It will take some time to see how both tax reform and infrastructure makes an impression on the muni market.
That was the assessment from a panel of buy side and sell side municipal experts assembled Wednesday morning to kick off he Bond Buyer's National Outlook 2018 Conference.
They said President Trump’s State of the Union address the night before left a lot of questions unanswered.
“We still don’t know where the funding is going to come from, is it going to be new-money or are they just going to re-characterize existing money, and is this going to create incentives for state and local governments to start on new projects,” said Michael Zezas, CFA, managing director of municipal research at Morgan Stanley. “It is hard to calculate the impact this will have on the market, until we get more details and find out if there are any new and fresh ideas.”
The panelists also noted that as with anything in politics, it can take some time to cross the finish line with bills and plans, but even if there is a real infrastructure plan, it won’t help with issuance this year.
“No matter what the infrastructure plan ends up being, it will not vault volume this year to the level we have seen the past two years,” said Judy Wesalo Temel, senior vice president and director of credit research for fixed income investments at Fiera Capital Inc.
As far as the tax bill, other than lower volume for the year panelists agreed that it is too early to tell exactly how the changes will impact the market.
“It is going to take some time for the effect to hit on banks, insurance company, etc. because at the moment, overwhelmed by supply/demand dynamic,” said Peter Block, managing director of strategic initiatives at Ramirez and Co. “ In theory, munis are less attractive due to the changes in corporate tax rates but so far, it hasn’t prompted them to sell or not to buy.”
Zezas agreed, saying that although the tax value goes down, there are still lots of reasons to own munis. “In general, tax reform won’t change the ownership dynamic in munis.”
Stephen Winterstein, managing director of research and chief strategist at Wilmington Trust Investment Advisors Inc., said that while for now PABs will remain as we know them – available for 501(c)3s, hospitals, higher education, affordable housing and stadium bonds, in the future they could be parceled out a bit.
“From what I have been hearing, its possible that sometime in the near future, affordable housing, stadium bonds, students loans and maybe airports might not fall under the PAB umbrella anymore but there are no political legs to also take out healthcare or higher-ed, so those should remain safe,” he said.
