Skip to comments.The Other Union Bailout [Treasury Issues Junk Bonds To Finance Public Works]
Posted on 09/23/2010 10:34:19 AM PDT by the invisib1e hand
The US Treasury has been quietly helping municipalities raise money for public-works projects, increasingly from foreign sources. Municipal projects are generally awarded to contractors willing to comply with strict federal hiring guidelines. The completed projects will likely employ, if anyone, mostly public union employees.
In order to attract investors, the interest offered on the Buy America Bonds is higher than that of municipal bonds, which are the usual method of financing municipal projects. The taxable bonds, maturing in an average of 29 years, yield of 5.76%, a premium of 185 basis points over 30 year Treasuries, reports Bloomberg. The US Treasury is paying 35% of the interest on the bonds.
The higher yield is attractive to foreign investors, who dont miss the tax-exempt status of traditional munies. Foreign investors have increased their purchases of the bonds by 15% in the last quarter, after a previous increase of 19% in the quarter prior. Currently, foreign holding of the hybrid federal/municipal debt amount to some $134 billion, the Bloomberg story said.
As one investment manager put it, There isnt much to compare with the amount of yield as an investor you can get with Build America Bonds. Theyve been a good investment and they have very high coupons, very high yields. As an investor, whats not to like?
Not much; but as a taxpayer, maybe a little. Investors, who under circumstances more favorable to the rule of law and competitive pricing might seek to finance private companies which hire both non-union and union employees, and that create wealth not merely absorb it are doing what any fiduciary must do: seeking the highest risk-adjusted yield.
Capital markets are being skewed by above-market yields and the bonds association with an issuer presumed to be too big to have its credits stigmatized with the old name for high-yield bonds junk. Regime risk on US investments is open ended because of the recent business-hostile government practices, such as running roughshod over private bondholders in the GM bankruptcy. The problems of low growth, high unemployment, and gargantuan deficits sully investors views globally, resulting in a capital strike.
Into this yield vacuum has stepped the Treasury with Buy America Bonds, luring foreign capital into federally sponsored municipal projects. But the yield premium and a portion of the interest are being financed by all US taxpayers, not merely those in the municipality of any particular project, where any benefit the stimulus is likely to be most directly felt.
The result is that this initiative, part of the overall Stimulus package, will do next to nothing to reduce unemployment, or federal or municipal budget deficits; it will create no wealth or lasting jobs, and will increase the burden on taxpayers, present and future. It will, however, enable the Treasury to target municipal financing, raising a huge pot of capital that can be doled out as it pleases.
This is a handy thing to have around election time, when your party's about to face a historic rout.
you saw it here first, friends and neighbors.