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The new bond in town

Unexpected demand has transformed Build America Bonds, an obscure component of the stimulus into the hottest bond since Daniel Craig.

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Lost in the ideological battles over fiscal stimulus is one newly authorized program that is already delivering results: Build America Bonds (BABs). Unexpected demand has transformed this once-obscure component of the federal stimulus legislation into the hottest bond since Daniel Craig.

California, the University of Minnesota, the New Jersey Turnpike Authority, and the New York Metropolitan Transportation Authority have been among the first to issue this new class of municipal bond, which could transform how America finances its 21st-century infrastructure needs.

California led the way with a $5.23 billion sale of BABs, a move that State Treasurer Bill Lockyer says will save the state $1.15 billion over the next 30 years.

Just weeks after the program began, sales have reached $10 billion. Market experts now predict that $50 billion in BABs could be sold this year, representing more than 10 percent of the annual municipal-debt issuance.

So how do BABs differ from conventional municipal bonds (munis)? The gist is that BABs alter the federal subsidy for state and local infrastructure investments to more efficiently tap private bond markets.

Conventional munis are subsidized through tax exemptions: Bondholders pay no income tax on interest payments received from the issuer. This setup offers no financial incentive for many categories of potential investors, such as pension funds and endowments, that already operate tax-free.


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