Search Results
Discussion Paper
The Federal Reserve's Liquidity Backstops to the Municipal Bond Market during the COVID-19 Pandemic
The COVID-19 pandemic has caused tremendous hardship all over the world. In response, the Federal Reserve has moved quickly and aggressively to support the economy in the United States. In this article, we present some initial evidence for the effectiveness of some of the facilities in calming the municipal bond market, particularly the short-term variable-rate demand obligation (VRDO) market. We discuss the important role of liquidity backstops in mitigating runs and stabilizing financial markets in general based on insights from our study on the runs on VRDO and auction-rate securities ...
Journal Article
The bonds of debt
The recent financial crisis blew a hole in the municipal bond market. But it has been shifting for more than a year.
Working Paper
Gas Guns and Governments: Financial Costs of Anti-ESG Policies
We study how regulation limiting ESG policies distorts financial market outcomes. In 2021 Texas enacted laws that prohibit municipalities from contracting with banks with certain ESG policies, leading to the exit of five of the largest municipal bond underwriters from the state. Issuers previously reliant on these underwriters face higher uncertainty and borrowing costs since the enactment of the laws. These effects are consistent with a deterioration in underwriter competition as issuers face fewer potential underwriters. Texas issuers will incur $300- $500 million in additional interest on ...
Report
Liquidity in U.S. fixed income markets: a comparison of the bid-ask spread in corporate, government and municipal bond markets
We examine the determinants of the realized bid-ask spread in the U.S. corporate, municipal and government bond markets for the years 1995 to 1997, based on newly available transactions data. Overall, we find that liquidity is an important determinant of the realized bid-ask spread in all three markets. Specifically, in all markets, the realized bid-ask spread decreases in the trading volume. Additionally, risk factors are important in the corporate and municipal markets. In these markets, the bid-ask spread increases in the remaining-time-to maturity of a bond. The corporate bond spread also ...
Journal Article
The municipal bond market, Part I: politics, taxes, and yields
This article assesses recent changes in the structure of the municipal bond market. It reviews the tax legislation, judicial interpretations, and other factors that affect the yield on municipal bonds. These factors are then employed in a statistical analysis of the determinants of municipal bond yields. ; The results of the analysis show that the ratio of yield to maturity on municipal bonds to yields on U.S. Treasury bonds (the interest rate ratio) has varied greatly in the past two decades and is greater for longer maturities. They also show that debate during 1986 about tax reform ...
Journal Article
Do municipal bond yields forecast tax policy?
During the recent flat tax debate, interest rates on long-term municipal bonds rose relative to the rate on U.S. Treasury bonds. This was widely attributed to expectations of a reduction in future tax rates. While an axiom of finance states that current asset prices reflect expectations about future events, there is no consensus on how sensitive municipal bond yields are to expectations about future tax rates. This study assesses that question by examining the relationship between the implicit tax rate and actual future tax rates.> Efficient markets theory predicts that the implicit tax ...
Newsletter
Tempestuous municipal debt markets: Oxymoron or new reality?
Municipal bonds (munis) are issued by states, cities, or other local government agencies. They may be general obligations of the issuer or secured by specified revenues, like fees paid by tollway users. The interest on municipal bonds is usually exempt from federal income taxes. Investors have long regarded these bonds as a relatively safe investment. Not coincidentally, holdings of municipal securities (or munis) have been heavily concentrated among household investors, who own about two-thirds of the $2.9 trillion market.
Newsletter
How vulnerable are insurance companies to a downturn in the municipal bond market?
As the U.S. economy remains weakened by the Covid-19 pandemic, concern persists for the health and resilience of the municipal bond market. Municipal bonds (muni bonds) are debt securities issued by state and local governments to raise money and are generally considered to be safe investments. However, the recent slowdown in economic activity due to Covid-19 created significant stress on state and local government budgets, leading to a heightened risk for municipal bond downgrades and possibly even defaults. In this Chicago Fed Letter, we examine to what extent property and casualty (P&C) and ...
Journal Article
Tax-free bonds
Journal Article
Municipal bond behavior