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U.S. faces future without Build America Bonds (Reuters)

We have all read hot news written by talented authors. This showdown U.S. faces future without Build America Bonds
(Reuters)
was a long time a coming. But the news doesn’t stop here. The writer shows two wonderful talents. Read the the rest sections to see what I mean.

WASHINGTON (Reuters) – U.S. state and local governments faced the realization on Friday that in just 14 days they will no longer be able to sell taxable Build America Bonds, the federally subsidized debt created in the economic stimulus plan to fund infrastructure projects and create jobs.

Investors, analysts, underwriters and federal policy-makers also confronted a future without taxable BABs, which made up more than a quarter of all new municipal debt sold this year and which have been largely credited with restarting stalled municipal credit markets.

As a result, prices of tax-free municipal bonds, particularly with longer maturities, are apt to fall, along with capital spending by states and local governments.

President Barack Obama once called for the BABs program to be made permanent. But the program will expire at year end after Obama decided against including its extension in a tax deal he cut with Republicans in Congress.

Lawmakers had considered the $858 billion deal on the so-called Bush tax cuts the best vehicle for extending BABs, which expire with the stimulus plan. The U.S. House of Representatives killed the possibility of an extension when it approved the deal late Thursday.

As prospects for a continuation of BABs dimmed over the last few weeks, top-rated 30-year tax-exempt bond prices dropped, pushing yields to their highest in nearly two years, according to Municipal Market Data.

Typically, BABs were sold with maturities of 15 years or longer. Issuer preference for taxable BABs ate into supplies of longer-term tax-exempt debt creating a scarcity factor that boosted prices and depressed yields on that part of the tax-free yield curve.

That will now change, Michael Decker, managing director and co-head of the Securities Industry and Financial Markets Association’s Municipal Securities Division, told Reuters’ Insider on Friday.

“The problem is we’re going to see significantly higher yields, especially for long-dated tax-exempt bonds, which translates into higher borrowing costs for state and local governments, like we’re seeing in the market over the last couple of days,” he said.

“And we’re going to see a lot more market volatility. We’re going to see periods of illiquidity and periods of pretty wide price swings as investors come in and out of the tax-exempt market,” he added.

Issuers, who receive federal rebates equal to 35 percent of the bonds’ interest costs, had hoped the program would be extended for a year or two. California issuers have sold the most BABs since the program debuted in April 2009.

“It will have a very real impact on communities, either with increased taxes or decreased building,” Maryland State Treasurer Nancy Kopp said. “What that does to the workforce, I don’t know.”

Kopp said the state saved $55 million through selling BABs and other direct rebate bonds from the stimulus plan instead of tax-exempt debt. The amount, she said, was large enough to cover the costs of building three or four elementary schools.

Maryland limits how much debt service it can pay. The federal BABs rebates allowed it to sell more debt because they made borrowing cheaper. The limit, along with rising interest rates on tax-exempt bonds, will force Maryland to issue less debt and cut capital projects next year, Kopp said.

Issuers have been rushing to sell BABs. So far in December they have sold nearly $9 billion of BABs, compared to $8.1 billion in all of December 2009, according to Thomson Reuters data. This year they have sold $110.4 billion, and over the life of the program they have brought more than $174 billion of BABs to market.

Obama has signaled he would like an extension passed next year, but the White House has not provided details of possible legislation. Congress will consider just a few pieces of legislation before 2010 ends, providing limited opportunities to attach BABs to another bill.

Just six months ago, an extension with a slightly lower subsidy rate seemed all but assured. The House had passed it twice. In September, the extension stalled in the Senate when it was attached to politically divisive tax legislation.

Last month, the Senate Finance Committee chairman said he was committed to passing an extension and the most vocal BABs critic, Republican Sen. Chuck Grassley, said he would not oppose an extension if it helped get a tax cut deal through.

(Additional reporting by Karen Pierog in Chicago, Michael Connor in Miami, Joan Gralla and Edith Honan in New York and Jim Christie in San Francisco; Editing by James Dalgleish)

It, U.S. faces future without Build America Bonds
(Reuters)
excerpt from US Economy

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Posted by on Dec 19 2010. Filed under Business. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry
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