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Understanding the Recent Rise in Municipal Bond Yields

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Abstract

In late March, investors sold off municipal bonds at a rapid pace, depressing municipal bond prices and driving up their yields relative to U.S. Treasuries. We find that this initial investor run on the municipal bond market was likely due to increased liquidity demand rather than credit concerns, making the Federal Reserve’s early actions to relieve liquidity stress effective. Going forward, however, municipal bond prices will likely reflect increased credit concerns.

Suggested Citation

  • Huixin Bi & Jacob Dice & Chaitri Gulati & W. Blake Marsh, 2020. "Understanding the Recent Rise in Municipal Bond Yields," Economic Bulletin, Federal Reserve Bank of Kansas City, issue May 27, 2, pages 1-4, May.
    • Handle: RePEc:fip:fedkeb:88069
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    File URL: https://www.kansascityfed.org/documents/5441/2020-eb20bidicegulatimarsh0527.pdf
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    References listed on IDEAS

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    1. Andrew F. Haughwout & Benjamin Hyman & Matthew Lieber, 2020. "Helping State and Local Governments Stay Liquid," Liberty Street Economics 20200410b, Federal Reserve Bank of New York.
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    Cited by:

    1. Huixin Bi & W. Blake Marsh, 2020. "Flight to Liquidity or Safety? Recent Evidence from the Municipal Bond Market," Research Working Paper RWP 20-19, Federal Reserve Bank of Kansas City.

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    More about this item

    Keywords

    Federal Reserve; Pandemic; Money Market Mutual Fund Liquidity Facility (MMLF); COVID-19; Municipal bond yields; Municipal bond market;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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