banks. As just one example, take a loan on which interest has not been paid for three years. The banks can pretend they received the interest and record the phantom payments as profit -- when in fact no money came in and the loan is bad.
In any ordinary situation, investors would have run for the exits long ago. But these are government-agency certificates, and thus important to the credit reputation of the United States. The Treasury does not guarantee Farm Credit issues. Nevertheless, they're considered moral obligations of the government, unthinkable to cut loose.
The Farm Credit Banks are preparing to ask Congress for a multibillion-dollar bailout -- more money than has ever before been stuffed into holes in the dike. But the president has been cool to the whole idea.
One congressional counterproposal would allow a bailout only if investors would accept a 20 percent loss on their Farm Credit investments.
The uncertainty has been driving many institutional investors out of the market. But other big investors have been buying in. They think that the government can't allow a default -- and if so, today's high-paying Farm Credit securities are a great buy.
Glen Parker, chairman of the Institute for Econometric Research, calls short-term Farm Credit investments "riskless" -- and advises conservative investors not to panic if they see these securities being bought by their money-market mutual funds. Adding farm issues to a short-term portfolio is, in fact, a positive sign, because it will increase the yield.
But longer term notes are "lousy," he told my associate, Virginia Wilson, "because I think there are going to be a couple of years of agony."
He doesn't foresee a default, because that would raise questions about the creditworthiness of the whole spectrum of moral-obligation government securities. But he expects the fears and hopes of investors to produce wide swings in market price. If you bought a note and had to sell it before maturity (maximum maturity on new notes is now about seven years), you might lose money.
The typical individual order for Farm Credit securities is $25,000 to $50,000, although big brokerage houses such as Merrill Lynch might take orders for as little as $1,000. But John Charlesworth, a Merrill Lynch vice president, says that a small order would carry a higher price -- wiping out much of the advantage of the higher yield.
Bottom-line advice from the experts is this: Individual investors with sizeable savings (maybe in Keogh plans of small pension funds) might want to consider the extra yield from farm-credit securities, if they can live with the interim risk. But small investors might as well keep their money in the bank.