Taming the Bond Pricing of BABs

Any investor who can negotiate fair bond pricing for BABs should consider these highly popular municipal bonds. Build America Bonds (BABs) are taxable muni bonds that were originally introduced as a temporary means to help state and local governments raise money. Introduced as a part of last year’s economic stimulus package, BABs were signed into law on February 17, 2009. They’ve since become the fastest growing entity on the bond market and are largely responsible for creating the biggest gains the municipal bonds market has seen in 20 years.

BABs Sell Billions

While BABs are long-term investments, something that’s not typically attractive to an individual investor looking to control risk in lieu of yields and bond pricing, BABs have still managed to sell an estimated $100 billion in a little over a year. They’ve sold particularly well in Illinois, North Carolina, Colorado, and Arizona and have proven to be quite alluring to institutional investors looking for the safety of municipal bonds credit. Large banks are simply smitten by BABs and have circulated well even in California thanks to the money issuers can save, and the bond pricing that is appealing to buyers.

It’s not difficult to see why these municipal bonds are so popular -- they save issuers money. This is because BABs act as a subsidy for interest of which issuers directly collect 35 percent. In fact, BAB issuers have saved approximately $12 billion so far. This figure is far more substantial compared to more traditional tax exempt bonds. Better still, as the dust is beginning to settle around the BAB, so too has its bond pricing, which is becoming even more satisfactory. The school, transit, and water districts and agencies are all benefiting significantly from these highly popular municipal bonds.

Underwriting and Bond Pricing Criticisms

However, there are some criticisms being levied against BABs. Opponents are unhappy with the higher underwriting fees that Wall Street can enjoy, which are 37% greater than traditional tax-exempt bonds. While these municipal bonds have helped issuers save billions, they’ve also helped Wall Street to make an estimated $1 billion through said underwriting fees. Additionally, to capitalize on the wild popularity surrounding BABs, some issuers have not been above selling these municipal bonds at hiked up interest rates.

Despite these concerns, the reality is that BABs are the biggest thing to hit municipal bonds in some time and are seemingly here to stay for now, as their lifespan has been extended until April 2013. Ultimately, for individual investors to profit on BABs, it’s important to exercise some caution but not be afraid to play a little hardball with bond pricing to get the good yields.