Build America Bonds Stabilizing Muni Market But Lowering Yields

Build America Bonds, the taxable muni bonds subsidized by the Treasury have helped to stabilize the municipal bond market. They may also be bringing more transparency to the municipal bond market.

The WSJ had an interesting article today entitled 'Build America' Boosts Muni Bonds.

"Muni-bond fund managers say Build America Bonds have eased a problem of oversupply and helped to stabilize the muni market. Managers hope that over time, muni bonds may offer buyers more regular and thorough disclosure as a result of selling into the taxable market.

"Build America Bonds are going to be a big part of the muni market for the next two years," said Ron Schwartz, manager of Ridgeworth Investment Grade Tax Exempt Bond Fund (trading symbol STTBX). "It's been a surprisingly good program and made the municipal market more efficient."

Build America Bonds are taxable municipal bonds which are subsidized by the Treasury.  For the most popular kind of Build America Bond, the Direct Payment, Issuer Bond, the US Treasury subsidizes 35% of the interest cost for the issuer.

In addition to helping stabilize the municipal bond market, Build America Bonds may have another advantange. The new way of investors, who are used to corporate bond disclosure, will demand the same transparency with the municipal bond market.  Until now, municipal bond financial information has often been incomplete and irregular.

For the average investor, Build America Bonds offer another alternative to the standard tax-advantaged munis.  While they do not have the same tax advantages, they offer higher rates as compensation.  And because muni bonds default at a much lower rate than their corporate cousins, investors can get corporate bond-like returns with greater security.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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