The Investment Association is formally backing the development of a UK municipal bond market to facilitate infrastructure spending plans outlined by Chancellor Philip Hammond today in his first Autumn Statement.
Municipal bond markets already exist in the US, Europe, Australia and China.
The US market is worth $3.7trn, but the UK has no such market. The IA points out that such bonds would be suitable for a mainstream fixed income portfolio.
It adds that it would give investors with limited knowledge to invest in infrastructure without investing directly.
The UK Municipal Bonds Agency founded in 2014 to provide funding for local councils and is set to issue its first bond before Christmas.
A statement from IA chief executive Chris Cummings says the trade organisation supports Hammond’s plans announced today to invest in infrastructure and productivity.
However, Cummings says policymakers need to work with the investment industry to turn the infrastructure policy into “practical solutions”.
“That is why we are today giving our formal backing to the development of a UK municipal bond market, which will help local authorities secure much-needed financing to invest in new infrastructure projects and meet their refinancing needs, by launching a position paper outlining our support and the benefits of municipal bonds for investors, borrowers and the wider economy.”
Cummings says the organisation already works with its members to advance investment in infrastructure and housing by creating attractive markets for investors.
On measures to boost economic productivity, Cummings says the IA welcomes the Government’s review into patient capital.
“Productivity can only occur when long-term investment increases,” Cummings says.
The IA is currently producing a Productivity Action Plan and last week published a paper calling for companies to move away from quarterly reporting.
The IA says municipal bonds appeal to risk-averse investors with a cumulative default rate of 0.14 per cent between 1970 and 2014.
They are typically investment grade, long-dated and inflation linked, the IA says.