Monday Musings: November 8, 2021

Nov 08, 2021

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Public Trust Credit Team
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The long-awaited infrastructure passes the House

With bipartisan support, the House of Representatives passed the $1.2 trillion infrastructure bill last Friday evening. The bill, widely viewed as expanding job and economic growth over the medium- to long-term, targets infrastructures investments to roads and bridges, high-speed rail, broadband Internet, electric grid improvements, electric-vehicle charging, clean drinking water, airports, road safety, and the modernization of public transportation. Spending for the bill is derived from both savings and new revenue including roughly $200 billion in unused COVID-19 relief funds, unused Medicare rebates, unused unemployment insurance funds, and revenues generated from cryptocurrency reporting requirements. In August, the Congressional Budget Office (CBO) estimated that the approximately $1 trillion package would add roughly $256 billion to the Federal deficit from 2021 to 2031; however, the CBO analysis provides credit for only about $13 billion over ten years regarding the repurposed $200 billion from COVID-19 aid.

Upgrades slowed from the brisk pace over the summer, but IG indexes have not retraced all downgrades from 2020

Between April and July, the market was looking at a record pace of net upgrades with $116 billion of debt upgraded per month; however, this trend has slowed with only $19.2 billion of debt upgraded in October. Despite improving credit fundamentals (U.S. IG leverage declined below 2019 levels in Q2), corporate IG indexes have only seen about 50% of the downgrades experienced in 2020 retraced. The early onset of COVID-19 resulted in the two largest downgrade months in history with $528 billion of downgrades in March 2020 and $409 billion in April. For the indexes, the average credit rating has declined from highs seen in 2019; we expect this to take some time to improve, especially given the attractiveness of issuing debt in a low rate environment and supply chain shortages that have capped the growth of global economies in the short-term.

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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