Are BAB Bond Funds Safe?

Are the relatively new Build America Bond funds of a fly by night nature, or are they here to stay? Many assume BABs' lifeline will continually be extended by Congress. President Obama has even sought to make them a permanent fixture; however, Build America Bonds themselves are associated with long-term investments, and as the economy continues to head either toward inflation or deflation (depending on whom you ask), the horizon could look somewhat bleak for BABs and the bond market as a whole.

The Rising Popularity of Bond Funds

Muni bonds have long been perceived as a market that best accommodates retail investors and people of high net worth -- those who depend on the income made from municipal bonds to finance their retirement or enable them to leave sizeable legacy gifts to future inheritors. However, many individual investors have found they can seize the opportunities inherent to munis and Build America Bonds through exchange traded funds.

Currently, many experts encourage those who seek exposure to muni bonds to test the waters via bond funds. There is a wide variety of muni ETFs on the market, each equipped to benefit different types of investors. For instance, even the little guy who lacks the assets to carry a diversified bond portfolio can now compensate by seeking out a diversified ETF.

Despite the recent news that muni bond ETF cash inflows have cooled off a bit in the past few weeks, the market still remains attractive to the public -- demonstrated by the perpetually healthy amount of money it continues to pull in. The sturdiness of bond funds can be attributed to the respectable income yielded -- relative to corporate bonds -- while offering more security by way of issuing municipalities' taxation authority.

There's no denying the huge popularity Build America Bonds have enjoyed, and so it's not surprising to learn the PowerShares Buld America Bond funds has already pulled in a whopping $560 million in a little less than a year.

Outlook on Build America Bond Funds

While many are currently enjoying the relatively higher interest associated with Build America Bonds, this could very well erode in the face of inflation, and these taxable bonds may eventually suffer rapidly depreciating bond values if the worst case scenarios many economists are predicting should come to pass. Ultimately, those who are new to investing (or remain wary of the possibility of an impending bond market collapse) are perhaps better off seeking out more short-term investments in lieu of Build America Bonds.