As Treasury yields have risen this year, long duration Build America Bonds and the exchange traded funds that hold those bonds have come under pressure.
Still, these ETFs remain fairly popular popular with investors due to enticing yield. For example, the PowerShares Build America Bond Portfolio (NYSEArca: BAB) boasts a 30-day SEC yield of nearly 5% and $662.2 million in assets under management. The rival SPDR Nuveen Barclays Build America Bond ETF (NYSEArca: BABS) has a 30-day SEC yield of nearly 4.8% while the actively managed Pimco Build America Bond ETF (NYSEArca: BABZ) has a 30-day SEC yield of 4.32%. [Build America Bonds may get a Second Chance]
Yields on the aforementioned ETFs are not the problem. Duration is. BAB has an effective duration of 9.26 years while the effective duration on BABZ is 10.36 years, according to PIMCO data.
That has left both funds and BABS vulnerable to the 49% jump in 10-year Treasury yield this year. As longer duration fare, Build America Bonds are more sensitive to interest rate changes than are bonds with low durations. [Rising Rates Hit Build America Bond ETFs]
Rising rates are not the only issue investors in Build America Bonds need to be aware of. Dwindling supply is another concern. “The supply of Build America Bonds is gradually drying up. There hasn’t been a new issue since the securities’ federal subsidy expired in 2010,” reports Brendan Conway for Barron’s.
Build America Bonds were created in 2009 as part of President Obama’s infrastructure program to bolster the then-sagging U.S. economy. Although President Obama wanted the Build America Bond Program to become a permanent fixture, policymakers on Capitol Hill were not able to reach an agreement on that front.