Crops, Drops and Bonds: The Impact of Water Risk on U.S. Municipal Bond Yields

51 Pages Posted: 19 Feb 2024

See all articles by Eline ten Bosch

Eline ten Bosch

Rotterdam School of Management, Erasmus University

Claudio Rizzi

University of Navarra - Finance

Date Written: February 7, 2024

Abstract

We study the relation between water availability, water demand, and U.S. municipal bond yields to explore how water stress affects local costs of debt. We define water stress as the imbalance between water availability and water demand within a county. We focus on agriculture-dependent counties in the U.S. and use satellite data to obtain their water availability and needs. By combining these datasets, we construct a novel county-level water risk measure that allows us to estimate which counties are under physical water stress. We find a significantly positive relation between our water risk measure and municipal bond yields while controlling for traditional municipal bond determinants. Initial evidence indicates that this effect is stronger for highly indebted counties. In sum, our findings suggest that lowering water stress may lower the cost of debt for local U.S. governments.

Keywords: Water stress, droughts, soil water content, crop production, U.S. municipal bond yields, spatial finance

Suggested Citation

ten Bosch, Eline and Rizzi, Claudio, Crops, Drops and Bonds: The Impact of Water Risk on U.S. Municipal Bond Yields (February 7, 2024). Available at SSRN: https://ssrn.com/abstract=4719672 or http://dx.doi.org/10.2139/ssrn.4719672

Eline Ten Bosch (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

Burgemeester Oudlaan 50
Rotterdam
Netherlands

Claudio Rizzi

University of Navarra - Finance ( email )

08034 Barcelona
Spain

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