Wednesday, Feb. 17, 2010

Build America Bonds

During the financial crisis, the municipal bond market seized, making it tough for states and local governments to raise money. Many credit the Build America Bonds program with reviving the muni-bond market and at least in part saving state and local governments from being forced to make steep budget cuts and curtail programs. Under the program, the federal government subsidizes the bond payments that local governments make to investors, boosting the yield by 35%. So a typical muni-bond that would normally pay 4.5% yields nearly 7% if it is issued through the Build America Bond program.

Unsurprisingly, that has greatly boosted investor interest in munis. More than $50 billion in BABs have been sold. What's more, the increased interest in the investing segment has lowered borrowing costs for local governments, saving municipalities and states needed funds. "It's the biggest thing to hit the municipal-bond market in a generation," Amy Resnick, editor in chief of the Bond Buyer, told TIME back in November. "It's clearly been a success as a means of stimulating the economy."

Grade: A