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Scarcity Issues Surround Build America Bond ETFs


As Treasury yields have risen this year, long duration Build America Bonds and the exchange traded funds that hold those bonds have come under pressure.

Still, these ETFs remain fairly popular popular with investors due to enticing yield. For example, the PowerShares Build America Bond Portfolio (BAB) boasts a 30-day SEC yield of nearly 5% and $662.2 million in assets under management. The rival SPDR Nuveen Barclays Build America Bond ETF (BABS) has a 30-day SEC yield of nearly 4.8% while the actively managed Pimco Build America Bond ETF (BABZ) has a 30-day SEC yield of 4.32%. [Build America Bonds may get a Second Chance]

Yields on the aforementioned ETFs are not the problem. Duration is. BAB has an effective duration of 9.26 years while the effective duration on BABZ is 10.36 years, according to PIMCO data.

That has left both funds and BABS vulnerable to the 49% jump in 10-year Treasury yield this year. As longer duration fare, Build America Bonds are more sensitive to interest rate changes than are bonds with low durations. [Rising Rates Hit Build America Bond ETFs]

Rising rates are not the only issue investors in Build America Bonds need to be aware of. Dwindling supply is another concern. “The supply of Build America Bonds is gradually drying up. There hasn’t been a new issue since the securities’ federal subsidy expired in 2010,” reports Brendan Conway for Barron’s.

Build America Bonds were created in 2009 as part of President Obama’s infrastructure program to bolster the then-sagging U.S. economy. Although President Obama wanted the Build America Bond Program to become a permanent fixture, policymakers on Capitol Hill were not able to reach an agreement on that front.

A lack of liquidity, perceived or real, could be an issue in the futures for Build America Bond ETFs. Liquidity concerns have crept into the bond ETF market in the past. Earlier this year, selling pressure on some high-yield bond ETFs prompted concerns about the liquidity of those funds, though those concerns were later allayed as it was proven those ETFs functioned as expected during a tumultuous period for junk bonds. [Digging Deeper Into Bond ETF Liquidity]

Importantly, as Barron’s notes, issuers of Build America Bond ETFs could make some changes to cope with the diminishing supply of these bonds. PowerShares could add taxable municipal bonds to BAB and State Street has indicated it could make changes to BABS, Barron’s reported. Issuers could also convert Build America Bond ETFs to closed-end funds or make them hybrid funds so other securities can be included. [Changes in Store for Build America Bond ETFs]

Pimco Build America Bond ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.