Macro

Barclays: Select BABs with Low Call Risk May Offer Value

Barclays sees value in Build America Bonds amid market challenges, highlighting opportunities in bonds with low coupons and long maturities.

By Max Weldon

4/15, 14:27 EDT
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Key Takeaway

  • Barclays recommends investing in specific Build America Bonds (BABs) with low call risk and low coupons, highlighting their value despite recent market concerns.
  • Investor apprehension has grown due to early calls of BABs for refinancing with lower-cost tax-exempt offerings, affecting bond prices.
  • Legal challenges against refinancing trends, like the University of California's $1 billion deal, underscore market tensions around BABs.

Build America Bonds Spotlight

Barclays Plc has identified an opportunity in Build America Bonds (BABs), despite recent market apprehensions due to early call actions by some issuers. Strategists, including Mikhail Foux, suggest focusing on BABs unlikely to be called and those with low coupons, such as the Salt River Project's 4.8% coupon bond maturing in 2041. This advice comes amidst investor concerns over a trend where issuers refinance BABs with lower-cost tax-exempt offerings, driven by the relative low yields of non-taxable bonds. An index tracking BABs has shown a relative cheapening, indicating potential value for discerning investors.

Investor Challenges and Opportunities

Investors are navigating a complex bond market, illustrated by the case of the Regents of the University of California's $1 billion refunding deal, which faced legal challenges over its call provisions. This situation underscores the nuanced risks and strategies in bond investment, particularly in a market where callable bonds and refinancing trends can impact returns. Despite these challenges, the resurgence of interest in bonds, fueled by rising interest rates and improved returns, is drawing investors back into the market. Retail investors, in particular, are showing increased activity, with significant upticks in Treasury bill sales and overall bondholdings.

Rising Interest in Fixed Income

The Federal Reserve's rate hikes have revitalized the bond market, offering yields that have become increasingly attractive to investors. This shift is prompting a reconsideration of bonds within investment portfolios, moving away from the low-yield environment that pushed investors towards stocks. Retail investors are exploring various bond options, including corporate and municipal bonds, to capture higher yields. However, the learning curve is steep, with investors facing challenges such as understanding call provisions and managing price fluctuations.

UBS's Take on Investment-Grade Corporate Bonds

UBS remains bullish on investment-grade corporate bonds, citing a still-appealing effective yield around 5.5%, despite a decrease from the previous year's highs. The firm highlights the excess return of investment-grade bonds over Treasuries and points to strong investor demand and sound corporate profits as supportive factors. UBS recommends focusing on the financial sector within the investment-grade market and suggests a strategic preference for short- and intermediate-term durations to balance yield and volatility.

Street Views

  • Mikhail Foux, Barclays (Neutral on Build America Bonds):

    "People are concerned about BABs altogether, but there is still a universe of bonds that are attractive, even at these levels."

  • Yingchen Li and Ian Rogow, Bank of America Corp. (Neutral on Build America Bonds):

    "[An index of Build America Bonds has cheapened in recent months relative to a broader taxable gauge.]"