What Does Biden’s Infrastructure Bill Have in Store for the Muni Market?

If President Joe Biden’s $2 trillion infrastructure bill passes, it could mean big things for municipal bond investors. We review some possibilities.

Municipal bonds are continuing their impressive Q1 performance further into the year. The Bloomberg Barclays Muni Index is up 0.58% month-to-date and has turned positive year-to-date with a 0.38% return. This is happening against the backdrop of a rising rate environment and weak returns for Bloomberg Barclays Treasury and US Corporate Indexes, down -3.7% and -3.67% year-to-date respectively. We attribute the strong outperformance for munis to very strong demand, outpacing even the recent increase in supply. Q1 municipal market issuance totaled $112 billion, the highest first-quarter issuance since 2007. Tax-exempt supply totaled $80 billion—the largest Q1 supply in four years. However, inflows to muni mutual funds are breaking records with another $3.9 billion during the week ending April 7, which means inflows now total $35.6 billion year-to-date. This marks Q1 2021 as the strongest start to a calendar year ever for munis since data began being collected in 1992.

Looking forward, the $2 trillion infrastructure proposal recently released by the Biden administration includes some major provisions that will have significant effects on the municipal market. However, with the bill facing challenges from congressional Republicans and no clear outline of any details, it’s too early to tell exactly what those effects will be. The current overview of spending includes:

• $621 billion for transportation, including $85 billion for public transit, $25 billion for airports, and $80 billion for passenger and freight rail service
• $400 billion for elderly and disability care
• $300 billion for US manufacturing and small businesses
• $213 billion for affordable and sustainable housing
• $111 billion for clean drinking water initiatives
• $100 billion for electric grid investments

Many of these spending initiatives would directly impact municipal issuers. The administration may revive a program similar to Build America Bonds (BABs), which were used in 2010 to allow muni issuers to issue taxable muni bonds on which they would receive a federal subsidy. This would result in a surge of taxable muni issuance, possibly at the cost of lower tax-exempt issuance. The bill could also include a repeal on the inability to issue advanced refunding deals, a return of which may then increase tax-exempt supply.