Why Municipal Bonds Are a Critical Component of U.S. Infrastructure?

A critical component to America’s infrastructure is municipal bonds as it is what gives US governmental entities access to capital in order to fund public infrastructure projects.

According to UBS,

Implications for federal infrastructure investment

The estimated USD 1.2tr in combined new spending from the Infrastructure Investment & Jobs Act (IIJA), the Inflation Reduction Act (IRA) and the CHIPS Act will help municipal governments finance investment in public works, either directly or indirectly. In the absence of these federal monies, municipal issuers would either need to issue debt, substantially increase their rates to directly pay for capital improvements or defer costly infrastructure projects and improvements. The significant boost in federal funding may help change the overall landscape of US infrastructure funding, given state and local governments have historically shouldered an increasing share of these costs.

Which sectors stand to benefit?

The benefits of each infrastructure package will vary by municipal sector, with IIJA largely bolstering transportation-related sectors, and the IRA and CHIPS Act principally advancing the utility sector. Increased investment in public infrastructure often spurs job creation and boosts economic activity. States and local governments will benefit from a positive economic environment, in addition to freeing up monies that otherwise would have been directed toward debt service. There will be a substantial degree of variation among individual credits within each sector with regard to both credit quality and investment performance in an economic slowdown, but the municipal sector has exhibited remarkable resilience during past economic cycles. We expect that to continue.

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