BY BILL HOUCK, CFP

NEWJERSEYNEWSROOM.COM

In a move to boost investment in local roads and infrastructure, the federal government is providing incentives for municipalities to roll out Build America Bonds (BABs). The bonds provide municipalities with another money raising option beyond traditional tax-exempt bonds. The newly issued, taxable municipal bonds currently offer higher yields than treasuries — 6% or higher versus around 3.9% for the 30-year Treasury. The high yields have created interest among IRA, pension, endowment and foundation investors, who otherwise would not be attracted to investing in traditional tax-free municipal debt. So far, mutual funds have been the main purchasers of large blocks of new issue BABs.

From a yield perspective, BABS are competitive with traditional tax-free municipal debt on a tax equivalency basis. For comparison, the Vanguard Intermediate Tax-Exempt Income fund is yielding 3.36%. For the investor in the 35% tax bracket, this equals a tax equivalent yield at 5.17% (3.36/1-.35). If you have a new issue BAB at 6%, a traditional municipal bond investment would have to yield at least 3.9% to be competitive. Another benefit of BABS, over "private activity" tax-free municipal debt, is that they are not subject to the Alternative Minimum Tax.