I'm Ann Ferentino. I am a Portfolio Manager and a Senior Analyst at Federated Hermes.
How would the Biden infrastructure plan affect munis?
Fiscal policy under the Biden Administration is benefiting munis. Year to date, munis have positive returns relative to most taxable, fixed-income asset classes which have negative returns. And now the announcement of Biden's infrastructure plan, the American Jobs Plan, is also considered to be a positive for the muni market. The American Jobs Plan proposes 2.3 trillion on infrastructure spending. Policy priorities and dollar amounts the administration intends to apply to those priorities are clear, but details beyond that are not. Two aspects of the program that are potentially being considered and would directly impact the muni market is the return of tax exempt advance refundings in direct pay Build America Bonds or BABs type program. The municipal bond tax exempt issuance was reduced by the Tax Cuts and Jobs Act of 2017 because the bill prohibited the use of tax exempt bonds for advanced refundings. As a result, issuers have been doing tax advance refundings using taxable bonds. The repeal of the ban on tax exempt refundings would bring a welcome supply of tax exempt debt back to our market. And at the same time though, the prospects of including a Build America Bond like type program in infrastructure legislation would actually increase taxable muni issuance, reducing tax exempt muni issuance. Because what this would do is it would give issuers the ability to go to the taxable market to finance infrastructure projects and in exchange for the tax exemption, they would be getting a federal subsidy from the government and that would then take away supply from the tax exempt muni market. But that should create positive, be positive for valuations as supply is decreased. Both of these factors are far from a given and we will wait to see if they are included in draft language of the legislation.
Disclosure: Views are as of April 13, 2021 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Past performance is no guarantee of future results. Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.Municipal bond income may be subject to the federal alternative minimum tax and state and local taxes. Advance refunding refers to the practice of taking the funds received from a new bond issuance to pay off a prior issue's debt. Federated Investment Management Company 21-30190 (4/21)