Build America Bonds (BABs) in 2025: A Guide for Australian Investors

With global bond markets shifting in 2025, Build America Bonds (BABs) are once again on the radar for investors beyond US borders. While these US-issued municipal bonds were first introduced in 2009, the conversation has returned as the Biden administration proposes infrastructure spending programs reminiscent of the original BABs. For Australian investors searching for yield, stability, and diversification, understanding BABs is more relevant than ever.

What Are Build America Bonds?

Build America Bonds are taxable municipal bonds issued by US state and local governments. First launched during the aftermath of the Global Financial Crisis, BABs were designed to support infrastructure projects while offering unique incentives to issuers and investors alike. Unlike traditional US municipal bonds—which are generally exempt from federal income tax—BABs pay taxable interest but offer a federal subsidy to the issuer.

• Taxable Interest: BABs pay interest that is subject to US federal income tax, making them accessible to a wider pool of global investors, including Australians.

• Federal Subsidy: The US government covers a portion of the issuer’s interest costs (originally 35%), allowing state and local governments to borrow at lower net rates.

• Purpose: Proceeds fund public infrastructure—think transport, schools, hospitals, and energy projects.

While the program officially ended in 2010, outstanding BABs remain in circulation. In 2025, renewed interest has surged as the US government discusses new infrastructure funding mechanisms that could mirror or revive BAB-like programs.

2025 Policy Landscape: Why BABs Are Back in the Spotlight

The US Treasury and Congress have floated proposals to reintroduce BABs—or similar taxable municipal bonds—as part of a broader infrastructure push. This is significant for several reasons:

• Potential New Issuance: If reauthorized, new BABs would hit the market, offering fresh opportunities for international investors.

• Yield Appeal: With global rates remaining relatively low and Australian government bonds yielding less than 4% in early 2025, BABs’ higher yields (often exceeding US Treasuries) are attractive.

• Currency Diversification: BABs are denominated in USD, offering Australians a hedge or exposure to the US dollar.

• ESG and Green Bonds: Many BAB-funded projects have environmental or social infrastructure goals, aligning with the growing ESG investment trend in Australia.

According to the US Municipal Securities Rulemaking Board, over $180 billion of BABs are still outstanding as of 2025. Some are held in global bond funds or can be accessed via international brokerage platforms.

Risks, Rewards, and How Australians Can Access BABs

For Australians, BABs present both opportunities and challenges. Here’s how they stack up:

• Yield Advantage: BABs typically offer higher yields than equivalent US Treasury bonds, and often more than Australian government bonds.

• Credit Quality: Most BAB issuers are US states or major cities with strong credit ratings, but some risk remains—especially with changing US fiscal policies.

• Interest Rate Risk: Like all bonds, BABs are sensitive to US interest rate movements. With the US Fed signalling a ‘higher for longer’ stance into late 2025, price volatility is possible.

• Currency Risk: AUD/USD movements can impact returns. A strengthening Aussie dollar could erode gains from BABs unless hedged.

• Liquidity: BABs are less liquid than Treasuries, but major international brokers and some Australian fund managers offer access via global bond funds or ETFs.

For example, the Vanguard Global Credit Bond Fund (available in Australia) holds a portion of its assets in US taxable municipal bonds, including legacy BABs. Some platforms also allow direct trading of US municipal bonds, although minimum investments and access may vary.

Final Thoughts: Should BABs Be on Your Radar?

As the US infrastructure debate continues, the return or expansion of Build America Bonds could present a rare opportunity for Australian investors seeking global diversification and attractive yields. While not without risks—especially around currency and interest rates—BABs stand out as a unique way to access the stability of US public sector credit and the growth of American infrastructure.

For those with a moderate-to-high risk appetite and a desire for USD exposure, keeping an eye on developments in the US muni bond space could pay dividends in 2025 and beyond.