The Muni Bond Spread: Credit, Liquidity, and Tax

49 Pages Posted: 30 Aug 2014

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Vineer Bhansali

LongTail Alpha, LLC

Yuhang Xing

Rice University

Date Written: August 29, 2014


Municipal (muni) bonds are risky and trade in illiquid markets, and both effects serve to raise muni yields relative to Treasuries. On the other hand, the tax exemption of muni bonds tends to lower their yields. We decompose the muni yield spread into credit, liquidity, and tax components. Before 2008, muni yields are reliably lower than Treasuries. After the 2008 financial crisis, the muni-Treasury spread flips sign to, on average, 0.87%, comprising credit, liquidity, and tax components of 0.57%, 2.14%, and -1.84%, respectively. Muni credit and liquidity components exhibit strong covariation with credit and liquidity factors prevailing in other asset classes.

Keywords: municipal bonds, public finance, muni default risk illiquidity, prerefunded munis, advance refunding, taxes

JEL Classification: G12, G28, H20, H24

Suggested Citation

Ang, Andrew and Bhansali, Vineer and Xing, Yuhang, The Muni Bond Spread: Credit, Liquidity, and Tax (August 29, 2014). Columbia Business School Research Paper No. 14-37, Available at SSRN: or

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Vineer Bhansali

LongTail Alpha, LLC ( email )

500 Newport Center Drive
Suite 820
Newport Beach, CA 92660
United States

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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