My name is Chris Wu. I'm a Portfolio Manager at Federated Hermes.
How may the infrastructure bill affect the bond market?
Until a final package is passed, it's difficult to predict. Unlike the COVID relief packages that injected trillions in the U.S. economy, the infrastructure spending is meant to create a foundation for faster future growth. Higher taxes to pay for it, to some extent, offset some of the near term benefits the higher spending creates for the economy. So I see a few potential implications for the bond market. First, if deficit spending is required to fund all or part of the package, that could put upward pressure on interest rates. Then again, rates dropped instead since March this year, even after more debt was added. Second, assuming the infrastructure bill promotes stronger economic growth, that should mean higher interest rates as well. There should also be considered a positive for the credit market, either with strengthened credit fundamentals, and as reduced default risk. The infrastructure bill would be especially beneficial for municipal bonds, as more federal funding may mean less issuance overall and would put communities in a stronger financial position. Additionally, municipal bonds should be more attractive if tax rates are increased on corporations and high net worth individuals in the final bills. In any case, since the infrastructure package isn't meant to have an immediate economic impact, chances are, in whatever form it takes, your investment strategy shouldn't change in any sizable way in the near term. However, it may create specific opportunities, depending on the final components in the bill.
Disclosure: Views are as of Aug. 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. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. Past performance is no guarantee of future results. Federated Investment Management Company 21-40420 (8/21)