Are Transportation Revenue Bonds Ready for Takeoff After Being Grounded Earlier This Year?

The transportation sector in the municipal bond market faces significant headwinds as a result of the COVID-19 pandemic. With people traveling and commuting less—or not at all—it is, unsurprisingly, the worst-performing municipal bond sector this year. However, we don’t believe that means it should be overlooked. Yields, on average, are higher than other muni sectors, partly due to the sector underperforming the rest of the muni market, but risks are elevated, as well.

Despite being the worst-performing sector, transportation munis offer higher yields than most of the muni market

Source: Components of the Bloomberg Barclays Municipal Bond Index, as of October 2, 2020. See Important Disclosures for a list of indices used. Past performance is no guarantee of future results.

Planes, trains, and automobiles: A primer on transportation bonds

Transportation revenue bonds are issued to finance local public transportation projects, such as airports, mass-transit systems, toll roads, ports, and parking structures. The bonds are commonly repaid from the revenue earned by the system and occasionally by support from the federal, state, or local government. However, they may also be supported by a tax, such as a property or sales tax. This support can help offset declines in usage. Here we’ll focus just on airports, mass-transit systems, and toll roads, and what to look out for when investing in these sectors.

In general, the credit quality of an issuer is a function of its:

  • Size and essentiality
  • Rate raising ability
  • City, state, and federal support
  • Mobility in the area
  • Bond provisions

On average, ratings for issuers in the sector are clustered in the A/A category, which is lower than the average rating for the rest of the muni market. The lower average credit rating for the sector is due to issuers operating with more business-like risk, compared to issues such as general obligation bonds, which are often backed by the full faith and credit of the issuer, or a water and sewer issuer that often has a monopoly over services.