The across-the-board federal spending cuts that began March 1, known as sequestration, cut the subsidy by 8.7 percent for states and cities. In 2014, the reimbursement will be curbed by 7.2 percent, the Internal Revenue Service said last month.
“Cutting the subsidy effectively reduces revenue of issuers of BABs,” a Moody’s Investors Service analyst, Nick Samuels, said in a report last week. While most localities plan to pay interest without the federal assistance, some “may need to make budget adjustments or draw on a debt service reserve to account for the reduced subsidy,” the report said.
Moody’s said the payment reductions were negative for Build America issuers that rely on the subsidy the most.
With a finite supply of the taxable debt, Build Americas gained 23 percent in 2011 and 12 percent in 2012, compared with returns of 11 percent and 7.3 percent for munis overall, Bank of America data show.
2013 Slump
This year, the bonds have slumped, even compared with other long-term debt.
The securities yield about 5.3 percent on average, according to the Wells Fargo index. The extra yield on the borrowings relative to similar-dated Treasuries rose to 1.6 percentage points on Sept. 24, the biggest gap in a year, according to data from Wells Fargo and Bloomberg.
Most analysts surveyed by Bloomberg predict long-term interest rates in the U.S. will rise in the next 12 months. Yields on 30-year Treasuries will jump to 4.26 percent in a year from 3.72 percent now, according to the median forecast of 44 analysts in the surveyed.
California borrowed the most through the program, followed by New York City and New York’s Metropolitan Transportation Authority, according to Moody’s.
The MTA, operator of New York City’s mass-transit system, will have to pay $7 million more annually in debt-service because of the curbed subsidy, said Aaron Donovan, an agency spokesman. It will continue to pay investors full interest, he said in an e-mail.