Graduation Year

2026

Date of Submission

11-2025

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Fan Yu

Abstract

This thesis investigates the determinants of yield spreads in the high-yield municipal bond market, which is a unique subset of the $4 trillion US municipal bond market. The defining characteristics of the high-yield market are illiquidity, fragmentation, and opaque information availability. Prior literature has focused on the tradeoff between credit and liquidity effects in determining municipal yield spreads, finding that credit risk dominates pricing. These studies use data on the entirety of the municipal bond market, including both investment grade and high yield CUSIPs. Motivated by my discussions with investment professionals in fixed income asset management and the recent compression of high-yield municipal yield spreads throughout 2025, I study whether illiquidity factors play a larger role in determining high-yield municipal bond spreads as compared to the investment grade municipal universe.

I construct a cross-sectional dataset as of October 1, 2025 using Bloomberg and US Census Bureau Survey data that contains bond level characteristics and issuer credit fundamentals. My dependent variable for the study is the high-yield municipal bond spread, denoted by the excess yield of each individual bond over the AAA main yield. I use three OLS regression models with robust standard errors to estimate the effects of credit and liquidity variables on the spread. The results of the study show liquidity is the dominant determinant of yield spreads in the high-yield municipal bond market.

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This thesis is restricted to the Claremont Colleges current faculty, students, and staff.

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