Investors are being urged to consider municipal bonds as a viable investment option, particularly as state and local governments are increasingly using these bonds to finance infrastructure projects aimed at mitigating climate risks.
Dan Close, head of municipals at Nuveen, highlighted that the frequency of costly climate-related disasters has surged, with 27 events in 2024 alone causing over $1 billion in damages each. This shift is occurring as the federal government may reduce its role in disaster response, potentially shifting more responsibility and costs to local governments.
Close noted that municipalities are issuing debt to strengthen their infrastructure, with approximately $63 billion in projects currently underway. The yields on municipal bonds remain attractive, especially for high-income investors, as interest income is often exempt from federal and state taxes.
For example, long-dated bonds are yielding over 5%, which can translate to a taxable-equivalent yield of around 10% for investors in high-tax states. However, Close cautioned that not all municipalities are adequately addressing climate risks, suggesting that investors should evaluate how communities are managing these risks.
He pointed to successful projects like Miami's $400 million bond program for flood control and New York's $658 million revenue bonds for a coastal flood barrier as examples of municipalities taking proactive measures. Overall, the evolving landscape of municipal bonds in response to climate risks presents both challenges and opportunities for investors