As was expected, municipal supply has fallen significantly this year due to the rush of issuance in late 2017. YTD issuance through the end of January was down about 50% versus last year. One ray of hope on the supply front is the administration’s infrastructure proposal.
The stated goal is to create $1.5 trillion in infrastructure investment over the next decade (up from an initial goal of $1 trillion and relative to an estimated need over the next 25 years of nearly $5 trillion). This goal would be met by a combination of federal investment and incentives along with municipal and private funding. According to the proposal, the Federal Government would invest $200 billion (perhaps now $300 billion) and hope to attract $800-1200 billion in matching funds from public and private sources. At least half of the federal funds would be allocated to projects in the form of grants, which would incentivize municipalities to move forward with their potential projects.
While the details are still somewhat vague, and any federal funding would require bipartisan support as it was not included in the 2018 budget resolution, the passage of such a plan could significantly increase supply expectations for later in 2018 or possibly into 2019. Other potential components of the proposal that would encourage additional supply include the elimination of the AMT provision and advanced refunding prohibition for Private Activity Bonds (PABs), elimination of the volume caps on PABs coupled with expanding the eligibility to ports and airports, and the removal of state volume caps for PABs.
Despite the very low supply figures municipal performance has been softer than expected YTD due to rising Treasury yields. That said, municipal bonds have outperformed Treasuries, particularly for bonds with short-term maturities.
Source: Bloomberg, Citigroup
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