'Build America' Bonds Up in the Air After GOP Victory

Uncertainty now reigns over the successful Build America Bonds program, which helps states and cities borrow more cheaply in the municipal bond market.

Even though the Republican winners from Tuesday's election won't take their seats in the House and Senate until early next year, momentum on the Hill has clearly shifted right. And that means additional spending—even on what market observers would call crucial state and municipal financing programs—could prove a tough sell.

Since its introduction last year, the Build America program has come to account for about 26 percent of the muni-bond market, and October was its biggest month yet.

One reason: Issuers were scrambling to take advantage of the program's benefits—which include the federal government footing the bill for 35 percent of the bonds' interest costs. Of course, demand for the bonds, now a significant cornerstone of the $2.8 trillion muni market, has also been strong.

But now all that is up for grabs. The Build America program, introduced as part of President Obama's Recovery and Reinvestment Act, sunsets Dec. 31—unless the lame-duck session of Congress votes to extend it.

Muni traders say there's a growing belief that the program will be permitted to expire, if only to be restarted early in the new year, perhaps as part of a new omnibus spending bill.

The market's behavior today would seem to underscore that. On the one hand, from Los Angeles to northeast Ohio's sewer system, a high volume of issuance continues. But at the same time spreads are gapping out a bit—perhaps highlighting the confusion over where we stand.

Rutgers University, for instance, issued about half a billion dollars today in new debt—a significant portion of which was in Build America bonds. It's the school's first foray into the Build America market, say traders.

But spreads on Rutgers bonds are markedly higher than those of a benchmark security like University of Virginia bonds, they say, perhaps highlighting the market's confusion over what's next.

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