How the New Fed Municipal Bond Facility Capped Muni-Treasury Yield Spreads in the Covid-19 Recession

Abstract

, and seminar participants at the Federal Reserve Bank of Dallas for comments, input, and suggestions. Any remaining errors are those of the authors. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The Option Value of Municipal Liquidity: Evidence from Federal Lending Cutoffs during COVID-19

“…Li and Lu (2020) focus on the effects of shutdown announcements on offering yields (rather than traded prices in the secondary market), and find that initial offering yields increased in response to shutdowns, and decreased following facility announcements. Both Bordo and Duca (2021) and Li and Lu (2020) are consistent with our results on market functioning, however, neither focus on the causal effects of MLF optionality on issuers. Finally, Fritsch et al (2021) study entities that issued directly through the MLF, and similarly find that yields declined after announcements of intent to issue via the facility.…”

“…By contrast, we find that this was only true when the MLF was not available to those issuers. Bordo and Duca (2021) further focus on the time series impact of the MLF announcement on yields spreads, and find that the MLF capped the growth of spreads by 5 to 8 percentage points. Li and Lu (2020) focus on the effects of shutdown announcements on offering yields (rather than traded prices in the secondary market), and find that initial offering yields increased in response to shutdowns, and decreased following facility announcements.…”

Influence of COVID-induced fear on sovereign bond yield

“…When analyzing different bond pricing models, the COVID factor has added an extra impact on Mexican bond risk premiums (Christensen et al, 2020) and on the U.S. municipal bond market, in which the initial negative influence was offset by the U.S. Federal Reserve interventions (Bi & Marsh, 2020;Bordo & Duca, 2021;Cipriani et al, 2020).…”