Same Ole Muni Story Is Far From Boring

We have acknowledged the President’s objective to raise taxes on corporations and wealthy individuals, which would have implications for the municipal bond market as higher taxes raise the allure of tax-efficiency for the asset class. Given the Democrats’ marginal control of the Senate and their thinner hold on the House, President Biden will have to call upon his time spent in the Senate and engage in serious bi-partisan negotiations in order to enact some part of his agenda, especially since he has repeatedly stated that “inaction” is not an option. Although we do not expect the President to even come close to getting his wish list fulfilled, his "go big or go home" negotiating strategy may actually give him some important victories. The President has made infrastructure his defining policy initiative, and while the administration’s definition of infrastructure may extend beyond a more traditional acceptance of its meaning, there is widespread bi-partisan support to pass a comprehensive infrastructure package. In our view, there are plenty infrastructure investment needs for the more obvious funding beneficiaries such as highways, bridges, tunnels, airports, ports, passenger rail, water infrastructure, and the nation’s electrical grid. Given the recent ransomware attacks on U.S. assets, we would argue that an elevated need to invest in cyber-security infrastructure would take on ample participation from both the public and private sectors.

We have been saying for some time now that infrastructure investment would likely rely on municipal bonds as an important component of the overall funding blueprint. Municipal bonds have historically provided low-cost financing to state and local governments in support of their infrastructure needs and we simply cannot envision a more cost-effective and efficient funding portal. As we move forward, time will tell whether certain initiatives get through either by bi-partisan support or by the budget reconciliation process with the latter bound to have practical limitations and the former subject to a deep political divide. We will be on the lookout for any realistic revival of the Build America Bond program, restoration of tax-exempt advance refundings, as well as any efforts made to relax the private activity bond volume caps and bank qualified bond constraints.

For now, state and local governments, school districts, and other viable segments of public finance are parsing through the $350 billion in relief allocations provided by the American Rescue Plan and deciding on the best way to utilize and invest these funds. For many municipalities, American Rescue Plan money can bridge the revenue gap created by the pandemic, and for others the resources can help to fund ongoing essential services. For many sectors of the muni market, Rescue Plan relief assistance can be accretive to overall credit quality and can help support a stable outlook. The President’s newly released budget also provides for a meaningful $36 billion-plus investment in climate change initiatives which could assist those local governments with out-sized deficits in climate change spending. With so much federal support flowing through the system and a stronger-than-anticipated recovery, many issuers are not necessarily strongly motivated to access the muni capital market in order to satisfy funding needs and respond to budgetary deficits.

For a comprehensive portfolio evaluation of your municipal holdings, please contact your Oppenheimer Financial Professional.