No Guaranties: The Decline of Municipal Bond Insurance

Abstract

The credit crisis that roiled the financial and housing markets in late 2007 and early 2008 resulted in well‐publicized budget challenges for state and local governments. Less visible has been a dramatic change in the bond insurance market, which alters how governments issue long‐term debt. Debt issuance data from Texas are used to model bond insurance premiums and examine utilization following the crisis. The results provide evidence that insurance premiums rose dramatically following the fiscal crisis, even when controlling for widening credit spreads and changes in the underlying credit quality of issuers.