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MarketEye: The US$3.8trillion bond sector you might not even know about

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This past year, 2017 leading into 2018, the US saw a lot of significant weather events and climate disasters. It saw three hurricanes: Harvey in Texas, Irma hit Florida and Hurricane Maria in Puerto Rico. The combined damage of those three hurricanes was around US$203bn. That has an impact on the economies of those states, the infrastructure of those communities and their tax and revenue bases.

The US also saw tornados, flooding, and on the east coast, serious winter storms. Forgotten vocabulary is coming back into the lexicon, like ‘bombogenesis’, which means bomb cyclone. The east coast of the US was hit with two of those in 2017/18 – the last time it had storms of that sort was several decades ago.

The states suffering from such climate crises really know the impact of climate change and what it can do to their communities. So in response to the Trump administration’s withdrawal from the Paris Accord, several states started the Climate Alliance. California, Washington and New York kicked it off, then were joined by 13 others (plus Puerto Rico). Their goal is to meet the Paris Accord targets – to decrease emissions by 26% to 28% from a 2015 base line by 2025.

The GDP of these states makes them comparable to many sovereign economies – California has a GDP approximately the size of France and New York is equivalent to Canada. They also have their own constitutions, law-making abilities and taxes. To fund infrastructure projects, which include climate change initiatives, they issue bonds.

These so-called municipal bonds are a diverse set and have already funded a huge amount of US infrastructure maintenance and renewal. At US$3.8 trillion, the municipal bond market is almost half the size of the US corporate bond market and we don’t see it getting smaller, particularly as the challenges of managing climate change continue or, potentially, intensify.

Dan Rabasco – Chief Investment Officer for Tax Sensitive Fixed Income. BNY Mellon Asset Management North America 

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