Washington social-spending invoice snubs municipal bonds. Will the market care?


Provisions that would have benefited state and local governments that issue municipal bonds have been removed from the $ 1.75 trillion social spending bill currently being debated by Congress, but one that put the needle in an already overheated market for municipal bonds is unlikely to move.

The Build Back Better program framework, released by President Joe Biden in late October, omitted the restoration of some forms of debt refinancing and a direct bond payment program, among other industry priorities.

The framework also added a 15% minimum corporate tax that could hit buyers of tax-exempt bonds, a move that is particularly unpopular with industry groups. “The costs will be substantial and, in turn, will be borne by our communities, not the bondholders,” a group of lobbyists said in a letter to Congress on Monday.

However, some public finance observers are more confident. “Munis become Muni no matter what,” said Eric Kazatsky, director of municipal strategy at Bloomberg Intelligence. “There will still be a minimum of spending on good repairs to keep the lights on for states and locals. The muni-friendly regulations in the draft law would have been an accelerator. “

The refinancing regulations, called “advance payments” in the jargon of the bond market, were removed from tax-free issues in the Tax Reduction and Employment Act 2017. (Municipalities can choose to issue bonds that are tax-exempt or taxable for the investors who buy them.)

Restoring tax-free prepayment was the key provision in previous versions of the bill, said Matt Fabian, a partner with Municipal Market Analytics. MMA estimates that since January 2020, issuers have paid an additional $ 8 billion to $ 10 billion in interest costs because of the curtailment of those refunds.

“This is Congress that is driving the cost of its savings into cities and states,” Fabian told MarketWatch.

In contrast, Kazatsky argued that losing a revitalized direct payments program similar to the Build America Bonds introduced after the Great Recession is the greater success. Build America Bonds were taxable, and their presence helped attract many nontraditional investors to the Muni market for whom the tax exemption was not critical.

See: Washington wants to bring back Build America Bonds. The muni market doesn’t buy it

At the moment the landscape is difficult for state and local governments, said Fabian. Many are still trying to figure out if their current sales mix reflects the economy they have now or the one they had before the pandemic.

“Issuers are not sure about the future, their current financial stocks are volatile, which doesn’t feel trustworthy in their world, and they are coming from a 10-year austerity program,” said Fabian. With that in mind, even a little more congressional recognition of the state and local issues would help, he added.

“Partisan politics made everything poorer than it used to be. Policies have had to become more defensive on investment, although long-term borrowing needs are likely to be higher than ever due to climate change and deferred maintenance. “

In a series of recent interviews with MarketWatch, several city executives said that one of the great benefits of the massive government incentives directed at them is the ability to avoid debt issuance.

See: “Infrastructure week” is here: local governments are no longer waiting for the congress

This stimulus helped offset some of the uncertainty from Washington, Kazatsky said in an interview. And that’s a big reason municipal issues have been relatively tepid, even at a moment when interest rates are unlikely to fall any further.

It does so despite demand skyrocketing, with Muni-bond inflows hitting multiple weekly records this year, causing a mutual fund to approach new investors while driving yields to all-time lows.

“It’s hard for this sector to worry too much at the moment,” said Fabian.

Next read: “Food battle” in the municipal bond market as demand devours all supply

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