What Did Policy Interventions Fix in the Municipal Bond Market - Liquidity or Credit?
70 Pages Posted: 1 Mar 2021 Last revised: 25 Jan 2022
Date Written: January 24, 2022
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: Suggested Citation