Municipal bonds have surprised this year, rallying for 10 consecutive months through October, and Build America Bond exchange traded funds are putting the rest of the munis market to shame.
Year-to-date, the PowerShares Build America Bond Portfolio (NYSEArca: BAB) rose 16.5% and SPDR Nuveen Barclays Build America Bond ETF (NYSEArca: BABS) gained 20.7%. BAB has a 8.85 year duration, a 3.81% 30-day SEC yield and a 0.28% expense ratio. BABS has a 12.6 year duration, a 3.75% 30-day SEC yield and a 0.35% expense ratio.
In comparison, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), which has a 6.28 year duration, a 1.59% 30-day SEC yield and a 0.25% expense ratio, increased 8.8% year-to-date. [Muni Bonds, ETFs Near Cheapest Level to Treasuries This Year]
To be fair, the Build America Bond ETFs benefited from their longer durations – yields and bond prices have an inverse relationship, so the falling yields this year helped lift longer-term bonds. According to Barclays Plc data, munis due in 2 or more years have generated a 14.9% return in 2015, outuperforming shorter maturities, reports Michelle Kaske for Bloomberg.
San Close, senior vice president at Nuveen Asset Management and manager of the SPDR Nuveen Build America ETF, points out that the rally in Treasuries helped support Build America Bonds this year.
The ETF benefited from “a generally declining interest-rate environment and, to some extent, some spread narrowing,” Close said in the article.
Investors jumped on the attractive yields relative to Treasuries. Build America Bonds that mature in 2030 traded with an average yield of 2.96%, or 1.1 percentage points higher than Treasuries.
“Not only was the fund getting a nice yield relative to other municipal bonds, but it was also getting that same increased price return from the underlying fundamentals of the municipal bonds,” Thomas Boccellari, an ETF analyst at Morningstar, said in the article.
Build America debt obligations were first crated under President Barack Obama’s 2009 American Recovery and Reinvestment Act where municipalities sold $188 billion of the debt before the program expired at the end of 2010. The Build American Bonds helped diminish borrowing costs for state and local governments as part of a stimulus package. Local governments used the bonds to pay for infrastructure projects and received a 35% federal subsidy on interest payments.
Investors should keep in mind that unlike other municipal bonds, Build America Bonds are taxable fixed-income securities.
Additionally, since the program expired, the Build America Bond market maintained its value due to the finite amount of debt in existence, according to Bart Mosley, co-president of Trident Municipal Research, and Boccellari.
PowerShares Build America Bond Portfolio
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.