The Build America Bonds project may be discontinued, as Congress decides how to extend the Bush Tax Cuts. The program’s expiration raises the question of what will happen to the ETFs that own such bonds.
The expiring income tax credits will be extended another year as President Obama decides how to compensate for economic hardship, but the popular Build America Bonds program has been left out of the extensions. Ryan Donmoyor for Bloomberg reports that payroll taxes and advancing jobless benefits won out over the bond program.
Jeremy Hobson for MarketPlace reports that the Build America bond program was passed in the stimulus in 2009. The idea behind it is to give cities, states and local governments the opportunity to continue to invest in bridges and roads and sewers over the period of the recession. The bond market helped the communities get low-cost financing for the repairs.
But how long can the Federal government support the municipal bond market?
Daisey Maxey for The Wall Street Journal reports that the volatility in the bond markets are due to this lingering decision and the existing muni bonds will become much more valuable if the decision passes in January. The long-term future of the ETFs holding the bonds is much more uncertain than ever.
When the ETF providers launched these funds, it was known that the BAB program was for a limited time. Language in the prospectus allows for its expiration and states that if BAB expires, it could cause the funds to deviate from their NAV as no new issues are made.
- PowerShares Build America Bond Portfolio (NYSEArca: BAB): Yields 5.43%
- SPDR Nuveen Barclays Capital Build America Bond (NYSEArca: BABS): Yields 5.7%
- PIMCO Build America Bond Strategy (NYSEArca: BABZ): yields 5.67%
Tisha Guerrero contributed to this article.