Build America Bonds
Here's some new research by Ang, Bhansali, and Xing on the impact of Build America Bonds:
Build America Bonds (BABs) are a new form of municipal financing introduced in 2009. Investors in BAB municipal bonds receive interest payments that are taxable, but issuers receive a subsidy from the U.S. Treasury. The BAB program has succeeded in lowering the cost of funding for state and local governments with BAB issuers obtaining finance 54 basis points lower, on average, compared to issuing regular municipal bonds. For institutional investors, BAB issue yields are 116 basis points higher than comparable Treasuries and 88 basis points higher than comparable highly rated corporate bonds. For individual investors, BABs have lower yields than regular municipal bonds. Thus, on average the Federal government subsidy disadvantages individual U.S. taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market.
A brief summary of the paper is available here.
babs
It also separates the financing decision from the local voter who may or may not approve of the specific project thereby increasing the power of the federal over state government and raising the already large potential for perverse incentives to enter into the process.
New type of investor
While most definitely Babs were the primary driver in knocking down yields in munis because of cutting the supply of new issues of traditional munis Babs have also been a very big boon to indivual investors who have purchased them in ira's etc because the yields on other investments have gone down so much.
A lot of people have been so fed up with the market they've started moving money to Babs to generate yield