Build America Bonds - Back Up Spells Value

With the back-up in municipals lately, BABs included, I am seeing value in the sector.  As with all credit instruments - yes, munis/BABs are credit instruments - the analysis is key.  Municipal financials come out with a lag and are somewhat opaque, there are end-runs that can help issuers siphon "pledged" revenues and the "federal help/subsidy hope thesis" cannot be predicted with any form of reliability.  Seems like a lot of negatives, but analysis is how you find "real" value.  Relative to corporate credit, there is value in the sector.

(Bloomberg) Build America Bond yields rose to the highest in 11 months as the federal program subsidizing state and local government borrowing costs is set to expire at year-end if lawmakers don’t extend it.

The average yield on the taxable securities climbed to 6.35 percent yesterday, the most since Jan. 7, as investors demanded a larger premium to buy the debt, according to a Wells Fargo index. Signs that the global economic recovery is gathering pace also pushed down Build America Bond prices along with U.S. Treasuries and other fixed-income markets.

PIMCO Buying Credit, Munis and Mortgages

On the wire;

Steve Rodosky, head of Treasury and derivatives trading at Pimco, said that he has stopped buying Treasurys since July. Instead he has purchased high-quality assets in investment-grade corporate bonds, mortgage-backed securities and municipal debt.

Article here:  PIMCO Talks Their Book

Bottom line:  PIMCO is a buyer of spread product.  This helps confirm my thesis that credit still has legs and BABs (or QScABs) have value as well. 

Disclosure:  Long LQD