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Friday, February 18, 2011

The Future of Build America Bond ETFs

Build America Bond issuance may surge next month, however, the Republican mid-term election gains could imperil the future of the program and its exchange traded funds (ETFs).
The Republican landslide in U.S. House elections may work against  efforts to extend the Build America Bond program. President Barack Obama’s stimulus has helped pump $158 billion into local public-works projects, so there are many who would like to see this program continue.

There could be a savior to the program coming: The Investing In American Jobs and Closing Tax Loopholes Act — HR 5893 — would extend BABs for two years. Also, the legislation would gradually reduce the subsidy rate for BABs from the current 35% level to 32% for bonds sold in 2011, and 30% for those sold in 2012. BABS come in a range of maturities, from 1-5 years on up to more than 25 years.

The prospect of expiration isn’t stopping new issues. State and local governments are accelerating debt sales to December and will more than quadruple borrowing under the program. Build America Bond issuance may surge next month to $40 billion as borrowers rush to take advantage of the expiration, reports Alexandra Harris for Bloomberg.

If the program does expire, the number of bonds available in the market could be limited and may negatively impact the value of the bonds, so be mindful of this situation if you’re holding these funds. There are two ways to get exposure to Build America Bonds with ETFs:
  • PowerShares Build America Bond Portfolio (NYSEArca: BAB): Yields 5.43%
  • SPDR Nuveen Barclays Capital Build America Bond (NYSEArca: BABS): Yields 5.7%
Disclosure I am Long BAB and BABS shares.

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