Does the Maturity Mix of Government Borrowing Impact Municipal Bond Rates?

The possibility that government borrowing may crowd out private borrowing has been widely discussed in the popular press and extensively analyzed by researchers. The Clinton Administration's “Operation Twist,” resulting in increased reliance on short-term securities to fund the Federal deficit, highlights the impact of the maturity structure of Treasury debt issues on interest rates. This paper examines the relationship between changes in the maturity distribution of Treasury issues and Moody's twenty year AA municipal bond yield. Briefly, I find changes in the maturity structure of outstanding Treasury securities Granger-cause changes in the Moody's twenty-year AA municipal bond yield. The results suggest that changes in the maturity structure of Treasury borrowing will impact the interest expense of municipal debt issues and therefore the rate of return earned by holders of municipal securities.