Maintenance of Essential Everyday Services Make Tax Exempt Infrastructure Bonds Attractive Investment Option
NEW YORK, May 23, 2013 — 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.
Standish Mellon Asset Management Company LLC (Standish), The Dreyfus Corporation (Dreyfus) and MBSC Securities Corporation are subsidiaries of BNY Mellon. MBSC Securities Corporation, a registered broker-dealer and FINRA member, is the distributor for the Dreyfus Funds. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. Standish investment professionals manage Dreyfus' open-end municipal bond funds under a dual employee agreement between Standish and Dreyfus. Dreyfus is the investment adviser for each of these funds.
The Dreyfus Corporation, established in 1951 and headquartered in New York City, is one of the nation's leading asset management and distribution companies, currently managing approximately $294 billion in assets.
Standish Mellon Asset Management Company LLC, with approximately $167 billion of assets under management, provides investment management services across a broad spectrum of fixed income asset classes. These include corporate credit, emerging markets debt (dollar-denominated and local currency), core / core plus, tax–sensitive, short duration, stable value and opportunistic (U.S. and global) strategies. Standish also offers full service capabilities in insurance client strategies and liability driven investing. The firm includes assets managed by Standish personnel acting as dual officers of The Dreyfus Corporation and The Bank of New York Mellon and Alcentra NY, LLC personnel acting as dual officers of Standish.
BNY Mellon Investment Management is one of the world's leading investment management organizations and one of the top U.S. wealth managers, with $1.4 trillion in assets under management. It encompasses BNY Mellon's affiliated investment management firms, wealth management services and global distribution companies. More information can be found at www.bnymellon.com.
BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 36 countries and more than 100 markets. As of March 31, 2013, BNY Mellon had $26.3 trillion in assets under custody and/or administration, and $1.4 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com, or follow us on Twitter @BNYMellon.
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