Municipal Finance During the COVID-19 Pandemic: Evidence from Government and Federal Reserve Interventions

Abstract

We study the functioning of the municipal bond market during the COVID-19 pandemic. The average offering yield increases while the number of new issues drops when county-level COVID-19 case and death counts rise. Exploiting the differential timing of local policy actions, we find that emergency declarations lead to a 69 basis-point increase in offering yields and a significant drop in new issuance. Investors shun transportation and dedicated tax bonds or bonds issued in fiscally unhealthy states. The Federal Reserve's unprecedented interventions through two municipal liquidity facilities have calmed the market. The reopening of local economies has led to a significant drop in offering yields.

Keywords: Municipal bond, New issuance, COVID-19, Local mitigating policies, Federal Reserve interventions, Municipal Liquidity Facility

JEL Classification: G14, G18, G24, H74