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Taking Advantage of the Infrastructure Boom: The Case for Taxable Municipal Bonds

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Taxable municipal bonds infographic

taxable municipal bonds

The Case for Taxable Municipal Bonds for Investors

If you’re a homeowner, there are probably a few things you’ve been neglecting to do. Perhaps the kitchen needs upgrading, or the roof needs replacing. We tend to procrastinate on these improvements due to large renovation costs, until it hits a point where we can’t ignore them anymore. This is the state that U.S. infrastructure has reached—on a national scale.

Today’s infographic from New York Life Investments highlights the level of disrepair in U.S. infrastructure. It also explores why taxable municipal bonds, which will finance the required infrastructure upgrades, provide such an interesting investment opportunity.

Falling Apart at the Seams

The American Society of Civil Engineers (ACSE) regularly assesses the nation’s infrastructure—things like bridges, airports, and drinking water—and scores it in a ‘report card’. After decades of neglect, the U.S. only scored a D+ in 2017.

The ASCE estimates that $4 trillion is needed to bring infrastructure up to a B grade, $1.3 trillion of which will be provided by state and local governments.

The urgent needs for increased investment in America’s infrastructure continue to grow and our nation’s economic vitality and quality of life are at stake.

— Ed Mortimer, U.S. Chamber Vice President of Transportation and Infrastructure

U.S. municipal bonds will be the primary funding source for this massive financing need. These bonds are quite popular with individual U.S. investors, as the interest income from most municipal bonds is not subject to federal income tax.

However, the U.S. tax code limits the volume of non-taxable bonds issued, and the purposes for issuing them. As a result, many local and state governments have been turning to taxable municipal bonds to finance their infrastructure projects.

The Muni Opportunity

Taxable municipal bonds are a potentially attractive investment for many reasons.

1. Competitive Historical Yield and Strong Returns
In the last decade, a lagging global economy led to historically low interest rates—many sovereign (national) bonds fell into negative territory. Taxable municipal bonds provided an alternative source of yield potential, outpacing the yields of comparable treasury bonds in some cases.

Not only that, but in the post-crisis era, taxable municipal bonds have averaged a return of 6.9% per year, beating the 4.6% performance on U.S. corporate investment-grade bonds, a staple in most institutional portfolios.

2. High-Quality, Stable Credit Ratings
Most municipal bonds are high quality with low default rates, making them attractive to risk-conscious investors.

 U.S. MunicipalsGlobal Corporates
Rating SpreadOver 76% rated A+ or betterOnly about 10% are AA rated
Tiny portion below investment gradeNearly half are below investment grade
Default Rate0.81% for those rated BAA by S&P0.84% for those rated AAA by S&P

Historically, municipal bond ratings have also been far more stable than that of global corporates.

3. Inefficient pricing
The municipal bond market is highly fragmented, and most issues are too small to be included in a market index.

This market fragmentation, combined with limited sell-side research and many buy-and-hold investors, often leads to inefficient pricing. Active investors have the potential to generate higher returns by applying their credit research and trading skills.

4. Low Correlations
Correlation measures the degree to which two securities move in relation to each other. In general, taxable municipal bonds have a low correlation to other fixed-income sectors. This means they help provide portfolio diversification and reduce volatility.

5. Longer durations
Since taxable municipal bonds fund long-term capital projects, they are usually financed with longer maturing bonds. Institutional investors welcome this source of long-duration assets, as they can match them up with their long-dated obligations.

A Compelling Portfolio Addition

Taxable municipal bonds have many positive qualities that make them a strong contender for investment. When added to a diversified fixed-income portfolio, they may also improve the risk/return profile.

As the U.S. begins to revitalize its infrastructure, taxable municipal bonds present a strong—and often overlooked—opportunity for investors.

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The New Rules of Leadership: 5 Forces Shaping Expectations of CEOs

This infographic delves into five major forces reshaping our world and the new rules of leadership that CEOs should follow as a result.

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It’s common knowledge that CEOs assume a long list of roles and responsibilities.

But in today’s world, more and more people rely on them to go beyond their day-to-day responsibilities and advocate for broader social change. In fact, a number of external forces are changing how leaders are now expected to behave.

How can leaders juggle these evolving expectations while successfully leading their companies into the future?

The New Rules of Leadership

This infographic from bestselling author Vince Molinaro explores five drivers reshaping our world that leaders must pay attention to in order to bring about real change.

“the

How is the World Being Reshaped?

Leaders need to constantly stay one step ahead of the transformative forces that impact businesses on a broader scale.

Below we outline five key drivers that are changing what it means to be a leader in today’s world:

1. Transformative Technologies

Over the last number of decades, several technologies have emerged that could either accelerate the disruption of companies, or provide them with new opportunities for growth. According to KPMG, 72% of CEOs believe the next three years will be more critical for their industry than the previous 50 years.

For example, artificial intelligence (AI), can now provide companies with insights into what motivates their employees and how they can help them succeed. IBM’s AI predictive attrition program can even predict when employees are about to quit—saving them roughly $300 million in retention costs.

Leaders must accept that the future will be mediated by technology, and how they respond could determine whether or not their organization survives entirely.

2. Geopolitical Instability

Geopolitical risks—such as trade disputes or civil unrest—can have a catastrophic impact on a business’s bottom line, no matter its industry. Although 52% of CEOs believe the geopolitical landscape is having a significant impact on their companies, only a small portion say they have taken active steps to address these risks.

By being more sensitive to the world around them, leaders can anticipate and potentially mitigate these risks. Extensive research into geopolitical trends and leveraging the appropriate experts could support a geopolitical risk strategy, and alleviate some of the potential repercussions.

3. Revolutionizing the Working Environment

As the future of work looms, leaders are being presented with the opportunity to reimagine the inner workings of their company. But right now, they are fighting against a wide spectrum of predictions around what they should expect, with estimations surrounding the automation risk of jobs ranging from 5% to 61% as a prime example.

While physical, repetitive, or basic cognitive tasks carry a higher risk of automation, the critical work that remains will require human interaction, creativity, and judgment.

Leaders should avoid getting caught up in the hype regarding the future of work, and simply focus on helping their employees navigate the next decade.

By creating an inspiring work environment and investing in retraining and reskilling, leaders can nurture employee well-being and create a sense of connectedness and resilience in the workplace.

4. Delivering Diversity

Diversity and inclusion can serve as a path to engaging employees, and leaders are being asked to step up and deliver like never before. A staggering 77% of people feel that CEOs are responsible for leading change on important social issues like racial inequality.

But while delivering diversity, equity, and inclusion seems to be growing in importance, many companies are struggling to understand the weight of this issue.

An example of this is Noah’s Ark Paradox, which describes the belief that hiring “two of every kind” creates a diverse work environment. In reality, this creates a false sense of inclusion because the voices of these people may never actually be heard.

Modern day leaders must create a place of belonging where everyone—regardless of gender, race, sexual orientation, ability, or age—is listened to.

5. Repurposing Corporations

The drivers listed above ladder up to the fact that society is looking to businesses to help solve important issues, and leaders are the ones being held accountable.

With 84% of people expecting CEOs to inform conversations and policy debates on one or more pressing issues, from job automation to the impact of globalization, CEOs have the potential to transform their organization by galvanizing employees on the topics that matter to them.

For a long time, the purpose of corporations was purely to create value for shareholders. Now, leaders are obligated to follow a set of five commitments:

  1. Deliver value to customers
  2. Invest in employees
  3. Deal fairly and ethically with suppliers
  4. Support communities
  5. Generate long-term value for shareholders

Ultimately, these five commitments build currency for trust, which is critical for sustained growth and building a productive and satisfied workforce.

Lead the Future

If leaders understand the context they operate in, they can identify opportunities that could fuel their organization’s growth, or alternatively, help them pivot in the face of impending threats.

But organizations must invest in the development of their leaders so that they can see the bigger picture—and many are failing to do so.

By recognizing the new rules of leadership, CEOs and managers can successfully lead their organizations, and the world, into a new and uncertain future.

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3D Map: The U.S. Cities With the Highest Economic Output

The total U.S. GDP stands at a whopping $21 trillion, but which metro areas contribute to the most in terms of economic output?

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US Cities by Economic Output

3D Map: The U.S. Cities With the Highest Economic Output

At over $21 trillion, the U.S. holds the title of the world’s largest economy—accounting for almost a quarter of the global GDP total. However, the fact is that a few select cities are responsible for a large share of the country’s total economic output.

This unique 3D map from HowMuch puts into perspective the city corridors which contribute the most to the American economy at large.

Top 10 Metros by Economic Output

The visualization pulls the latest data from the U.S. Bureau of Economic Analysis (BEA, 2018), and ranks the top 10 metro area economies in the country.

One thing is immediately clear—the New York metro area dwarfs all other metro area by a large margin. This cluster, which includes Newark and Jersey City, is bigger than the metro areas surrounding Los Angeles and Chicago combined.

RankMetro AreaState codesGDP (2018)
#1New York-Newark-Jersey CityNY-NJ-PA $1.77T
#2Los Angeles-Long Beach-AnaheimCA$1.05T
#3Chicago-Naperville-ElginIL-IN-WI$0.69T
#4San Francisco-Oakland-BerkeleyCA$0.55T
#5Washington-Arlington-AlexandriaDC-VA-MD-WV$0.54T
#6Dallas-Fort Worth-ArlingtonTX$0.51T
#7Houston-The Woodlands-Sugar LandTX$0.48T
#8Boston-Cambridge-NewtonMA-NH$0.46T
#9Philadelphia-Camden-Wilmington PA-NJ-DE-MD$0.44T
#10Atlanta-Sandy Springs-AlpharettaGA$0.40T
Total GDP$6.90T

Coming in fourth place is San Francisco on the West Coast, with $549 billion in total economic output each year. Meanwhile in the South, the Dallas metroplex brings in $478 billion, placing it sixth in the ranks.

It’s worth noting that using individual metro areas is one way to view things, but geographers also think of urban life in broader terms as well. Given the proximity of cities in the Northeast, places like Boston, NYC, and Washington, D.C. are sometimes grouped into a single megaregion. When viewed this way, the corridor is actually the world’s largest in economic terms.

U.S. States: Sum of Its Parts

Zooming out beyond just these massive cities demonstrates the combined might of the U.S. in another unique way. Tallying all the urban and rural areas, every state economy can be compared to the size of entire countries.

US States and Country Comparison by GDP 2018

According to the American Enterprise Institute, the state of California brings in a GDP that rivals the United Kingdom in its entirety.

By this same measure, Texas competes with Canada in terms of pure economic output, despite a total land area that’s 15 times less that of the Great White North.

With COVID-19 continuing to impact parts of the global economy disproportionately, how will these kinds of economic comparisons hold up in the future?

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