NEW YORK – Infrastructure bonds, used to finance essential services such as roads, schools and bridges, appear attractive because of their potential to offer higher after-tax income than comparably rated general obligation bonds and historic resilience during weaker economic conditions, according to Standish, the Boston-based fixed income specialist for BNY Mellon.
"For over a century, federally tax exempt municipal bonds have been the main source of funding to finance infrastructure projects – such as roads, schools, utility plants, bridges, hospitals and airports – that are essential to our everyday living," said Jeffrey B. Burger, CFA, Standish portfolio manager and author of the paper, "The Case for Tax Exempt Infrastructure Bonds." "As an investment option, ‘infrastructure bonds’ have the potential to provide investors with a high level of federally tax free regular income that is derived from revenues related to these essential long-term projects and services."
According to the paper, other reasons why investors should consider an investment with infrastructure bond exposure include:
- Revenue Bonds – Including Infrastructure Bonds – May Provide Credit Stability – Essential-purpose revenue bonds may be less impacted in weaker economic periods than general obligation bonds, and may possibly benefit with service usage increases during times of economic growth.
- Municipal Revenue Bonds May Offer Higher Yield Potential – Municipal revenue bonds have the potential to offer both a high level of absolute and relative after-tax current income potential versus GOs of equal maturity (which, generally, are perceived to have a higher credit quality as they are backed by the state’s taxing power).
"Municipal bonds play a critical role in funding America’s infrastructure," said Christine L. Todd, President of Standish. "This is an area of growing investment opportunity in higher inflationary environments, and has a noble purpose. The inelastic demand for infrastructure-related services ensures the creditworthiness for bondholders."
"As we look toward the future, we see an aging infrastructure approaching the end of its life-cycle," said Burger. "In addition, a growing U.S. population is fueling the need for new construction. This will pressure state and local governments across the country to make the investments required to sustain the usefulness and safety of U.S. infrastructure."
See https://public.dreyfus.com/insights-ideas/research-articles/white-papers.html for the complete paper.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. Contact your financial advisor or visit Dreyfus.com to obtain a prospectus that contains this and other information about a fund, and read it carefully before investing.
Bond funds are subject generally to interest rate, credit, liquidity and market risks, among other factors, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes, and rate increases can produce price declines.
High yield bonds are subject to increased credit risk and are considered speculative in terms of the issuer’s perceived ability to continue making interest payments on a timely basis and to repay principal upon maturity.
Infrastructure sectors and projects may be subject to a variety of factors that may adversely affect their development, including (but not limited to): high amounts of leverage and high interest costs in connection with capital construction and improvement programs; difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets; and, costs associated with compliance with and changes in environmental and other regulations. Income from municipal bonds in general may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax (AMT) for certain investors. Capital gains, if any, are taxable.
Municipal infrastructure financings most commonly come to market in the form of revenue bond issuance. Unlike General Obligation bonds (GOs), which are bonds backed by the issuing jurisdiction’s general credit and taxing power, revenue bonds are secured by pledges of dedicated resources (or in certain cases, taxes related to the particular project(s) being financed) that are distinct and separate from general government operations. Revenue bond issuers typically have operations that are more insulated from the political pressures to which state governments are subject. In addition, most revenue bond issuers have natural monopolistic characteristics: for example, most water and utility enterprises face little competition for their services and often are the exclusive provider. Infrastructure revenue bonds usually are issued to build long-lived assets as opposed to financing operations, and historically, many have generated stable and somewhat predictable revenues. Because these revenue bond issuers provide essential services, the revenues from many of these issuers have historically been more resilient during weaker economic conditions relative to tax revenues that go to support state and local GOs, including during the recent financial crisis of 2008-09.
For example, data from Moodys, based on annual year-over-year percent changes in median state GO revenues versus median revenues for water and sewer systems, hospitals, and public and private higher education facilities for fiscal year (FY) periods beginning 2007 through 2011 indicates that many revenue bond issuers have demonstrated more stable revenue streams since the financial crisis than GO issuers. There is no guarantee that these trends will continue in the future. GOs are generally viewed as having higher creditworthiness relative to revenue bonds due to the GO issuers’ pledge of their full faith, credit and taxing power, all other factors being equal. Municipality revenue flows will vary year over year and may be affected by various economic and fiscal factors.