Premium
The Two Worlds of Municipal Bonds: Are Lower‐ R ated Bonds Punished More by Financial Crisis?
Author(s) -
Peng Jun,
Kriz Ken,
Wang Qiushi
Publication year - 2014
Publication title -
public budgeting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.694
H-Index - 30
eISSN - 1540-5850
pISSN - 0275-1100
DOI - 10.1111/pbaf.12028
Subject(s) - bond , financial crisis , municipal bond , business , financial system , bond market , corporate bond , financial market , yield (engineering) , investment (military) , finance , monetary economics , economics , political science , law , materials science , politics , metallurgy , macroeconomics
Since the inception of the financial crisis in late 2008, the municipal bond market has undergone tremendous disruption. While some parts of the market are returning to normal, other parts are still under pressure in the aftermath of the financial crisis. By comparing the yields on municipal bonds and comparable corporate bonds, we find that since the crisis, municipal bonds of lower investment grade ratings, those rated A and BBB, are now paying a significantly higher risk premium than their corporate counterparts as seen in light of the traditional yield spread between these two bond markets. This higher risk premium has negative implications for the municipal bond market. Factors for this perception of increased risk in the municipal bond market are discussed and potential solutions are suggested.