The $188 billion Build America Bond market is extending a record rally as investors bet that municipal issuers repairing their finances can withstand reduced federal subsidies on the debt.
Under so-called sequestration that began March 1, $85 billion in federal spending cuts will be made for the fiscal year ending Sept. 30. That includes reducing the originally promised 35 percent subsidy on Build America Bonds to about 32 percent for U.S. states and cities from Hawaii to Maine.
Investors in the taxable securities remain undeterred, betting that improving revenue and a housing rebound will allow municipalities to shoulder the burden. The extra yield on the debt relative to U.S. Treasuries narrowed last week to 1.19 percentage points, the smallest since the program began in 2009, Wells Fargo & Co. data show.
“The fundamentals for munis continue to get better and the spread action on Build Americas is certainly reflecting that,” said Dan Close, who oversees $1.4 billion of the debt across six funds in Chicago for Nuveen Investments. “This is still a sector that can demonstrate spread compression.”
Popular Securities
The bonds were created as part of President Barack Obama’s 2009 stimulus package, spurring localities to use the proceeds for infrastructure projects after the longest recession since the 1930s. It became the fastest-growing part of the $3.7 trillion muni market, with buyers attracted to the securities’ higher yields and issuers rushing to take advantage of the program before it expired at the end of 2010.
U.S. state tax collections have grown for 11 straight quarters, beginning in the first three months of 2010, according to a February report from the Nelson A. Rockefeller Institute of Government. The revenue has exceeded pre-recession levels since September 2011, according to the Albany, New York-based research group.
At the municipal level, purchases of new U.S. homes jumped in January by the most since 1993, Commerce Department figures show. Sales surged 15.6 percent to a 437,000 annual pace, the highest since July 2008. February data will be released today. Property taxes have made up at least two-thirds of total local- government revenue over the last 20 years, the institute said.
Resisting Reduction
As states and cities have balanced their budgets, the U.S. government’s debt has swelled to more than $16 trillion. The Build America program’s 35 percent subsidy on interest cost the U.S. about $3.4 billion a year, and was among hundreds of areas to see reductions as a result of legislation passed in 2011 to shrink the federal deficit by $1.2 trillion over a decade.