President Trump’s long-awaited $1.5 trillion infrastructure plan is finally coming into the forefront of discussion moving into 2018.
While details have been sparse, the proposed plan would put a heavy burden on local and state governments, as well as private corporations, and could have a significant impact on the municipal bond market. The upshot is that a finalized plan is unlikely to come to fruition in 2018 despite the administration’s promises.
Check out Trump’s policies and their potential impact on the municipal bond market here.
What Is Trump’s Infrastructure Plan?
President Trump promised infrastructure reforms that would revitalize the nation’s roads, bridges, tunnels, airports, railroads, ports, waterways, and pipelines that are “absolutely decaying and rotting and falling apart” within his first 100 days in office. After that deadline passed, the administration promised a detailed plan by the third quarter, but only released a six-page fact sheet outlining the high-level points.
In the fact sheet, the administration proposed $200 billion in outlays related to infrastructure, with the remaining $1.3 trillion footed by local governments and private companies. The plan would also speed up the environmental permitting process by reducing the number of federal agencies involved in the permitting process and delegating to state or local governments when it makes sense, while divesting many government-controlled institutions, like air traffic control.
The administration also proposed ways to improve access to financing for infrastructure projects. For example, the proposal would remove the $15 billion cap on Private Activity Bonds, or PABs, to support future public-private partnership projects, as well as expand PAB eligibility to a greater number of projects. The proposal also suggests that the Federal Budget move away from a cash basis when it comes to investment in infrastructure projects.
Click here to learn more about PABs and when it might be the right time to invest in these instruments.
How Would It Impact Muni Bonds?
The bond markets have seen a sharp increase in yields over the past couple of months amid higher inflation expectations. For example, 30-year Treasury bonds reached 3.223% by late February, which are the highest yields since June 2015. The Federal Reserve also issued a stronger growth outlook for 2018, saying that “further” rate hikes were in the cards. This could have a negative impact on Treasury and municipal bond prices, which can be accessed from our dedicated Municipal Bond Trade section.
At the same time, the municipal bond market has been struggling to rebalance following the tax reforms passed earlier this year. The lower corporate tax rate is expected to reduce demand for municipal bonds from banks and insurance companies, although PABs will continue to be tax-exempt despite an earlier proposal from the House of Representatives to remove their tax-exempt status. Many experts believe that these changes will increase volatility for bonds with lower coupons.
Trump’s infrastructure plan would require state and local governments to come up with $1.3 trillion, which would most likely be done through the issuance of PABs and other municipal bonds. If muni bond demand remains the same, the increase in supply could drive yields higher and prices lower at a time when prices are already under pressure from the combination of higher inflation and recently enacted tax reforms.
It is important to conduct thorough due diligence on municipal bonds before investing in them. Check here to learn more about this process.
Hurdles to Passing the Infrastructure Plan
A new infrastructure bill could radically impact the municipal bond market, but it’s unlikely to come to fruition in 2018 for several reasons.
Midterm elections are coming up in November 2018, which reduces the likelihood of another major legislative effort this year. There’s also the question of where the $200 billion in funding will come from, given that new tax reforms have already created a potential $1.5 trillion deficit over the next ten years. Republicans would also need a supermajority in the Senate to pass any new plan, which would require at least nine Democrats to vote in favor of the plan.
The Bottom Line
President Trump’s proposed $1.5 trillion infrastructure plan would put a heavy burden on local and state governments, as well as private corporations. With the municipal bond market already under pressure, the issuance of new PABs and other muni bonds could push yields even higher and prices even lower.
The upshot is that new legislation is unlikely to come this year given upcoming midterms, concerns over a growing deficit, and the lack of a Republican supermajority. As a result, the impact on the municipal bond market is likely to be limited, at least for this year.
Be sure to check our Muni Bond Investment Strategies section to know more about relevant ways to invest.
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