A Flash in the Pan(demic)? Migration Risks and Municipal Bonds *

Abstract

We show that migration induced by the COVID-19 pandemic significantly predicts changes in municipal bond yields. Negative migration shocks have made debt more expensive, with the effects concentrating in medium-to long-term maturity bonds and bonds issued by the areas most exposed to the transition toward working from home. Structural model estimates indicate that the 11.7 basis point municipal yield spread increase in the hardest hit areas likely corresponds to a more than 2% reduction in the present value of municipal cash flows. Analyses of 2021 revenues qualitatively supports this idea as the most hard hit areas (i.e., those with out-migration and high work-from-home exposure) experience larger declines in municipal revenue relative to their pre-COVID levels. Overall, our results suggest that investors have changed their estimates of the level or uncertainty of municipalities' future cash flows, especially for areas and bonds most exposed to the transition toward remote work.

Keywords: Municipal Bonds, COVID-19, Migration, Work-from-home, Remote Work JEL Classification: G12, J11, H70

JEL Classification: G12, J11, H70