The impact of the pandemic and the Fed’s muni program on Illinois muni yields

On October 21, officials announced a plan to borrow an additional $1.7 billion to refinance existing debt to save $450 million in 2020 and $501 million in 2021.5 A week later, Fitch and Moody's joined Standard & Poor's (S&P) in revising Chicago's credit rating outlook from stable to negative.6 This could hurt the city's ability to take advantage of low interest rates in the future. Since March 2020, S&P has downgraded the credit ratings of three states (Alaska, New Jersey, and Wyoming) and given negative outlooks to another 11 states.7 If municipalities continue to experience large revenue losses due to business closures, elevated unemployment, and reduced economic activity, while spending continues to rise to counteract the effects of the pandemic, larger deficits may become unsustainable. [...]on August 11, the Fed reduced the interest rate spread on tax-exempt notes for each credit rating category by 50 bps. [...]it is limited to 400 authorities (out of more than 40,000), the primary market, and notes with no more than 36 months until expiration. A daily model of Illinois muni yields To quantify the economic impact of the pandemic and of the Fed's MLF on the Illinois muni market, we estimate a simple model in which daily variations in spreads between GO muni and Treasury yields of various maturities are explained by a number of high-frequency indicators summarizing economic and public health conditions in Illinois as well as key changes to the MLF.