The Biden Administration’s idea to finance its infrastructure plan with “direct pay bonds” is the right approach, according to a long-time investor.
‘Buried in Biden’s proposal is a passing reference to “direct pay bonds”, which I believe is the single best way to finance much of the plan.’
— Scott Minerd, chief investment officer, Guggenheim Partners
Scott Minerd, CIO of Guggenheim Partners, notes that direct pay bonds are the same as the “Build America Bonds” that the Obama administration developed as part of the response to the Great Recession.
“These are essentially juiced-up municipal bonds issued by state and local governments,” Minerd wrote in a recent analysis. The interest payments are subsidized by the federal government, he noted, and they are not tax-exempt, like plain-vanilla municipal bonds are. That means they’ll likely be more attractive to big institutional investors, including foreign ones, who don’t need the tax exemption that make munis attractive to high-net worth Americans.
Another advantage of Build America Bonds, Minerd adds, “is that they finance spending at the local level, which effectively makes cities, states and investors partners in infrastructure investments, instead of passive bystanders to the Feds.”
Despite Minerd’s enthusiasm, it’s worth noting that people who track the state and local sector don’t think there’s much demand for these bonds among the cities and states that would issue them.
That’s simply because there’s so much demand for regular, tax-exempt municipal bonds — the highest on record, according to several metrics. All things being equal, issuers would prefer to float tax-exempt bonds, in large part because the process is easier — but also because those non-traditional muni buyers Minerd references are already familiar with the muni market, and have been ever since Build America 1.0.