Build America Bond Yields Climb to 11-Month High as U.S. Subsidy May End

Build America Bond yields rose to the highest in 11 months as the federal program subsidizing state and local government borrowing costs is set to expire at year- end unless lawmakers extend it.

The average yield on the taxable securities climbed to 6.35 percent yesterday, the most since Jan. 7, as investors demanded a larger premium to buy the debt, according to a Wells Fargo index. Signs that the global economic recovery is gathering pace also pushed down Build America Bond prices, which move inversely to yields, along with U.S. Treasuries and other fixed-income markets.

“It’s uncertainty, the fact that people don’t know the future of the program,” said Christopher Mier, a municipal strategist at Chicago-based Loop Capital Markets LLC, in an interview at Bloomberg headquarters in New York today. Some investors are saying they “may not participate in a market that won’t exist in two weeks,” he said.

The San Francisco Public Utilities Commission today postponed a $524 million debt sale, including $350 million in Build Americas, after the surge in borrowing costs.

States and local governments are set to sell $4.3 billion of the taxable securities this week, the fourth-highest since borrowers began offering the debt in April 2009, according to data compiled by Bloomberg. The New Jersey Turnpike Authority boosted its bond sale to $1.9 billion from $1.5 billion today, Bloomberg data show.

Supply Concern

Some investors are concerned supply may increase ahead of the program’s expiration, Mier said. The Pennsylvania Turnpike Commission sold $600 million in Build Americas in August, funding two years of projects in one issue, to take full advantage of the federal subsidy while it lasts, Chief Financial Officer Nikolaus Grieshaber said.

Borrowers have sold about $177 billion of Build America Bonds since Congress created the program in the American Recovery and Reinvestment Act last year to help repair the $2.8 trillion municipal market after the credit crisis. The Treasury pays 35 percent of the interest cost on bonds for new public- works projects if states and local governments sell taxable, instead of tax-exempt, debt.

Left Out

President Barack Obama and congressional Republicans left the program out of a tax deal they reached this week. An extension was contained in a Democrat-backed tax-cut bill that was defeated in the Senate over the weekend, and analysts including those at JPMorgan Chase & Co. had previously expected the program to be included in legislation continuing the Bush- era tax cuts.

Senator Max Baucus, the Montana Democrat who heads the Finance Committee, said yesterday that the program is one of several issues that are subject to further negotiation.

The jump in Build America yields comes amid a sell-off in federal debt and tax-exempt munis, said Cecilia Gondor, an analyst at Thomas J. Herzfeld Advisors Inc. in Miami.

“Outside forces are putting pressure on municipal-bond prices, and investors want to get out now rather than later,” she said in a telephone interview. “Those outside forces are the Build America Bond program possibly not being extended, additional supply in the tax-exempt market and a rise in interest rates.”

Exchange-Traded Funds

The iShares S&P National AMT-Free Bond Fund, an exchange- traded fund that seeks investment results that correspond to the performance of the S&P Municipal Bond Index, lost as much as 1.4 percent today, touching $98.63, the lowest since March 18, 2009. The fund was down 0.81 percent to $99.19 at 2:27 p.m. in New York.

Prices of Treasuries dropped, pushing yields on 10-year notes up the most over two days since September 2008, as signals the global economic recovery is accelerating sapped demand for the relative safety of U.S. government debt.

The 10-year Treasury note yield advanced 14 basis points, or 0.14 percentage point, to 3.27 percent at 1:27 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 fell 1 3/32, or $10.94 per $1,000 face amount, to 94 18/32.

Rates have jumped 36 basis points over two days, the most since Sept. 19, 2008. Thirty-year yields climbed about 20 basis points to 4.44 percent, the highest level since May 12.

To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net; Brendan A. McGrail in New York at bmcgrail@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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