Consumer Price Index (CPI) data showed inflation trending at a 30-year high. While Treasuries sold off considerably on the news, municipal yields wavered but ultimately finished relatively unchanged for the week. One reason for this stability is the strong demand for tax-exempt income. CPI is only a snapshot, and we believe the Fed has time to control inflation first by tapering purchases, then raising short-term interest rates. The onus is on the Fed to show that it intends to aggressively fight inflationary pressures. Otherwise, we could see more upward pressure on interest rates in both Treasuries and municipal bonds.

The District of Columbia issued $657 million general obligation bonds (rated Aaa/AA). The deal was priced to sell, but some bonds traded at a slight concession in the secondary market. For example, 5% coupon bonds due in 20 years came at a yield of 1.47%. Those bonds traded at a yield of 1.49% (or 2 basis points cheaper) in the secondary, as dealers wanted to keep moving inventory.

High yield municipal fund flows came roaring back last week at $1.22 billion. Yields have declined on average for three consecutive weeks, likely boosting investors’ confidence. Puerto Rico’s GO restructuring appears on track, and would ultimately return nearly $7 billion to current bondholders. The infrastructure bill does not include macro-level municipal bond features, but it could materially benefit certain muni-centric sectors and specific issuers in the utility and transportation sectors. This week’s high yield new issue calendar remains robust. Last week, most deals were heavily oversubscribed. But several problematic deals remain unable to clear the market, demonstrating the market’s continued vigilance.

In Focus: Infrastructure Passes, Finally
President Biden is expected to sign the $1.2 trillion bipartisan Infrastructure Investment and Jobs Act (IIJA) bill into law today.

While pared down from the original $2 trillion, this bill represents the largest federal infrastructure investment in more than a decade, with $550 billion in new spending. Major provisions include:

• $178 billion for power & water systems

• $158 billion for transit (rail, public transit, airports, ports, safety)

• $110 billion for roads, bridges and major infrastructure projects

• $65 billion for broadband infrastructure

• $37 billion for other projects, including environmental remediation, electric vehicle plug-in infrastructures, electric bus/transit and reconnection communities