Another Bill Introduced To Rescue Floundering Muni Bond Market

Tyler Durden's picture

It has been a few weeks since the last attempt to extend the Build America Bonds program, even as muni
bond prices continue to stagnate. Which means it is time for another
valiant try, this time possibly using the post-revolutionary chaos in
Egypt as a smoke screen. Bond Buyer reports that Rep. Gerald Connolly,
D-Va., has introduced a bill extending the Build America Bond program
through 2012 at subsidy rates of 32% in 2011 and 31% in 2012. Since we
are certain that Bill Gross is lobbying about as hard as one can to get
this bill passed due to his massive latent muni exposure, this last ditch attempt to subsidize the muni market just could pass. If it doesn't, that could be the bottom of the muni market.

More from Bond Buyer:

The program, which was authorized by the American Recovery and Reinvestment Act in early 2009, expired Dec. 31. It allowed state and local governments to issue taxable bonds and receive federal subsidy payments from the federal government equal to 35% of their interest costs.

The Obama administration had proposed making the program permanent.

But Sen. Chuck Grassley from Iowa, the ranking minority member of the Senate Finance Committee, and other Republicans criticized the program for generating high underwriting fees for investment banks and for rewarding issuers with poor credit by providing them with higher subsidy payments from the federal government.

Connolly’s bill has been referred to the House Ways and Means Committee.

Since Bernanke's debt monetization QE3 program will need a uses of funds, we are fairly confident that this bill won't pass and the muni space will be left to Bernanke to salvage. Although on the other hand, don't forget: it's not the size of the Newport beach bond manager in the fight that matters, it is the amount of corruption in the financial system, the kickbacks and bribes, and the potential loss upside/downside analysis that determines what laws are passed.

h/t Bruce Krasting