The Guggenheim Build America Bonds Managed Duration Trust (ticker:GBAB) is a diversified closed end fund that invests in taxable municipal securities known as “Build America Bonds” or “BABs”. Build America Bonds were issued as part of the American Reinvestment and Recovery act of 2009. They provided state and local governments with an alternative way of financing capital projects. To help offset issuers’ borrowing costs, the US Treasury subsidized 35% of the interest paid to investors. These subsidies allow issuers to sell BABs that have a higher interest rate than tax exempt municipal bonds. Most BABs also offer higher, more attractive yields than other similar rated private bond issuers in the taxable fixed-income market.
The BAB program allows state and local governments to issue an unlimited amount of taxable debt through December 31, 2010. As of today, the program has not been extended, and many state and local governments have been issuing BAB bonds in order to get in “under the wire”. This has caused a temporary glut in the market.
The GBAB fund was started only a few months ago (inception date: October 26, 2010). The primary objective of the fund is to provide current income with a secondary objective of long-term capital appreciation.
The fund uses a two-pronged approach to keep the portfolio effective duration under 10 years:
– Use interest-rate swaps to trade “inefficiencies” in the yield curve. There are portions of the yield curve that are relatively flat and offer decreases in duration without significant yield concessions.
– Invest up to 20% of the portfolio assets in non-BAB securities which may consist of short-duration fixed income securities like senior loans, high yield bonds and asset-backed securities. The idea is to decrease the overall duration while potentially adding incremental yield.
There is likely a good short-term tactical trading opportunity in GBAB for the following reasons:
- There has likely been major tax loss selling in GBAB. The IPO was in October, and the fund has already dropped over 10% from the initial offering price of $20.
- Since November 30, the NAV has dropped less than 1%, while the market price has dropped a whopping 12%. The discount to NAV as of December 27 is -6.23% which is the largest discount since inception.
- The glut of new BAB issuance will come to an abrupt halt starting in 2011. This change in the BAB supply demand balance should help the NAV value of GBAB in the first quarter of 2011.
Guggenheim Build America Bond Fund pays quarterly
- Total Assets= 307 Million
- Annual Distribution (Market) Rate= 7.96%
- Fund Expense ratio= 1.27% Discount to NAV= -6.23% (12/27)
- Leverage: Up to 33% of assets.
Full Disclosure: Long GBAB in some IRA accounts.