|

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

WASHINGTON (Reuters) – U.S. state and local governments face a surge in borrowing costs after lawmakers refused to renew the federally subsidized Build America Bonds program used to fund projects and create jobs.

The $2.8 trillion municipal bond market also faces depressed prices and greater volatility due to the loss of taxable BABs, which made up more than a quarter of all new municipal debt sold this year and which have been largely attributed with restarting stalled municipal credit markets.

“Taxpayers starting next year are going to have to pay more for making needed investments in infrastructure,” said Tom Dresslar, a spokesman for California State Treasurer Bill Lockyer.

Issuers like California, the single biggest BABs seller at about $14 billion, receive federal rebates equal to 35 percent of the bonds’ interest costs. And most issuers hoped the program, which debuted in April 2009, would be extended for a year or two beyond its December 31 expiration. But an extension failed to make its way into a tax bill passed by Congress this week.

There were whispers on Capitol Hill that BABs could be “reincarnated,” next year, most likely through a sweeping transportation bill. But that legislation has yet to be introduced.

“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.

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. But prices on Thursday and Friday began to rebound.

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.

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.

A spokesman for the House of Representatives Transportation Committee said BABs were one mechanism the incoming Republican chairman, Florida’s John Mica, was considering as it drafts legislation for how the federal government funds highways, roads and bridges.

Historically, the legislation has taken months and even years to wend its way through Congress.

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.

Issuers have been rushing to sell BABs. So far in December they have sold nearly $14 billion of BABs, compared to $8.1 billion in all of December 2009, according to Thomson Reuters data on Friday. This year they have sold $115.4 billion, and over the life of the program they have brought nearly $180 billion of BABs to market.

Starting January 1, the market will confront the new year without BABs.

“It gets us back to the way we were before the financial crisis,” said Chris Mier, a muni market strategist at Loop Capital Markets in Chicago. “I don’t necessarily think that’s a horrible thing.”

He said he doesn’t see the market at least in January repeating the pounding it took in the “nightmare months” of November and December. Issuance in January is usually light at the same time investors have billions of dollars in cash from muni bond redemptions and coupon payments to reinvest, Mier added.

(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 Theodore d’Afflisio)

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

Short URL: http://www.usnews9.com/?p=4642

Posted by on Dec 21 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
Tags:

You must be logged in to post a comment Login

Recently Commented

  • James Mitchell: Oakland raid is latest in Occupy camp crackdowns
  • tatwizard: BLVCK FRIDAY 11252011 ALL BLACK EVERYTHING DJWIZZKIDD amp; DJVISION_ BURNIN RUBBER ON NIGGAS
  • Peter Occupy Austin: RT steveweinstein: Thousands of Riot Cops Descend on Occupy Oakland, 32 Arrested, But No...
  • Justin Bieber: Griffin iTrip FM Transmitter for iPod and iPhone: Black Friday Griffin iTrip FM Transmitter for iPod...
  • Austin Kinney: RT cavewallshadows: