Winecoff – Municipal bond sectoral risk and information intermediation in uncertain times

Dr. Ruth Winecoff and Lang (Kate) Yang examined whether sectors that experience heightened risk due to the pandemic are more likely to rely on intermediation. They then directly tested the market uncertainty hypothesis of intermediation by examining whether the intermediaries are associated with a larger reduction in yields for high risk-elevation sectors than low risk-elevation sectors.


The municipal bond market is not homogeneous but consists of varying credits supporting different governmental activities. In this paper we discuss how sectors form and how they are differentially subject to market risks, using the Covid-19 pandemic as a case study. The pandemic has disrupted all financial markets, particularly some municipal bond sectors supported by nongeneral obligation credits, such as health care, arts, and transportation. By comparing the sectors that face a greater increase in risk with others, we empirically examine the market uncertainty hypothesis that intermediation provides stronger certification value when sectoral risk increases. We find an increased use of insurance among high-risk-elevation bonds. Bond insurance, nevertheless, is not associated with larger reductions in offering yields in the high-risk-elevation sectors on average, but only for issuers consistently insuring all issuances. The yield difference between unrated and rated bonds expands more in the high-risk-elevation sectors; for an average unrated bond in such sectors, receiving any investment-grade rating is associated with yield reductions.

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