Build America Bonds (BABs) are taxable bonds that municipalities can issue for capital projects and receive a 35 percent subsidy payment from the government to reduce borrowing costs.
At Breckinridge, we believe the Build America Bond program marks the beginning of a new chapter in municipal bond investing. While the federal government remains committed to subsidizing municipal borrowing, it is clearly no longer wedded to doing so only by exempting municipal bond interest.
The federal government created the Build America Bond program within the fiscal stimulus legislation to address the high cost of borrowing for municipalities. The long duration and high quality of Build America Bonds is very appealing to taxable fixed-income investors like insurance companies, endowments and pension funds. This has broadened demand and helped stabilize the municipal bond market. Although set to expire at the end of 2010, we have every expectation given its positive impact to-date, the Build America Bond program will be extended or even made permanent.
Consequently, investors must recognize that the supply of tax-exempt debt is likely to shrink, diminishing the advantage tax-free municipal bonds currently enjoy. As in the past, there may be periods when a higher after-tax yield is available by investing in taxable municipal bonds or government agencies in a particular maturity range. This will be especially true for investors in lower tax brackets.
Taxable Muni FAQs
