What Did Policy Interventions Fix in the Municipal Bond Market - Liquidity or Credit?

70 Pages Posted: 1 Mar 2021 Last revised: 25 Jan 2022

See all articles by Huixin Bi

Huixin Bi

Federal Reserve Bank of Kansas City

W. Blake Marsh

Federal Reserve Bank of Kansas City

Date Written: January 24, 2022

Abstract

We examine how policy interventions during the COVID pandemic impacted municipal bond market pricing. Focusing on narrow trading windows, we find that announcements of fiscal and direct monetary policy interventions reduced liquidity risk concerns but did not immediately ease credit concerns. Using rolling-window regressions, we find that policy interventions eased credit
concerns for short-term bonds over time, while longer-term bond spreads show increased credit risks. The credit risk shift from short- to long-term bonds reflects policy designs that benefited short-term bonds more, as well as changing investor expectations on state and local government budgets due to the pandemic’s persistence.

Keywords: municipal bonds, credit risk, fiscal and monetary policy

JEL Classification: E52, E62, G12, H74

Suggested Citation

Bi, Huixin and Marsh, W. Blake, What Did Policy Interventions Fix in the Municipal Bond Market - Liquidity or Credit? (January 24, 2022). Federal Reserve Bank of Kansas City Working Paper No. 20-19, Available at SSRN: https://ssrn.com/abstract=3754450 or http://dx.doi.org/10.2139/ssrn.3754450

Huixin Bi (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

W. Blake Marsh

Federal Reserve Bank of Kansas City

1 Memorial Dr.
Kansas City, MO 64198
United States

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