COVID-19, Lockdowns, and States’ Cost of Borrowing

We study the influence of state lockdowns during the coronavirus (COVID) pandemic on states’ cost of borrowing. First, we examine the extent to which states’ own COVID exposures are priced, controlling for US-level COVID developments. We find that a doubling of new COVID cases in a state is associated with a 5% increase in its cost of borrowing particularly at the beginning of the pandemic. Although this finding suggests that lockdowns would lower states’ borrowing costs by reducing the spread of COVID, lockdowns also reduce local economic activities. Overall, we find that lockdown announcements are associated with an 8% increase in states’ borrowing costs. This effect is stronger among general obligation, unsecured, and shorter-term bonds, for lockdowns announced before the Federal Reserve’s liquidity programs, and not reversed after state re-openings. Our findings suggest that the increase in financing costs of lock-down states may prolong their economic recovery from the pandemic.