Beyond Bulls & Bears

Fixed Income

Muni Impact of US Infrastructure Bill Could Prove Longer Term

While the new US infrastructure investment bill didn’t have any initiatives directly targeting the municipal bond market, there are still implications for munis in the longer term, according to our Municipal Bond Director of Research Jennifer Johnston. She explains the ramifications for investors in the space.

On November 15, 2021, US President Joe Biden signed into law HR3684, the Infrastructure Investment and Jobs Act. This bipartisan infrastructure bill includes US$1.2 trillion of federal spending over the next five years. Of the US$1.2 trillion, US$550 billion is new spending, while the remainder will fund the reauthorisation of the Highway Trust Fund. The final bill did not contain certain municipal bond market-related initiatives such as advance refunding, Build America Bonds (BABs) or elimination of the state-and-local tax (SALT) deduction cap.

The US$550 billion in new spending is spread out over a number of transportation subsectors. The largest spending categories include US$110 billion for roads and bridges, US$73 billion for electric grid infrastructure, US$66 billion for rail, US$65 billion for broadband projects and $55 billion for water infrastructure. Moneys will be allocated using various formulas and distribution methods to states, local governments and agencies that will ultimately determine how the money is spent.

This bill comes on the heels of three rounds of federal stimulus in response to COVID-19, much of which is also being spent on infrastructure and/or directed at municipal sectors.

We don’t expect the new bill to inject the economy with US$1.2 trillion right away. Funds will be available in increments over the next five years. We think that this could result in additional municipal debt issuance, but that will take time as projects are selected and plans are created and executed. With funding coming in over several years, the impact on the muni market is also expected to play out over several years.

Although the ultimate amount of this package is less than what Biden had initially sought out, we do think this smaller amount is far more manageable. Given the multitude of government entities across three levels of government required to carry out a package of this type, we think this smaller package has a better chance of being implemented in its entirety. A larger package might have proved too onerous to execute in the time frame.

We continue to watch as the president and Congress discuss the Build Back Better Act, targeting social infrastructure as well as the budget reconciliation process for additional funding. Market-favoured programmes like Build America Bonds and advance refunding might not make it into legislation, but removal or adjustment of the SALT deduction cap appears to be back on the table. Either way, the muni market continues to be an important part of how the country addresses infrastructure while providing investors an opportunity to earn tax-free income.

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Because municipal bonds are sensitive to interest rate movements, a municipal bond portfolio’s yield and value will fluctuate with market conditions. Bond prices gener­ally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the portfolio’s value may decline. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.

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