Week of 11/15/2021

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Lower Rated Munis Biggest Winner…Credit Positive: Fed Infrastructure Investment… Illinois Leads Infrastructure Funding… Credit Positive: Fed Infrastructure Investment… Illinois Leads Infrastructure Funding… More Federal Funds for Puerto Rico… Illinois’ Come Back… Cook County, IL Earns Upgrade, Outlook Boost… Airports Outlook Positive… New Federal Reserve Appointments…

Lower Rated Munis Biggest Winner… Lower rated tax-free bonds have returned 7.2%, seven times the return on overall municipal bonds this year. The performance gap is the widest since 2012. Taxable corporate bonds and U.S. Treasuries show negative returns. This years’ second largest investment in lower rated municipal bonds was recorded last week, with more than $1.2 billion invested in high yield bonds. For 36 straight weeks, investors have added cash to muni bonds, a metric reflecting strong demand. Economic improvements, federal aid to governments and debate on higher taxes have boosted the riskiest tax-free bonds the most.

Credit Positive: Federal Infrastructure Investment… The transportation sector, a leading beneficiary of infrastructure package, stands to gain significantly with a $118 billion transfer to the highway trust fund that restores funding for the next five years. Counties own 38% of public roads, so the much awaited funds will go a long way in supporting local governments. The federal investment will mitigate extreme weather related risks, ward off cyberattacks and allow for maintenance of roads, airports and transit. Funding of $55 billion for water utilities will address material infrastructure needs of aging systems. Public power utilities will have over $65 billion for grid resiliency, transmission and cybersecurity investments, allowing utilities to limit new borrowing. The $1.2 trillion package supports revenue growth for states and locals, allowing governments to maintain rapidly aging assets and clear project backlogs. The Infrastructure Investment and Jobs Act, soon to be signed by President Biden, will free up debt capacity and reinvigorate capital spending by states and local governments. Due to prolonged underinvestment, the new funding falls short of the nation’s infrastructure needs.

Illinois Leads Infrastructure Funding … “Thanks to this historic investment, we will be able to widen the scope of our historic Rebuild Illinois capital program,” Governor Pritzker welcomed the $1.2 trillion infrastructure package. Illinois stands to receive more than $17 billion, of which more than half is for highways. Significant federal infrastructure funding will supplement a six-year, $45 billion infrastructure program approved by lawmakers in 2019 which authorized $23 billion of new bonds that the state has been tapping over the last two years. Chicago’s debt-based five-year capital program will get a boost from federal package. Chicago’s O’Hare airport, which has earned a stable credit outlook from all ratings agencies, will receive an infusion of federal funds, to help ramp up an $11 billion planned overhaul and expansion. The federal funds will be handy as Chicago Mayor Lightfoot makes good on her promise to replace lead water lines. Political leaders, along with state and local governments, are accelerating longstanding projects. Illinois is a top recipient of latest federal funding following California, Texas, New York and Florida.

More Federal Funds For Puerto Rico… At least $2.2 billion will rebuild Puerto Rico’s roads, bridges, public transportation and broadband from the $1.2 trillion infrastructure package. This includes about $900 million for road and highway reconstruction, $456 million for transportation initiatives, $225 million to repair and replace bridges and $102 million for airport. Federal funds have played a crucial role in boosting the Island’s economy.

Illinois’ Come Back… With a $418 million budget surplus in Fiscal 2022, Illinois has come a long way from last November when the state warned of ‘sizeable deficits’ after voters rejected Governor Pritzker’s graduated income tax plan. Illinois has trimmed its deficit estimate for the next five years, with a $406 million budget shortfall forecast in Fiscal 2023 down from $2.9 billion earlier estimate. Illinois has “made tremendous progress in putting Illinois on the right fiscal path,” Governor Pritzker added “I am committed to building on this significant progress while tackling our remaining fiscal challenges.” For the first time in two decades, Illinois received credit upgrades this year. The extra yield investors demand for Illinois bonds has dropped from 300 basis points to 70 basis points.

Cook County, IL Earns Upgrade, Outlook Boost… The nations’ second largest county, Cook County in Illinois, earned an upgrade to “AA-”, from Fitch and S&P boosted its outlook to stable from negative. Resilience during COVID-19, federal aid, reserves and ongoing supplemental pension contributions led to the positive rating actions. The County’s finance director noted, “We continue to work with the pension fund, our labor partners and the state legislature on legislation that incorporates actuarially based contributions going forward. Assuming the county can secure a mutually acceptable approach with all its stakeholders, we would expect to introduce legislation in next year’s legislative session.” The outlook boost begins to reverse a pattern of unfavorable ratings actions between 2011 and 2020.

Airports Outlook Positive… Strong rebound of domestic air travel and stabilizing credit conditions of airlines have boosted the prognosis for airports’ rate-setting on tenants and passengers. Airports expect to receive $25 billion from the recent federal infrastructure bill and logged about $20 billion from three rounds of prior COVID-19 related federal aid. Separately, U.S. airlines have received more than $82 billion in COVID-19 related secured loans and payroll support programs. Taken together, more than $100 billion of federal aid to the aviation sector, arguably the most hard -hit by Covid-19, scales many times higher than $6.6 billion federal aviation aid in 2001 and compares favorably to the $94 billion federal aid to the auto sector in 2009. New York airports are top aid recipients, followed by Atlanta, Los Angeles and Chicago O’Hare. Recent opening of international routes will smooth enplanement recovery.

New Federal Reserve Appointments… President Biden is weighing whether to keep Jerome Powell as chair of the Federal Reserve for a second term or to elevate Fed Governor Lael Brainard as the nation’s top central banker, per an administration official. Looming ahead are several new central bankers to be appointed by President Biden. Federal Reserve Governor Randal Quarles is stepping down, and two senior officials, Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren, retired recently. Fed Vice Chair Richard Clarida’s term ends next year. A lawmaker who heads the Senate Banking Committee said that President Biden will probably advance a ‘whole slate’ of nominees to the Federal Reserve Board, which may or may not include Federal Reserve Chair Jerome Powell.

Compare 30-Year taxable U.S. Treasury yield 1.92% to 30-Year tax-exempt muni bond yield “AAA” 1.61%; “AA” 1.78%; “A” 2.05%; “BBB” 2.35%. For investors in the 35% tax-bracket, a 2.5% tax-exempt yield is equivalent to a 3.62% taxable yield. Top rated tax-free bonds yield 84% of comparable taxable U.S. Treasuries.