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Week of 8/9/2021
What’s in the Infrastructure Bill For Municipal Bond Issuers… Bellwether Bond Yield Hits Low… Second Rating Outlook Boost For New Jersey… Detroit’s Duggan Leads… Accelerating Transport Demand… Puerto Rico Revenue Outperforms… Labor Woes…
What’s in the Infrastructure Bill for Municipal Bond Issuers… The largest long term infrastructure investment in nearly a century is set to deliver billions of federal dollars to U.S. states. Illinois alone will get over $11 billion federal aid for highways and bridges over five years, California expects $9.4 billion for public transport, and New Jersey is close to $8 billion. Texas will get the biggest share of the bounty. The historic legislation brings $110 billion in new spending for roads and bridges, $73 billion for power grid upgrades, $66 billion for rail including Amtrak, $65 billion for broadband expansion, $55 billion for clean drinking water and $39 billion for transit. The funding agreement mitigates social and environmental risks as it allocates $15.7 billion to replace lead utility service lines, of which Illinois and Chicago stand to receive a big portion. With Flint, MI 2014 water crisis in the rearview, federal funding to address the environment is credit positive for states and cities. A pending amendment could allow state and local governments to use up to 30% of their unspent Covid-19 federal relief funds, freeing up between $80 billion and $100 billion for capital projects. Typically, large federal initiatives carry favorable implications for states and local governments. For example, the Federal Aid Highway Act of 1956, signed by President Eisenhower, authorized the building of 41,000 miles of interstate highway, setting off construction projects in all states and territories, as did President Obama’s Build America Investment Initiative. ‘A once-in-a-generation investment in infrastructure’, the Bipartisan Infrastructure Investment and Jobs Act is likely to be approved by lawmakers this week and is a big win for municipal bond issuers.
Bellwether Bond Yield Hits Low… 10-year U.S. Treasury bond yield hit 1.13%, its lowest in five months, and down from 1.7% in May. Disappointing jobs data, softer- than-expected inflation and Delta variant concerns contributed to the yield fall. Inflation fell below expectations, consistent with the notion that inflation may have peaked for now. Along with the significant drop in U.S. yields, advanced nations’ bond yields tumbled further into negative territory. Japan’s 10-year yield dipped below zero last week for the first time this year. All of Germany’s debt, a reference for the eurozone, now yields below zero. The bond rally has expanded the stock of negative yielding debt to more than $16.5 trillion worldwide, the highest in six months. The U.S. Treasury stated it plans to cut down the size of government debt sales in the next quarter as funding needs for relief efforts ease. Lower supply of much sought U.S. Treasury bonds could bolster prices. Long term tax-free municipal bonds are currently yielding 77% of taxable U.S. Treasury bond yield, up from 69% in mid-July. A higher Muni-Treasury yield ratio reflects relative value in tax-free bonds. Bondholders have been rewarded with gains as yields trended lower.
Second Rating Outlook Boost For New Jersey… S&P boosted its outlook on New Jersey bonds to positive from stable last week, echoing a similar outlook raise from Moody’s in July. “The outlook revision reflects our view that the decisions made by the state on how to spend surplus revenues in fiscal years 2021 and 2022 could position New Jersey to materially improve its long term liability profile,” S&P stated as it affirmed the Garden State rating at “BBB+”. New Jersey Treasurer assured that steps like ‘making record pension payments, reining in soaring health care costs, controlling debt, building our surplus and pursuing reliable and recurring revenue sources’ have gotten accolades from ratings agencies. On July 1, the Murphy administration formally made New Jersey’s largest pension payment in decades, $6.9 billion, marking the first full pension contribution in 25 years. “We have been entrusted by the people of New Jersey to get our fiscal house in order,” Gov. Phil Murphy said in an August 4 statement. “The S&P Global Rating outlook upgrade, in addition to the recent outlook upgrade from Moody’s, shows that we’ve made significant progress.”
Detroit’s Duggan Leads… On November 2, Motor City will elect its next Mayor, in which Mayor Duggan seeks top office for the third time. Siding with Mayor Duggan, Detroit voters rejected a city charter revision ballot proposal, Project P, that called for creating some new city departments, restructuring the police and fire departments and linking water rates and public transportation fares to income. Mayor Duggan opposed the revisions as he estimated it could cost upwards of $2 billion over four years. Incumbent Duggan is the top contender, having won 72% of the mayoral primary election votes last week.
Accelerating Demand for Transport… 2021 could see pre-COVID-19 activity levels for toll traffic, with parking demand expected to restore in 2022 and air travel in 2023 per S&P estimates. Public transit ridership faces the longest recovery relative to other U.S. transportation subsectors. At present, airport activity levels are at 70% of pre-COVID level and public transit has recaptured 45% of pre-COVID ridership. Ratings agencies have reversed outlooks on many transportation related muni bonds from negative to stable. Lower credit risks come from favorable developments such easing of mobility restrictions, pent-up demand, vaccinations and additional federal spending.
Puerto Rico Revenue Outperforms… The Island’s general fund revenue collections are 20% higher than a year ago and have outperformed estimates. Over $4 billion direct federal aid from America Rescue Plan is targeted to boost the Island’s economic development. Both the Oversight Board and Governor Pierluisi seek parity federal Medicaid funding. On the mainland, a bipartisan compromise could provide Puerto Rico’s Medicaid program with five years of federal funding with a Federal Matching Assistance Percentage (FMAP) of 76%, compared to 83% FMAP for other U.S. territories. Puerto Rico, which received a “D” grade from the American Society of Civil engineers for its infrastructure, is set to receive over $1 billion for highways from the likely Bipartisan Infrastructure Investment and Jobs Act.
Labor Woes… Since April 2021, labor supply issues have made headlines. Nationwide service jobs in leisure, hospitality, education, healthcare and local government sectors were more than half of COVID-19 related job losses. Some states, CA, NY, HI carry a slack labor market, with two unemployed people for every open position. Expiry of federal aid programs could present an income cliff, a headwind for certain tax-free bond sectors such as affordable housing. The Biden administration has given renters a two month eviction reprieve, states and locals have spent less than 10% of the $47 billion federal rent aid in the pipeline. As seen in New York state, where state tax collections dipped only 1.7% in 2020, despite a 11% employment decline, states with steep progressive income tax regimes proved to be more resilient.
Compare 30-Year taxable U.S. Treasury yield 1.93% to 30-Year tax-exempt muni bond yield “AAA” 1.42%; “AA” 1.69%; “A” 1.81%; “BBB” 2.22%. For investors in the 35% tax-bracket, a 2.2% tax-exempt yield is equivalent to a 3.4% taxable yield. Top rated tax-free bonds yield 74% of comparable taxable U.S. Treasuries.
If you have any questions or desire updated information contact your GMS Account Executive.