As posted by: Wall Street JournalThe U.S. government is now in the farm- and construction-equipment business.
The Federal Deposit Insurance Corp. backstopped $2 billion of debt issued by farm-equipment maker Deere & Co. on Tuesday, a tangible sign of the government's unprecedented push into the private markets.
The offering, which is guaranteed by the FDIC's Temporary Liquidity Guarantee Program allowed Deere's credit arm to pay under 3% interest on its borrowing. That saved the firm tens of millions of dollars, compared with over 5% yields on some of its current, non-FDIC-backed debt, according to MarketAxess. The credit unit helps finance farmers' purchases of tractors and other machines.
The deal comes as the Federal Reserve threw all of its weight behind its efforts to spur the economy and stem a deflationary spiral. The central bank moved interest rates to near 0% and pledged to use "all available tools" to combat a deepening recession. The step sent investors further into the safety of Treasury bonds. The 10-year Treasury rose in price by 1 19/32 points,or $15.94 per $1,000 invested, to yield 2.4%. T-bills that mature in one month remain at yields close to zero.
"We are an eligible U.S. savings-and-loan holding company and, therefore an eligible entity and a participant under the TLG program by virtue of not electing to opt out of the TLG program," Deere said in its bond prospectus.
Thus far, Deere is an unusual entrant to this program, though General Electric Capital Corp., which also finances commercial-lending operations, and American Express Co., which funds consumer credit, also have used the program to access funds. Most of the borrowers have been large banks like Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and Bank of America among others.
But companies such as Deere -- which maintain small, industrial banks used to finance consumer purchases -- will increasingly tap FDIC-backed markets. Over time that will makes the U.S. government a guarantor of debt used to make loans for everything from tractors and cars to credit cards and construction projects.
Absent FDIC-backing, credit markets remain mostly closed. They are extremely expensive for even the highest-quality borrowers, with bonds pricing at more than 7% interest. Investors also are flocking to this new FDIC insured debt market where they can buy bonds with guarantees as good as Treasurys but at three times the yields.
By comparison, the three-year Treasury bond ended Tuesday at 0.9%. Credit-rating companies rate all FDIC-backed debt triple-A, the highest credit ratings available.
Over $67.9 billion of the bonds backed by the FDIC have been sold since Goldman Sachs was first with a $5 billion offering Nov. 25. Issuers have until June 30, 2009 to sell the debt, which must mature in three years or less.
Illinois Muni Bonds Are Hit by Scandal
Amid the scandal plaguing the governorship of of the state, investors in Illinois municipal bonds were mostly scared off from investing in $1.4 billion of state bonds used to pay state employees and meet other obligations.
Illinois got the deal done Tuesday after delaying it last Thursday, but only because J.P. Morgan Chase & Co. bought the entire $1.4 billion at a cost to the state of about 4% in an auction that included bids as high as 8.5%, according to people familiar with the deal.
Investors balked at the deal in part due to the charges of fraud and bribery brought against the state's governor Rod R. Blagojevich, a notice about which leads the official notice for the offering that investors would review. Investors were also concerned because ratings firms deemed the offering less than pristine, which surprised investors who are used to a higher rating for the state of Illinois.
"None of the allegations have any relationship to or impact on the State of Illinois' cash position, the need for short-term financing or the ability of the State to repay the short-term financing," writes Ginger Ostro, a director in the governor's office of management and budget.
Treasurys Rally
Prices of Treasurys jumped across the board after the Federal Reserve signaled plans to keep interest rates low while using all tools available to aid growth as it concluded the last monetary policy meeting of the year. John Deere has many products besides tractors including: John Deere Ag Equipment, John Deere Golf & Turf Equipment, John Deere Parts, John Deere Used Parts, John Deere Lawn & Garden Equipment, John Deere Construction Equipment, John Deere 6x4 Gator, John Deere Clothing, John Deere Gifts, John Deere Collectibles, John Deere Toys, John Deere T Shirts, John Deere Hats, John Deere Caps, John Deere Pink Clothing, Pink John Deere, Pink JD and John Deere Women's Clothing. Yields on two-, five-, 10- and 30-year maturities hit record lows. The 10-year note rose 1 19/32 points, or $15.9375 per $1,000 invested. Its yield fell to 2.364% from 2.535% as bond yields fall when prices rise.
