Economic fundamentals, policy responses, and state-level municipal bond sensitivity to COVID-19 prevalence

Abstract

This paper conducts a state-by-state analysis of the financial impact of the COVID-19 pandemic on the U.S. municipal bond market. Using panel regressions and state-by-state regressions, we find that the prevalence rates of the COVID-19 virus negatively impacted the aggregate performance of municipal bonds. The study also explored whether the disparities in the economic fundamentals of U.S. states, as well as the COVID-19 mitigation policies employed by each state, can explain the sensitivity of the state’s municipal bond to its COVID-19 prevalence rates. States with more desirable economic fundamentals and robust COVID-19 mitigation policies appeared to have higher COVID-19 sensitivities than states that do not. This finding may be due to a baseline effect, in which the higher levels of economic activities in these states also make them more susceptible to the deleterious effects of the stronger mitigation policies enacted by them.