Citigroup's Friedlander Gets `Aggressive' on Build Americas: Muni Credit
Citigroup Inc.’s George Friedlander and JPMorgan Chase & Co.’s Chris Holmes lead bank strategists advising investors to buy Build America Bonds after yields on the debt climbed to an eight-month high.
“‘Grab for yield’ will be one of the predominant themes in 2011, and with only a few pockets of value remaining, we feel that investors will be well-served by aggressively adding to their BAB positions now,” Friedlander said in a research note.
Yields on the taxable securities this month have jumped more than 19 basis points, or 0.19 percentage point, to 6.26 percent on Dec. 3, the highest since April 8, according to a Wells Fargo index. States and local governments are set to borrow about $12.6 billion this week, including $4.2 billion in Build Americas, both the highest in three weeks, according to data compiled by Bloomberg.
The rising yields, which move inversely to prices, make Build Americas a relatively good value for investors now, as an anticipated lack of supply of the debt in the first three months of 2011 will likely drive rates back down, according to Citigroup.
With issuers looking to lock in the 35 percent federal subsidy for interest costs on the securities before the program expires Dec. 31, sales have climbed to more than 35 percent of total municipal issuance, compared with about 23 percent a week since the program began in April 2009, according to data compiled by Bloomberg.
“We’ve been overweight on Build America Bonds because of the yield advantage over corporates,” Holmes said yesterday in a telephone interview. “At the current levels that are being offered, Build America Bonds should be appealing to investors right now.”
The extra yield investors demand for Build Americas rather than 30-year U.S. Treasuries increased to 194 basis points on Dec. 3 from 173 basis points on Nov. 3, according to a Wells Fargo index, whose components have an average maturity of about 29 years and an average rating of AA- from Standard & Poor’s.
The so-called spread on corporate debt rated AA and maturing in 15 or more years has narrowed to 152 basis points from 157 basis points in the same period, according to a Bank of America Merrill Lynch index.
A 30-year bond from Bentonville, Arkansas-based Wal-Mart Stores Inc., rated AA, yielded 5.17 percent yesterday, 93 basis points above federal debt.
Excluded From Deal
A one-year extension of the Build America program wasn’t included in a deal reached yesterday by President Barack Obama and congressional negotiators to continue tax cuts enacted during President George W. Bush’s first term, according to two officials briefed on the plan who spoke on condition of anonymity because the details haven’t been released. Party leaders still have to sell the agreement to Democrats and Republicans in the U.S. House of Representatives and the Senate.
Obama called it a “framework” for a compromise to prevent taxes from rising next month. The agreement also includes a 13- month extension of unemployment benefits and a cut in payroll taxes for Medicare and Social Security, to spur hiring.
With the likelihood of an extension of the taxable Build America program waning, the average yield on top-rated tax-free municipal bonds maturing in 30 years rose 1 basis point to 4.35 percent today, according to a Bloomberg BVAL index.
The Build America program was created by Obama’s $814 billion economic-stimulus package. More than $174 billion of the securities have been sold since April 2009, according to data compiled by Bloomberg. The subsidy would have been scaled back to 32 percent under a Senate bill to extend it by a year. That bill was defeated Dec. 4.
Panel May Decide
The fate of the Build America program, which Obama has sought to extend, may be determined by a six-member panel headed by Treasury Secretary Timothy Geithner, the White House officials said. Panel members were appointed by Obama and congressional leaders to negotiate tax issues.
“If there is no extension, then the less-visible deals would not trade well,” Friedlander said in a telephone interview yesterday. “Better names will continue to trade even if there is no BABs market.”