Infrastructure and municipal bonds—Washington gridlock and your portfolio

December 30, 2019

Although it’s widely agreed the U.S. needs to address its aging infrastructure, there's no consensus on how to fund the improvements, as Washington remains gridlocked. Associate Portfolio Manager Dennis DiCicco discusses how individual states are funding infrastructure improvements on their own and how the municipal bond market is handling this new bond issuance.

Looking back to the 2016 presidential election, infrastructure spending had been a key topic. Both sides of the aisle could agree that this is an issue in America that needs to be addressed; however, the key point is how do we fund this. Everything’s been floated in Congress from bring back the Build America Bond Program from 2009 and 2010, help facilitate the use of public-private partnerships, and also, possibly, raising the federal gas tax. However, the divide in Washington at this point has really sort of left the potential of a deal getting done in the near term slim to none.

In the meantime, states have really picked up the onus and have been funding a lot of these infrastructure financings, really on their own. They’ve had a couple years of really solid returns from a revenue perspective and also have been able to fund these through both the taxable and tax-exempt market. Some low-hanging fruits for states have been in the airport and toll road sectors, two sectors that have seen outsize issuance in recent years, mainly due to their dedicated revenue streams. This outsize issuance has been well received by a market that’s been really starved for bonds due to net negative supply and also outsize demand really exacerbated through 2017 tax reform. If at some point the federal government did step in and come up with an infrastructure bill, that would only enhance the prospects of getting more projects done, and possibly lowering borrowing costs for both states and local governments.

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