A Flash in the Pan(Demic)? Migration Risks and Municipal Bonds

We show that migration induced by the COVID-19 pandemic significantly predicts changes in municipal bond yields. Negative migration shocks have made debt more expensive, especially in the areas and bonds most exposed to the work-from-home (WFH) transition. Over the full sample, a one-standard-deviation increase in COVID period out-migration predicts an approximate 4.5-basis-point rise in municipal bond yields, after controlling for a range of local economic factors including state- or core-based statistical area (CBSA)-year fixed effects. This effect is 40% larger for areas in the top decile of WFH exposure and approximately twice as large for transportation-backed bonds. Moreover, areas containing the most exposed bonds (i.e., those with out-migration and high WFH exposure) also experience relatively large post-COVID declines in municipal revenue. Overall, our results suggest that investors have changed their estimates of the level or uncertainty of municipalities’ future cash flows, especially for areas and bonds most exposed to the transition toward remote work.

This paper was accepted by Bo Becker, finance.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.02674.