skip navigation

Stay up to date on timely topics and market events. Subscribe to our Blog now.

16 November 2021

Weekly Municipal Monitor—Infrastructure Passes

By Robert E. Amodeo, Michael Linko

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Municipals Posted Positive Returns During the Week

The US muni yield curve moved 2-5 bps lower during the week. Municipals shrugged off the Treasury rate selloff and outperformed across all maturities. Technicals strengthened as fund flows accelerated. The Bloomberg Municipal Index returned 0.15%, while the HY Muni Index returned 0.31%. This week we highlight the passage of the Infrastructure Investment and Jobs Act and look at the latest draft of Biden’s Build Back Better spending plan.

Technicals Strengthen as Municipal Mutual Fund Inflows Accelerate

Fund Flows: During the week ending November 10, municipal mutual funds recorded $1.9 billion of net inflows. Long-term funds recorded $1.8 billion of inflows, high-yield funds recorded $1.2 billion of inflows and intermediate funds recorded $163 million of inflows. Municipal mutual funds have now recorded inflows 77 of the last 78 weeks, extending the record inflow cycle to $156 billion, with year-to-date (YTD) net inflows surpassing a record calendar-year pace at $95 billion.

Supply: The muni market recorded $11 billion of new-issue volume during the week, up 53% from the prior week. Total YTD issuance of $407 billion is 2% lower from last year’s levels, with tax-exempt issuance trending 7% higher year-over-year (YoY) and taxable issuance trending 23% lower YoY. This week’s new-issue calendar is expected to decline to $9.1 billion of new issuance. The largest deals include $1.2 billion state of Mississippi and $1.2 billion Grand Canyon University transactions.

This Week in Munis—Infrastructure Passes

Earlier this month, Congress passed the Infrastructure Investment and Jobs Act (IIJA), which was signed into law by President Biden yesterday on November 15. The law includes a modest expansion of tax-exempt private activity bonds, but major bond incentives of tax-exempt advance refunding bonds and federally subsidized direct pay bonds (akin to the Build America Bond program) were excluded.

As highlighted in our last blog related to infrastructure policy, IIJA includes a reauthorization of existing federal spending on highways and transit. It also includes new spending on highways, transit, electric vehicles, airports, ports, clean water, clean energy and broadband. We anticipate the sheer dollar amounts allocated to the various transportation sectors will be an incremental positive for certain credits but we expect the overall market effect of the spending will be muted.

With the bipartisan infrastructure bill behind us, all eyes are looking forward to the proposed $1.75 trillion Build Back Better bill currently being debated by Congress. As the current draft stands, municipal supply incentives of tax-exempt advance refunding bonds and taxable direct-pay bonds are also not included within this legislation. While most muni bond buyers will be disappointed by an ongoing restriction of tax-exempt bond refinancings, the absence of a taxable direct-pay bond solution ensures that the traditional tax-exempt muni bond will remain the cornerstone of domestic infrastructure financing.

Build Back Better also includes a few notable tax provisions. The most recent draft does not increase the top marginal tax rate of 37%, but it does include a surcharge of up to 8% on incomes over $25 million, increasing the top potential federal effective tax rate from 40.8% to 48.8%. Meanwhile, the bill lifts the state and local tax (SALT) deduction to $80,000 from its current level of $10,000. The bill also includes a proposed minimum corporate income tax of 15%, impacting the potential value of tax-exempt muni bonds for insurance companies.

We would expect the combined effect of these provisions on the muni market to be marginally positive. Any tax increase on ultra-high net worth individuals should spur incremental demand, but we believe the prospect of tax increases was at least partially reflected in current market valuations. An expansion of the SALT tax-deduction could reduce all-in effective tax rates in high tax states, but we do not anticipate a SALT expansion would significantly curtail the marginal demand for municipal bonds. Lastly, while insurance companies facing a minimum tax rate may be incentivized to trim tax-exempt holdings, it is important to realize that they hold less than 15% of outstanding municipal bonds. While Build Back Better is still fluid and politically fraught, we continue to monitor developments but anticipate the ultimate impact on the municipal market will be more subdued than headlines may suggest.

Exhibit 1: Municipal Bond Yields and Index Return
Municipal Bond Yields and Index Return
Source: Bloomberg. As of 12 Nov 21. Select the image to expand the view.
Exhibit 2: Tax-Exempt Muni Valuations
Tax-Exempt Muni Valuations
Source: Bloomberg. As of 12 Nov 21. Select the image to expand the view.
© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.