President Donald Trump has taken steps to unlock $1 trillion in spending on infrastructure, which could help create jobs and modernize aging bridges, airports and highways.
In campaign documents, investors can find clues as to where these investments are being directed and potentially identify opportunities within the municipal bond market. Many muni bonds could benefit from increased federal funding that could help reduce risk and support higher yields.
In this article, we will look at President Trump’s infrastructure plan and how investors can capitalize on it using municipal bonds.
Trump’s Infrastructure Plans
President Trump promised to spend $1 trillion on infrastructure through a combination of public and private investment. According to his advisors, the investments will focus on feasible projects that can ensure national security – such as electrical grid improvements – as well as those creating direct jobs and/or boosting the manufacturing sector. These spending measures have received bipartisan support from Democrats, making them likely to succeed near-term.
In a campaign document, President-Elect Trump outlined a proposed $137.5 billion investment in 50 different projects that would create 193,350 direct jobs and an estimated 241,700 indirect job years. These projects include everything from a $10 billion overhaul of outdated radar-based air traffic control systems to energy storage and grid modernizations required by the California Public Utilities Commission to deal with the state’s blackouts.
Many of the largest projects are focused on states like New York – such as the $14.2 billion Second Avenue Subway – but there are many smaller projects spread throughout the United States. For example, Kansas City Missouri, and Seattle, Washington, could receive funding for new airport modernizations while Michigan’s $4.5 billion Gordie Howe International Bridge could receive funding to connect Interstates 75 and 94 with the Herb Gray Parkway in Ontario.
Capitalizing on Infrastructure
Investors can capitalize on President Trump’s $1 trillion in planned infrastructure spending through equities, municipal bonds and even commodities like copper. However, the right decision would depend on an investor’s risk profile and long-term investment goals.
The five biggest projects mentioned in President Trump’s campaign document include:
|Project Description||State(s) Affected||Budget Amount|
|Second Avenue Subway – Phases 2 & 3: NYC's first major expansion of the subway system in more than 50 years.||New York||$14.2 Billion|
|Texas Central Railway: A 240-mile high-speed rail line connecting Houston and Dallas/Fort Worth.||Texas||$12 Billion|
|Gateway Program: Reconstruction of the Northeast Corridor rail infrastructure between Newark and NYC.||New York||$12 Billion|
|DC Union Station Expansion & Rehab: Modernization of Union Station and surrounding rail infrastructure.||Washington DC||$8.7 Billion|
|15 Bridges on I-95: All 15 bridges are structurally deficient and need to be repaired or replaced.||Philadelphia||$8 Billion|
Municipal bonds represent a low-risk way to capitalize on higher infrastructure spending since they’re backed by local or state governments. In addition, these bonds have certain tax advantages, especially for individuals in higher income brackets. Infrastructure-related muni bonds may be less risky than equities or corporate bonds in the current environment since they tend to be recession-proof while providing an attractive after-tax yield.
For example, the New York Metropolitan Transportation Authority (MTA) has several bonds outstanding to support its infrastructure spending. For instance, 59261ACX3 is a certified green bond that provides a 4% coupon with a maturity date of November 15, 2046. The federal government’s contribution to infrastructure spending could reduce the default risk of this and similar bonds and make the yield even more compelling.
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Also see: Why There is Growing Demand for Green Bonds.
Risk Factors to Consider
President Trump’s planned infrastructure spending has support from both sides of the aisle, but as his tenure has demonstrated thus far, there remains a high level of unpredictability. Investors should keep in mind several risk factors when considering infrastructure-related municipal bonds while ensuring that their portfolios are properly diversified against risks. It’s important to undergo due diligence to ensure investors are making the right decision.
Some key risk factors to consider include:
- Regulatory Risks. Infrastructure investments are subject to approvals and execution delays that can hamper bond repayments.
- Litigation Risks. Many infrastructure projects face litigation risks, such as Wyoming’s wind power project, and green investments are no exception.
- Funding Risks. President Trump’s executive order pushes for greater infrastructure spending, but there’s still no guarantee that it will pass through a legislature.
- Financial Risks. Some infrastructure projects don’t pan out as city planners hope and end up failing to generate required revenue to make bond payments.
The Bottom Line
President Trump plans to improve the ageing U.S. infrastructure across several verticals. For investors, these plans could translate into opportunities in the municipal bond sector where federal support could help lower risk and make yields even more attractive. Investors can consider bonds in states like New York or Texas, which have relatively better financial standing compared to other U.S. states, while being cognizant of the potential risks involved.
For more information, check out the different ways to invest in muni bonds and stay up-to-date with the latest investment strategies.