The Allures of Build America Bonds
Investors have been clamoring to buy Build America Bonds, the new, taxable municipal bonds whose interest cost the U.S. government is helping to pay. Over the past two weeks, the issues have been hot sellers, sending prices soaring and yields down. Demand is resetting expectations in the tax-exempt muni market, where yields are falling but remain at big premiums to Treasuries. The new bonds—which have quickly been dubbed BABs—have been sold chiefly to institutions; individuals find it hard to buy them. Moreover, for most taxable investors, munis are a better deal anyway, says Daniel Solender, Lord Abbett's head of munis. Take California's 30-year Build America Bonds, first offered on Apr. 20. They yielded 7.4%, while comparable California tax-free bonds yielded 5.3%. An investor in the 35% federal tax bracket would make 5.3% on normal munis but only 4.8%, after taxes, on the Build America Bonds. If tax rates rise, munis will be even more attractive for high-bracket investors.
Bargains Among the Rail Stocks?
Plummeting business activity is hitting railroads hard. Burlington Northern (BNI) reported Apr. 23 that first-quarter revenue dropped 20% and profits fell 55%. The story was much the same at Union Pacific (UNP), Norfolk Southern (NSC), and CSX (CSX). Anticipation of bad times has dragged down the railroads' share prices, with Burlington off 33% over the past year, Union Pacific down 29%, Norfolk falling 36%, and CSX off 49%.
When prices crash, deep-value managers go bargain hunting. Hedge fund manager Thomas Steyer of Farallon Capital Management has been buying shares of rail-car maker FreightCar America (RAIL), down 50% over the past year. As of his Mar. 30 regulatory filing, he owned more than 6% of the company's shares. Steyer isn't talking, but FreightCar, trading at 19, has almost $11 a share in cash and virtually no debt. Its results improved in 2008's fourth quarter after tanking earlier in the year. It reports first-quarter results on May 5.
GE Capital Bonds: A Good Deal Made Better
On Apr. 22, General Electric Capital (GE) sold $250 million of debt backed by the Federal Deposit Insurance Corp. The three-year notes are supersafe—and the yield reflects that fact: It's a paltry 1.8%, not much better than an equivalent Treasury. But investors can boost their yield further and take on only slightly more risk by forfeiting the FDIC protection, says Don Galante, senior vice-president for fixed income at MF Global, an options and futures broker (MF). The chance of a GE default, he says, is low, since the mega-conglomerate still has a strong credit rating despite its recent downgrade from AAA status. And as long as GE has the ability to issue more debt through the FDIC program, it has a ready source of cash to make good on other liabilities. The key, Galante says, is to purchase one of the company's bonds that mature in, say, 18 months (yield: 2.9%), which puts them safely within the three-year window that certain companies have to issue FDIC-backed bonds.