Sales of Build America Bonds, which have enabled states and cities to borrow about $185 billion from investors around the world since last year, are drying up a week before the federally subsidized program is set to end.
Next week’s scheduled issuance will plummet to $35 million, the second-lowest total since April 2009, after reaching a record in the past five days, according to data compiled by Bloomberg. A record 141 individual offerings of the debt, which is set to expire Dec. 31, have been sold in the last two weeks, Bloomberg data show.
The glut of Build Americas has driven yields up 44 basis points this month to 6.51 percent on Dec. 15, the highest this year, according to a Wells Fargo index. The prospect of higher premiums to sell municipal debt next week may have discouraged issuers from coming to market, said Evan Rourke, a portfolio member with Boston-based Eaton Vance Corp., which has almost $10 billion under management.
“The rush to issue BABs took us to this point,” Rourke said in a telephone interview. “Now the market shuts down.”
Among borrowers, Carlton County, Minnesota, is offering $5 million in Build Americas next week after a two-week delay pending completion of paperwork, said Treasurer Paul Gassert.
This is the 35,000-population county’s first time issuing the securities, for which the Treasury provides a 35 percent subsidy on interest. After accounting for the subsidy, the county will pay less yield than if it were to issue all tax-exempt debt, he said.
“Fortunately, we made the deadline, so we’ll be issuing to build a new community center,” Gassert said. “We’ll save at least a million dollars in borrowing costs.”
Opposition to Program
Build Americas were created under President Barack Obama’s stimulus legislation as a means of driving down borrowing costs for localities and funneling money to job-creating construction projects. More than $184 billion of the securities have been sold since April 2009, funding clean-water projects in Ohio, highways in Kansas, dormitories at Rutgers University in New Jersey and a new bridge spanning the San Francisco Bay.
While Obama and the Democrats have supported prolonging the program, they have run into opposition from Republicans critical of the stimulus package. Extensions have twice passed the Democratic-controlled House only to stall in the Senate, where the Republican minority has sufficient power to block legislation.
The subsidy was left out of an agreement Obama struck with Republicans. U.S. Senator Ron Wyden, a Democrat from Oregon, who previously led an unsuccessful bid to extend the program, offered an amendment this week to include it in the tax bill.
Representative John Mica, who becomes chairman of the House Transportation and Infrastructure Committee in January, said today he would introduce a “reincarnation” of the program.
“I can almost guarantee a reiteration of the Build America Bond program,” the Florida Republican said in an interview in Washington.
The iShares S&P National AMT-Free Bond Fund, an exchange-traded fund that tracks S&P’s muni-bond index, rose $1.00, to $99.64, or about 1 percent, at 12:25 p.m. in New York Stock Exchange composite trading.
California and New York City, two of the three largest issuers of municipal debt, marketed Build Americas to overseas investors. Overall, foreign buyers boosted their holdings of U.S. munis to $52 billion in the third quarter from $50.5 billion in 2008 on the strength of the taxable securities, according to data released Dec. 9 by the Federal Reserve.
Seasonality also may have played a role in the smaller slate of sales next week, Rourke said. About $14 million in Build Americas were sold in the last week of December 2009, the lowest on record, Bloomberg data show.
“Low issuance next week is because of a combination of dealers needing to close down their books for the year and issuers going on vacation,” he said. “Individual investors are also distracted and mentally people are positioned for the end of the year.”
Following are descriptions of pending sales of U.S. municipal debt:
BUILD AMERICA BOND sales will total about $35 million next week, led by the University of Louisville’s $20.9 million offering. Sycamore, Ohio, Community School District will sell $9 million, with Carlton County issuing about $5 million. Louisville and Carlton will be sold through competitive bidding on Dec. 20 and Dec. 21, respectively, while Fifth Third Bancorp. will market the Sycamore securities. (Added Dec. 17)