Liquidity in the Municipal Bond Markets
Semester
The purpose of the project was to identify key constraining factors to liquidity in the municipal bond market and propose possible policy recommendations to enhance liquidity in the market. One of main factors to illiquidity is the size of individual municipal issues that trade on the secondary market. The Capstone team's final report demonstrated a positive relationship between the size of the municipal bond issue and frequency of trading. Furthermore, the study focused on the role of pooling municipal authorities as means of consolidating individual municipal issues. Specifically, municipal bond banks have helped small municipal issuers in several states to overcome liquidity disadvantages through pooling debt issuances. As a policy recommendation, the Capstone team advised state legislators to look into forming bond banks as a potential aggregator of local debt, or encourage local municipalities to weigh in the option of issuing its debt through bond banks. Finally, the report concludes with a study to test the liquidity improvement from eliminating cross-state income tax on out of state municipal bond earnings by comparing Puerto Rico bond liquidity to comparable issues across the United States.