Municipal Finance During the COVID-19 Pandemic: Evidence from Government and Federal Reserve Interventions

We study the functioning of the primary market for municipal bonds during the COVID-19 pandemic. The average offering yield increases while the number of new issues drops when county-level COVID-19 case and death counts rise, with investors exhibiting great concern over coronavirus-related mortality. Exploiting the differential timing of the implementation of local mitigating policies, we find that emergency declarations exert an adverse effect, leading to a 69 basis-point increase in offering yields and a significant drop in new issuance. Investors shun transportation and dedicated tax bonds or bonds issued in fiscally unhealthy states. Announcements of first cases and stay-at-home orders, however, have weak impacts. The Federal Reserve's unprecedented interventions through two municipal liquidity facilities have calmed the market. Offering yields on average dropped 200 basis points on March 23, 2020 alone. New issue volume also rises gradually over the study period. The reopening of local economies has led to a significant drop in offering yields.