The impact of real estate market risks on the issuance costs of urban investment bonds: Evidence from China

It has been widely believed that bond spreads are positively correlated with related market risks. However, some studies in China's urban investment bond (UIB) market indicate that an increase in real estate market risks usually narrows UIB spreads. This article focused on such puzzle and introduced a quadratic form regression to detect a U-shaped relationship between housing price volatility and UIB spreads, which confirms that UIB pricing is actually in consistence with the traditional bond theory. We further indicated that spreads of guaranteed UIBs were barely affected by housing price volatility, and fiscal transparency seemed to mitigate such volatility's impact on the issuance costs of UIBs. Those findings not only illuminate ways of mitigating risks in the UIB market in China using market instruments but also have important implications for how local governments around the world can mitigate their debt-related problems.