Build America Bonds

A product of the 2009 economic stimulus package passed by Congress, Build America Bonds are one of the most popular bond offerings today.  These unique bonds capture elements of US Treasuries and local municipal debt that make them attractive to investors.

What Makes Build America Bonds like Municipal Debt?


Build America Bonds are issued by communities to fund “shovel-ready projects,” or those that are ready to begin as soon as funding is available.  Therefore, whereas a Treasury bond purchase might fund new fighter jets or someone's social security benefits, Build America Bonds are likely directly financing some new improvement in your locality.

Build America Bonds are issued in $1,000 denominations, a sharp contrast to $10,000 Treasury denominations, making diversification possible with even a very small portfolio.   Likewise, a number of brokers sell Build America Bonds alongside more popular and established offerings, so the selection is as thick and diversified as any other asset class.

However, unlike municipal bonds, Build America Bonds are very much taxable, and they do not have the same tax-free advantages of simple municipal debt obligations.  However, their higher yields and greater safety factors help make up for their lack of tax benefits.


Interest Subsidization


One characteristic that helps define Build America Bonds against a backdrop of municipal debt is the direct interest subsidy from the Federal government.  Whereas the Federal government does not back municipal debt, 35% of the interest paid on a Build America Bond comes directly from the Federal Treasury's coffers.  The subsidization by the Federal government gives investors additional confidence the bonds will be repaid, as well.

The idea behind Build America Bonds was that by reducing the interest expense, cities would be more likely to invest in long term infrastructure projects that could create jobs.  And invest they did!  A number of cities, who saw subsidized rates and over-subscription by investors, issued hundreds of millions more in Build America Bonds than was initially expected.

Build America Bond ETFs


As individual investors to institutional investors piled into the new asset class, fund companies started to look for unique ways to bring these unique products to the market.  PowerShares, an exchange-traded fund issuer, was the first to create a Build America Bond fund that would be made up in entirety of special bonds.  That fund trades under the ticker symbol BAB, and several hundred thousand shares change hands daily, attesting to their popularity.


Build America Bond Round Up


All told, Build America Bonds are a unique product that makes a great addition to any portfolio.  Since they are subsidized 35% by the Federal government, they also make a get product to bridge the gap in risk between ultra-secure, but taxable US Treasuries, and the less secure but tax-free municipal debt. 

The easy entry, easy exit exchange-traded platform is a perfect way to score exposure to a number of Build America Bonds cheaply, as well as strengthen your portfolio with more diversification.  Next time you find yourself on the hunt for new fixed income products, give Build America Bonds a second glance.
Tim Ord
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