The CA Build America Bond program is great for the state and local governments. If they are looking for low-cost money to finance billions of dollars in capital projects such as roads, schools and transportation infrastructure, Build America Bonds may be just what they needed.
Build America municipal bonds can also be a good deal for individual investors at a time when interest rate hikes may be on the horizon.
U.S. Treasury data, as of Jan. 1, 2010, shows that nearly 800 municipal bonds have been issued under the BAB program since it began in April 2009. Those bonds total more than $65 billion.
The big benefit to municipalities is that the federal government reimburses 35 percent of the interest paid to the investor. The goal, of course, is that the subsidy will spur municipalities to get some projects going, boost employment and revitalize the economy.
<strong>Higher Tempting yields</strong>
The yields on BAB’s are tempting. Yields are comparable to many corporate bonds. The interest is taxable, unlike many regular municipal bonds, which are tax-free. The federal interest subsidy, theoretically, should allow municipalities to pay higher interest which, in turn, should attract more investors.
Since municipal bonds, historically, have a considerably lower default rate than corporate bonds, the investor is theoretically taking less credit risk.
But these are tough times for state and local governments. Investors need to monitor any bonds that they own and stay on top of any potential problems.
Interest rate risk is another risk that investors need to contend with.
The current low-rate environment may eventually reverse, and rates will have nowhere to go but up. These are long-term bonds and if rates rise then the bond prices will decrease. You may have a difficult time selling your bond prior to maturity without taking a loss.
Newly issued BABs (as they are called) are available through brokerages and financial advisers. You can also pick them up on the secondary market from other investors, usually at a premium or a discount.
The Build America Bonds program is scheduled to end Dec. 31, 2010, but Treasury will may well extend the program.
