With the March 1 deadline for automatic federal spending cuts approaching, the $3.7 trillion US municipal bond market is again focused on the impact of cuts to Build America Bonds (BABs) subsidies.
One significant potential problem for investors: Whether their BABs contained so-called extraordinary redemption provisions, which give the issuer the ability to call the bonds under some circumstances, said Mikhail Foux, an adviser at Citigroup Global Markets Inc.
Some of those provisions allow the bonds to be called at par, while others - the more prominent kind - can be called at a particular spread over the US Treasury. The inclusion of such provisions by tightly traded muni bond issuers makes those bonds overpriced because that option is so valuable to the issuer.
"It should at the very least affect prices of the bonds, because they can call at any point in time," Foux said. The amount of any actual losses would depend on where a bond was trading, Foux added.
States, cities and other issuers sold $181 billion of BABs between April 2009 and December 2010 in order to capture a 35 percent federal rebate on interest costs.
In September, the White House said it would reduce BAB payments by 7.6 percent, or about $255 million, in 2013.
Separately, the primary market for munis remains strong, with sales rising next week to $6.2 billion from a revised $5.3 billion this week, according to Thomson Reuters estimates on Friday.
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