The Build America Bond program ended in December, but some think its expiration could be part of what’s hurting municipal bond exchange traded funds (ETFs).
President Obama recently signed a stopgap measure that would reduce $4 billion from current government spending. He called for Congress to find a way to keep the government funded through Sept. 30 or face a government shutdown, writes Lynn Humme for Bond Buyer. Moody’s Investor Service stated that a shutdown of more than 30 days would negatively impact credit on certain muni bonds…but they probably won’t default.
Moody’s report does not mention Build America Bonds and other direct-pay bonds. Anne Van Praagh, the Moody’s group credit officer, remarks that their “approach to rating BABs is that [they]evaluate the issuer’s ability to pay debt service with or without the subsidy,” and most issuers will be able to pay debt service on BABs if federal subsidy payments temporarily stop. [Build America Bond ETFs May Get a Second Chance.]
January issuance of municipal bonds, both new issues and refundings, plummeted 71% from the average fourth quarter issuance and 69% from December issuance, according to Minyanville. Composite interest rates for muni bonds increased from 3.82% in mid-October to 5.1% in mid-January.
Atlantic Capital Management believes that after the BAB program was allowed to expire, the credit market no longer is willing to accept muni bond rates at discounted rates compared to taxable bonds since BABs either provided rates comparable to taxable bonds without additional interest costs or gave investors a 35% tax credit against federal income taxes.