Key changes in the municipal bond market since 2007

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Beside the obvious and immediate damage it inflicted on asset values, the financial crisis of 2007-2009 reshaped the structure, functioning, and regulation of American securities markets. A forthcoming new paper from Daniel Bergstresser and Martin Luby takes a close look at how the market for municipal bonds has changed in recent years. Bergstresser and Luby will present the results of their findings at the opening panel of the 2017 Municipal Finance Conference, co-hosted by the Hutchins Center on Fiscal and Monetary Policy at Brookings, the Rosenberg Institute of Global Finance at Brandeis International Business School, the Olin Business School at Washington University in St. Louis, and the University of Chicago Harris School of Public Policy.
In the paper, which will be published as a Hutchins Center Working Paper, Bergstresser and Luby highlight the changes in the municipal market related to primary market issuance and secondary market trading trends, bond ownership composition, bond structures, products and processes, and market participants. They also offer a discussion of future developments that are likely to impact the municipal securities market in the future.  Here are some key factors they discuss.
State and local governments are less reliant on municipal bonds than they were before the financial crisis.
State and local governments issued $470 billion of municipal bonds in 2016, about 2 percent less, in nominal dollars, than in 2005. New bond issuance (as opposed to issuance that restructures or refinances existing debt), fell even more, about 25%, between 2005 and 2016. This decline in new issuance is far larger than the decline in state and local capital spending over this period, suggesting that municipal bonds are now increasingly complemented by other funding and financing sources for infrastructure. Understanding these other sources will be an area of concern for bond market participants.
Still, new bond structures have proven to be important financing tools.
While some bond products and structures have declined in use ...

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