How Infrastructure Spending Affects Municipal Bonds

Posted by CopyTeam

According to the American Society of Civil Engineers, the 10-year tab to meet the country’s basic infrastructure needs is about $6 trillion. The report, published in March, includes $125 billion needed for bridge repairs, $435 billion for roads and $176 billion for the nation’s transportation systems.¹

For more than 200 years, municipal bonds have been used as public financing instruments in the U.S. Today, two-thirds of infrastructure projects such as schools, hospitals, highways and airports are financed by municipal bonds.²

In addition to providing revenue for infrastructure projects, muni bonds offer an attractive investment opportunity. They provide tax-advantaged yields for current income, stable credit quality and a risk-averse allocation for an investment portfolio. One way to diversify municipal bond investments is through a municipal bond fund or ETF. Given the potential for increased interest and investment in infrastructure in the foreseeable future, we’re happy to discuss opportunities suitable for your portfolio. Give us a call if you’d like to learn more.

President Joe Biden recently proposed a $2.3 trillion plan to invest in the nation’s infrastructure. One funding option Congress may consider is the Build America Bonds (BAB) program, which was introduced during the Great Recession as a means to fund recovery efforts through infrastructure repairs and development. BABs were originally structured for states, cities, schools, airports, mass transit agencies and other public entities to sell for a limited time. They were particularly attractive because the federal government kicked in 35% of interest costs.³

Stimulus packages over the past year have benefited the municipal market by making funds available to state and local governments to make up for lost sales tax revenues due to lockdowns and the beleaguered economy.⁵ Now, with more revenue available, local public agencies may be inclined to issue debt for capital purposes.

Bonds backed by states and cities tend to have high credit ratings and low default risk, and the federal government underwriting municipal debt makes them even more attractive. Historically, muni bonds have offered rates as high as 7% or more.⁶ Furthermore, given the potential that an expensive infrastructure bill may be supported by an increase in income tax rates, municipal bonds offer an opportunity for investors to shield income from taxation.⁷

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¹ Thomas Franck. CNBC. March 26, 2021. “Build America Bonds may be key to financing Biden’s infrastructure plans.” https://www.cnbc.com/2021/03/26/build-america-bonds-may-be-key-to-financing-bidens-infrastructure-plans.html. Accessed May 5, 2021.

² Jenna Ross. Visual Capitalist. Nov. 4, 2019. “From Coast to Coast: How U.S. Muni Bonds Help Build the Nation.” https://www.visualcapitalist.com/municipal-bonds-build-nation/. May 5, 2021.

³ Karen Pierog. Reuters. March 31, 2021. “Build America Bonds may stage a comeback in Biden’s infrastructure plan.” https://www.reuters.com/article/usa-biden-infrastructure-bonds/build-america-bonds-may-stage-a-comeback-in-bidens-infrastructure-plan-idUSL1N2LR1UZ. Accessed May 5, 2021.

⁵ Sanghamitra Saha. Nasdaq. April 7, 2021. “4 Factors Why Muni Bond ETFs Could Rally.” https://www.nasdaq.com/articles/4-factors-why-muni-bond-etfs-could-rally-2021-04-07. Accessed May 5, 2021.

⁶ Ibid.

⁷ Franklin Templeton. March 18, 2021. “Stimulus and Infrastructure: Boon for Muni Bonds?” https://www.franklintempleton.com/investor/tools-and-resources/investor-education/talking-markets-podcast/stimulus-and-infrastructure-boon-for-muni-bonds. Accessed May 5, 2021.

Content prepared by Kara Stefan Communications.

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