Build America Bond ETFs Bit by Multiple Factors

With 10-year Treasury yields up 43.4% in the past 90 days, it is not surprising that investors are pulling money from bond funds. Earlier this week, ConvergEx noted that investors have yanked $3.5 billion from bond ETFs over the past month.

It would appear investors are getting the message that rising rates are destructive to fixed income portfolios, particularly those portfolios with significant exposure to longer duration bonds funds. [Outflows Show Bond Weakness Sinking in With Investors]

Build America Bond ETFs are among the fixed income funds that are feeling the pinch of rising interest rates. Build America Bonds, which are no long issued, were a central part of President Obama’s post-financial crisis economic revitalization effort. Classified as municipal bonds, Build America Bonds were created as part of President Obama’s 2009 stimulus package targeted at creating “shovel ready” infrastructure jobs. [Build America Bond ETFs Future in Question]

The intent of BABs may have been pure, but the recent performance of the ETFs that hold these bonds has been dismal. In the past three months, the SPDR Nuveen Barclays Build America Bond ETF (NYSEArca: BABS) tumbled 13.3% while the $755 million PowerShares Build America Bond Portfolio (NYSEArca: BAB) has lost 9.4%.

BABs may be classified as muni bonds, but the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) is down just 7.3% over the same time. Part of the problem is duration, or the sensitivity of these bonds to interest rate changes. BAB has an effective duration of 9.32 years while BABS has a modified adjusted duration of nearly 12.4 years.

However, it is not just rising rates that are plaguing BAB and BABS. Sequestration that started in March reduced the originally promised 35% subsidy on BABs to about 32% for U.S. states. [Rising Rates, Sequestration Hit Build America Bond ETFs]