Infrastructure investment has changed vastly in the last few years. Not only is the sector at the epicenter of Biden’s stimulus packages, but “infrastructure” has evolved beyond the traditional view of buildings and transportation. Infrastructure investment now refers not only to road and rail—the literal backbone of 20th century development—but also to emerging global themes like decarbonization, clean water, and digital transformation. Further, infrastructure investment has expanded from municipal bonds to equities and other fixed income solutions. As in the past, there continue to be compelling reasons why an allocation in infrastructure makes sense for today’s portfolios:
• Consistent and stable return profile
• Strong portfolio diversifier.
• Focus on essential assets.
President Biden has put America’s aging infrastructure at the center of his presidency and there is a major infrastructure bill moving through Congress which we believe would provide unprecedented opportunity for investment in the sector.
But what is the best way to invest in infrastructure?
Essentially there are three routes. First, through globally listed infrastructure, which is currently trading very favorably levels*. For example, P/E ratios for infrastructure equity investments are well below those of other comparable investment profiles. Take a look at the MainStay CBRE Global Infrastructure Fund (VCRIX), a Lipper Award winning fund, to learn more.
Second, tax exempt muni bonds can be a strong and traditional option. Three-quarters of all infrastructure funding is provided by muni bonds, and the sector has generally had fewer credit downgrades than the bond market as a whole, largely because of the “essentiality” of the services that municipal issuers provide. For example, the provision of water, power, and education have not been greatly affected by recessions. An option for infrastructure investment via tax exempt muni bonds consider the IQ MacKay Municipal Intermediate ETF (MMIT), a highly rated fund by Morningstar.
Third, taxable muni bonds are an increasingly popular option which fulfil an important role in the ecosystem. Their issuance has surged since their effective inception in 2008 via Build American Bonds after the global financial crisis. They consist of largely the same issuers, but their taxable status means they can be utilized in areas where conventional muni bonds largely have not, such as qualified plans, pensions, endowments, and foundations. Check out the MainStay MacKay U.S. Infrastructure Bond Fund (MGOIX).
*Source: CBRE Clarion as of 3/31/21
All investments are subject to market risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market.
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The market was in a frenzy over the latest CPI report which had the highest rise in inflation…see the full story on our partner Magnifi’s site
Inflation worries may have surged this Spring, but that has not helped real yields. When you compare the yields of stocks and bonds versus inflation, the truth is that real yields have turned negative. It is unusual for the S&P 500 to have a negative yield, which is currently at -0.81%. That is slightly better than 10-year Treasuries’ real yield of -0.87%. This has usually spelled trouble historically. Going back to 1970, there has only been one instance when the market did not decline at least 32% in the two years following the point at which yields went negative.
FINSUM: This is a pretty scary statistic, but then again, most historical contexts don’t involve a pandemic-induced country-wide shutdown and unprecedented government stimulus.
Last week's jobs report was disappointing, to say the least, but bond market investors want to know what exactly this means for the recovery: Is this a blip or are we headed for a weakening recovery? Markets are signaling that it could be a slower tightening than they initially might have expected but upcoming data will help investors solidify their response. Job’s Openings and Labor turnover survey (jolts) will tell investors if there is a labor market slump. CPI inflation numbers on food and energy will tell investors how big the labor market spillover troubles are. Additionally, real average hourly earnings are included in this report to be released Wednesday. Finally, retail sales data is released for April on Friday. Growth is expected to slow already but the additional slowdown could be a warning.
FINSUM: These data releases are critical for not only what the bond market sees but what the Fed sees as well. If economic data slows this could change the cadence of the recovery and QE.
May 12th was one of the key market moments of 2021. All eyes were on new inflation data that would make or break the market. The result was a definitive “break”. Inflation came in hot, with the reading measuring 4.2%, well over already high expectations of 3.6%. Markets took a pounding, with the Nasdaq leading the day’s losses in a 2.7% fall. The Dow and the S&P 500 also fell sharply.
FINSUM: We are now in the middle of another market tantrum. It is critical to ask oneself why inflation is so troubling. The reason the market is losing is because of higher rates’ effect on tech stock valuations, but even more importantly, the timeline for the Fed’s taper. But if you can put that aside, what is actually happening is that economy is doing well, and earnings look likely to be great. We think investors should just ride out the storm.
After a consistent rise in yields in late February and March rates are finally falling. However…see the full story on our partner Magnifi’s site
Model portfolios are getting ever more popular for advisors. Not only do they help outsource some portfolio management, but there is such a wide variety of them that they can be tailored to many different plans. In some cases, there are almost too many! One area where they make a lot of sense is in tax minimization strategies. Biden and the Democrats look like to hike taxes considerably, and that fact coupled with ultra-low yields and highly variant financial situations in muni bonds, means there is a lot to gain from models in this area.
FINSUM: COVID affected municipalities in very different ways, and spreads to Treasuries are historically low, so there is a of risk. Nuveen is seen as a leader in the munis space, so a good place to start the search.
The big inflation-driven bond sell-off has decidedly ended. In fact, bond yields have fallen considerably (with prices rising) over the last few weeks. The gains have prompted some investors to wonder if it is time to jump back into the long-term bond market. Goldman Sachs and Bank of America say an emphatic “no” to that idea. Goldman said the market moves this month have been “Noisy (and potentially temporary)”. They do not believe that yields will continue to fall, only that the chances of a big overshoot of how high they go have diminished.
FINSUM: Yields still seem likely to trend higher, but the market has bought into the idea that the Fed is not going to taper support any time soon, which means the lid is now on long-term yields much more tightly.
Investors may fear it, but we all know the big tax package is coming. Personal income tax rates, and likely business rates will rise. State and local taxes will be affected too. So one big question is how this will pay out for muni bonds. The answer, at least according to Franklin Templeton, is that munis are going to do great. The reason why could not be simpler: with tax rates rising, the relative value of munis rises since their tax exempt status because relatively more valuable.
FINSUM: Anxiety about the forthcoming tax plan is rising, and that is a great tailwind for munis. Couple that with the fact that Democrats are more in favor of federal support for municipalities and you have a great combination for muni bonds.
Some analysts think that investment grade (IG) bonds might see some very rough times ahead. In fact, one analyst from Pavilion Global Markets says that IG bonds have “virtually no value proposition under any given economic scenario”. Think about the following package of information taken as a whole: 1. iShares iBoxx $ Investment Grade Corporate Bond ETF has lost 6.6% this year; 2. IG yields are well below 6.6%; 3. Investors have been pouring money in IG bond mutual funds and ETFs. So IG bonds are losing value much more quickly than they are yielding, which spells a recipe for disaster to some. According to the same analyst “be mindful of the potential for significant outflows in the days to come”.
FINSUM: We can’t say we agree here. While fixed income as a whole looks fragile right now, the losses have provided room for IG bonds to appreciate as the economy and earnings improve. We do not think it will be all bad news.
The Pandemic has shifted the paradigm for many investors as they look to environmental, social, and governance (ESG) to make up a larger share of their portfolio. ESG will shape the future of investing but there is a new way to invest in green companies with a new twist. Sustainably linked bonds (SLB) allow firms to receive money for green energy initiatives but rather they will pay a penalty if they don’t meet expectations. Marilyn Ceci head of ESG development at JP Morgan expects SLB to hit $120-150 billion despite issuance since inception being only around $20 billion. SLB isn’t a threat to ESG as the industry is expected to grow from $270 billion last year to over $400 billion this year, but rather a compliment to the growing industry. ESG's ability to withstand the full business cycle is a testament to its future. FINSUM: SLB’s offer many companies a way to a greener future without an explicit plan, and are a reflection of how large ESG is growing. Other companies need a way to keep up with this burgeoning bond market.