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Looming under the somewhat Byzantine headline name, Sequestration, are automatic cuts to government spending that may include planned reimbursements to state and local issuers of Build America Bonds (BABs). BABs are taxable municipal bonds, authorized as a stimulus program under the 2009 American Recovery and Reinvestment Act. The federal government promised rebates to the issuers equal to 35% of their interest costs as an incentive to raise capital for "shovel ready" projects. Many market participants considered it to be a highly successful program.
Authored by James Colby
With the political ripples of the "cliff" and inauguration finally reaching the edge of the pond, the markets appear to be once again fully engaged in the dissection of domestic economic releases, earnings and European monetary drama. The elements that I believe sparked a year-end selloff have now receded, allowing municipals to push forward with a month-to-date gain of 0.62% as of January 25, 2013. New flows into municipals, along with cash from calls, maturities and coupon payments are again positive, overwhelming a meager January supply: a formula that is prevalent in most years, coined the "January Effect."
One point which I believe is universally made regarding the municipal bond market is that the overall credit quality (the implied security) of the issues brought to the market not only underpins the attraction of municipals as an asset class, but separates it very distinctly from other fixed-income choices.
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Any discussion of specific securities mentioned in the commentary is neither an offer to sell nor a solicitation to buy these securities.
Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.
The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.
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