Abstract
THE CYCLICAL MOVEMENT in the yield differential between bonds of diSering quality has been investigated by several previous researchers. Although most of this research has focused on corporate bonds [3, 5, 13], a few recent studies [2, 5, 9] have examined the eSect of the business cycle on municipal bond yield spreads. This study further investigates these cyclical relationships in the municipal market by examining the determinants of the relative yield spread RYS.1 The most important findings are that such municipal yield spreads are inversely related to the level of economic activity and that these spreads are significantly aSected by changes in economic activity occurring up to twelve months prior to the issue date. This paper first reviews a selection of the previous research concerning the cyclical behavior of yield spreads and looks at the factors explaining this cyclical behavior. The methodology is presented next, and the empirical results appear in section 3. A brief summary follows in section 4.
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