April 5, 2010

How Are Build America Bonds Working?

severely impaired,"-- The Treasury report notes that, "These savings are considerably greater than the net cost to the federal government of the BABs program."

As part of the American Recovery and Reinvestment Act, BABs lower the borrowing costs that states and local governments would typically pay on municipal bonds issued for capital improvements--roads, sewers, hospital or school improvements and infrastructure. The Treasury pays 35% of the interest payments on these bonds directly to the state or local governments. That saves issuers an average 31 bps for the 10-year bonds and 112 bps on 30-year bonds, according to the report.

The BAB program was intended to allow state and local governments to borrow at reduced rates and, in turn, "stimulate economic activity during the recession and to provide relief to struggling municipalities." The bonds are taxable, and for that reason may appeal to a broader investor demographic than tax-exempt bonds.

The new report focused on municipalities that have issued both tax exempts and BABs on the same day, in order to compare concerns and differences in the two types of bonds. It also looks into underwriting fees for BABs, which have declined over the past year, and are now "almost comparable to underwriting fees for tax-exempt bonds."

See full report, here.

For more on Build America Bonds, see related article, "Forecast for Municipal Debt."

Comments? Please send them to kmcbride@wealthmanagerweb.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

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