RPT-UPDATE 2-US Treasury: Build America Bonds show promise

(Fixes spelling of lawyers name) (Adds comments from hearing, details on program)

WASHINGTON, May 21 (Reuters) - The new Build America Bonds launched by the Obama administration carry a permanent subsidy and have the potential to serve a broader portion of the state and local debt sector, a senior U.S. Treasury official said on Thursday.

"While it is premature to make any general statements about the program or its future prospects, the early signs are positive," Alan Krueger, Treasury assistant secretary for economic policy, told a U.S. House of Representatives Ways and Means subcommittee.

"The Build America Bond program offers the potential for a broader and more efficient market for at least some portion of the state and local governmental debt sector as compared to the traditional tax-exempt bond market," Krueger said.

Easing some concerns among investors in the bonds, Krueger said the appropriation to subsidize 35 percent of the coupon interest on Build America Bonds was permanent and indefinite for bonds issued under the program, which allows an unlimited amount of issuance in 2009 and 2010.

He said that the bonds, targeted toward rebuilding and maintaining U.S. infrastructure, offer significant savings to state and local governments as compared with traditional tax-exempt munis, with effective interest rates ranging from 40 to 100 basis points lower for the $9.5 billion issued so far.

At the hearing, executives from bond issuers and dealer groups called for the direct subsidy of Build America Bonds to be broadened to allow more uses and extended beyond 2010.

"The development of a robust market for alternative financing tools such as Build America Bonds will be hampered by the temporary nature of the program," said Gary Bornholdt, a bond lawyer with Nixon Peabody LLP.

Krueger said the Treasury would in the next several weeks provide "priority guidance" on bond volume cap allocations for $25 billion in Recovery Zone Bonds, which were authorized by the Obama administration's economic stimulus act to aid areas hit hard by unemployment. These carry a deeper subsidy of 45 percent of the coupon interest.

In addition, Krueger said the Treasury has a longer-term priority project to provide guidance on the "stripping" of tax credits from tax credit bonds to broaden the investor appeal for such securities. This guidance could come within the next several months, he added.