Are BABs in your future?
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Date: 4/16/2010
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Source:
Investment News
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Author: John Radtke, President Incapital LLC
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http://www.investmentnews.com/article/20100419/FREE/100419891
Build America Bonds were introduced in April 2009 to create jobs and to help municipalities offset borrowing costs with a 35 percent direct subsidy from the U.S. Treasury. BABs have had a strong reception from both issuers and investors, with 1,066 separate BABs issues financing more than $90 billion in new municipal building projects.
President Obama has proposed making the BABs program permanent with a 28 percent subsidy rate at least through 2014. The administration has stated that an expanded BABs program would provide greater certainty in municipal financing and enhance retail ownership of these securities.
From an investment point of view, BABs can fit well inside both taxable and tax-deferred accounts.
With a wide range of maturities from a diversified base of issuers in 48 states, BABs are typically competitive in yield with similar quality corporate bonds. The table below is example of recent BAB issuance with yield comparisons to corporate bonds and tax free bonds in similar maturities.
Metropolitan
Nashville Convention Center
BAB Yield Comparison:
Maturity |
Nashville BAB |
Financial Index |
Industrial Index |
Nashville Tax-Free |
TEY |
UST Yields |
2016 |
4.86 |
5.23 |
5.03 |
3.39 |
5.21 |
3.05 |
2020 |
5.69 |
5.39 |
5.33 |
4.24 |
6.52 |
3.84 |
2025 |
6.21 |
5.40 |
5.41 |
4.65 |
7.15 |
4.40 |
Metropolitan Nashville Convention Center Authority BABs are rated AA3/A; Nashville’s Tax-Free Bonds are rated A2/A (Moody’s/S&P) Financial & Industrial Corporate Indices track bonds rated AA/AA Source: Bloomberg. All Yields and Ratings effective April 15, 2010 |
It should be noted that the market for BABs can vary depending on many factors, including available supply and credit quality. For example, recently issued BABs from Mooresville North Carolina (rated A3/AA-) currently trade at yields approximately 50 basis points lower than the Nashville Convention Center BABs. Washington County Oregon Water & Sewer BABs (rated AA3/AA) trade at yields approximately 100 basis points less than the comparable Nashville issues.
Taxable munis and investment grade corporate bonds are generally correlated to US Treasuries, but have additional risk considerations. Sites such as
incapital.com
and
investinginbonds.com
offer further risk disclosure for all three types of securities.
The success of the BABs program has created a viable alternative for fixed income portfolios. For most financial advisers, BABs are likely to become an asset class worth considering for taxable bond allocations.
John Radtke is the president of Incapital LLC, a securities and investment banking firm based in Chicago, Boca Raton, and London. Incapital underwrites and distributes fixed income securities and structured notes through over 900 broker-dealers and banks in the US, Europe and Asia.
Please consult your financial advisor prior to investing any money in these or other products. These products are offered through many but not all broker-dealers. This information does not constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there be any sale of those securities, in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful. Certain products are offered by prospectus or offering circular only. Product suitability must be determined for each individual investor. Some
Risk Considerations
concerning BABs include: Liquidity Risk, Interest Rate Risk, Credit Risk and Subsidy Risk.