EATON VANCE BUILD AMERICA BOND EBABX [Y]
PowerShares Build America Bond BAB [Y] [Invesco Guide]
Kiplinger Munis' worthy rivals Feb 2010
The muni market is changing rapidly. If Congress extends the BAB program beyond its scheduled close at the end of 2010 — and the lobbying to extend it is fierce — the traditional tax-free market will shrink, and BABs will likely become the dominant factor in the muni-bond market in the future
If you’ve avoided munis because you don’t need a low-yielding, tax-free investment, you might find the Build America Bonds useful. They fit well inside a tax-deferred account, such as an individual retirement account.
But what if you’re retired, prefer tax-free income and spend the interest as soon as it arrives? Then you’re probably unhappy. Bond brokers and fund managers say it’s tough — and getting tougher — to find new, high-quality, long-term tax-exempts with generous yields.
All this began as part of the government’s massive stimulus program. The centerpiece of BABs is a federal interest subsidy that works in one of two ways. In one variety, the bondholder gets a federal tax credit of 35% of the interest income every year for the life of the bond, regardless of tax bracket. In the second, which is quickly becoming the more common type, the Treasury directly pays 35% of the bond issuer’s interest cost. (Zenmcsqr - BAB only does latter)..
That means that when Pennsylvania sells those 20-year BAB bonds at 5.45%, the Treasury (meaning taxpayers from all over the nation) picks up enough of the interest tab so that Pennsylvania actually pays a net of 3.5%. But you, the investor, get 5.45%, a yield that is in the ballpark of current interest payments on single-A-rated corporate bonds maturing in 15 to 20 years from companies such as Archer Daniels Midland, Deere and Halliburton.
The feds, and this is important, do not insure or guarantee any BAB principal or interest payments. State and local governments and their entities still have to make good on their obligations. BABs carry ratings from triple-A to just above junk. Some of the bonds are backed by taxes and others by revenues from tolls, water bills or whatever.
Once you cut through the politics and the financial gobbledygook, you can almost imagine BABs to be a new kind of corporate bond — except that the “companies” that issues the bonds run states, cities, toll bridges and school systems, and are owned by taxpayers rather than by stockholders.
You can find BABs listed for sale at places such as the Schwab and Fidelity online bond markets. If you plug “Build America Bonds” into your favorite search engine, you should find a schedule of new issues in registration. BAB mutual funds are also appearing. One is Eaton Vance Build America Bonds Fund, a load fund with multiple share classes (EBABX is the most common version). PowerShares Build America Bond Portfolio (BAB) is an exchange-traded fund that buys these bonds. Both are too new to judge, but I’d caution investors that BABs funds may be more volatile than the typical muni-bond fund because of their wider ownership base.
Build America Bond ETF and Interest Rates , December 2009
Powershares sent around an ETF report that included a lot of information on their new Build America Bond ETF. I am favorably disposed to the segment and the fund but do think that, at a minimum, it needs a few months of trading under its belt before I would be comfortable buying some.
In the report, there was a table of correlations to other asset classes and other bond market segments. A crucial element of portfolio construction is the interaction of one thing with the other things in the portfolio. Part of this understanding comes from looking under the hood (if we are talking about an ETF), but some must also come from observing actual trading. It is OK to give a fund a few months to build a little track record without you. The fund will still be there in six months.
Chances are the numbers in the table are not a shock to anyone, but it is still instructive. It has a 0.89 correlation to ten year treasuries, and it looks as though the index underlying BAB yields quite a bit more than the ten year, however.
This serves as a warning of sorts. Even after a noticeable move up in rates in the last few days, 3.68% is a very low number by historical standards. Additionally the current environment of debt issuance creates a visible path to higher rates.
The above does not ensure higher rates; it just creates visibility. If ten year treasury rates do go up then the prices will go down and based on the history of the index underlying BAB so too will build America bonds. As a rule of thumb, an 100 basis point increase in yield works out to about an 8% drop in price, though obviously it could be a little more or a little less with an ETF. The difference with an ETF is there is no par value to collect at maturity.
According to Yahoo Finance, the ten year yielded 6% or more the vast majority of the time from 1969 to 1997. Although Yahoo Finance does not go back past 1962, yields were generally lower than 6% most of the time before that in the 20th century.
You can decide for yourself what normal is, whether rates are going higher or not and if they do go up how much, but it should be clear that if rates go up BAB will feel that pain. Owning BAB means believing rates will not go up or being willing to actively follow the interest rate market and being willing to take action of some sort if rates do start to rise in a meaningful way.
Funds Bet Build America Bond Deal Gets Extended, November 17, 2009
NEW YORK — Eaton Vance Corp. and Invesco Ltd. launched on Tuesday the first-ever mutual fund and exchange-traded fund focusing on Build America Bonds, judging investors and lawmakers will keep showing interest in these new, taxable municipal securities.
Invesco's (IVZ: 19.3, -0.89, -4.41%) PowerShares Build America Bond ETF (BAB: 24.88, 0.05, 0.2%) and Eaton Vance's Eaton Vance Build America Bond Fund (EBABX: undefined, undefined, undefined%) seek to give retail investors easier ways to invest in a new type of bond that carries the lower risks of municipal debt with the higher yields of corporate debt.
Since a special government program started in April, municipalities have issued an estimated $48 billion in what's known as BABs, garnering healthy demand for the securities. Among the top issuers of the securities so far, California takes the cake, having sold $6.75 billion already, according to Merrill data. The Los Angeles Unified School District has issued $1.69 billion.
There are questions hanging over the program and investments built around it, however. The BABs program is scheduled to expire at the end of 2010. That means the supply of new debt for these funds could dry up in about a year. But some analysts anticipate lawmakers will extend the program, as they have for the popular first-time homebuyer's tax credit. Fischer (Merrill Lynch) expects more than $60 billion to be sold by the end of the year, with another $60 billion coming next year.
If it's not extended, the ETF says its board could change the fund's investment strategy to invest in an index composed of taxable municipal securities beyond BABs.
There are other ways to get exposure to BABs. Taxable bond funds are already able to buy BABs, and some diversified managers have, including the Dodge & Cox Income Fund (DODIX) , which has 1% of its assets in some of California's BABs, according to Morningstar.
Tax-exempt market boosted
If new BABs issuance ends, the existing bonds become more scarce and appreciate in value, noted Domenic Vonella, a municipal-bond analyst at Thomson Reuters.
"If there is no more issuance, demand for long-term BABs is going to increase," he said.
PowerShares has said that if the BABs program is not extended, the number of BABs available in the market will be limited, and illiquidity may negatively affect the value of the BABs.